Having read the Commission letter through it is clear that the game has moved to a different pitch. The key issue is not the 1991 transfer pricing arrangement or its subsequently revision in 2007. Yes, there was little objective basis for the 65/20 margins used and there was no reference to the arm’s length principle and the arrangement seemed to be reverse engineered, but there is nothing in the EC letter to say that the margins used were wrong and led to taxable income figures that were significantly out of line if a more careful and objective approach was taken in line with OECD standards (which weren’t introduced here until 2010).
There is no doubt the 1991 advance pricing arrangement (APA) was put together in a pretty arbitrary manner as indicated by the minutes and notes taken by the Revenue official but that was as much the nature of the regime at the time rather than any special or preferential treatment to Apple. The detailed nature of the records kept suggest it was not unusual.
Can it be argued that similar arrangements were not put in place for other companies? APAs on a cost-plus basis for entities that engage in the activities attributed to the Apple’s Irish operations are not unusual.
Apple Operations Europe:
- the "manufacture of a specialised line of personal computers."
- providing "shared services to Apple companies in Europe, the Middle East and Africa (EMEA) region, including payroll services, centralised purchasing and a customer call centre."
Apple Sales International:
- the "procurement of Apple finished goods from third-party manufacturers"
- the "onward sale of those products to Apple-affiliated companies and other customers"
- "logistics operations involved in supplying Apple products from the third party manufacturers to Apple-affiliated companies and other customers."
Manufacturing, shared services, procurement and logistics are not high-profit activities. The Commission can argue that the 65/20 cost-plus margins in the 1991 APA and the updated margins in the revised 2007 agreement were "wrong" but they are unlikely to result in a material difference to the amount of tax Apple would have had to pay in Ireland. In monetary terms, any finding here would be relatively insignificant.
It is pretty clear that the issue has moved on and that these transfer pricing arrangements are no longer central. The key issue is Apple’s intellectual property, or more precisely, the location of Apple’s intellectual property.
If we look at the five items requested by the Commission in June letter published this week none of them relates to the pricing agreements. The information requested was:
- Provide the financial accounts of ASI and AOE for the period 2004-2013, in particular the P&L accounts.
- In the case of ASI single out in the P&L the amount of passive income each year and specifying if such passive income comes from Ireland.
- Provide the number of full time equivalent employees (hereinafter “FTE”) of ASI and of AOE over the same period (each end of reporting period). Provide the FTE of the Irish branch of ASI and of AOE for the same period (each end of accounting period).
- Provide the cost sharing agreement between Apple Inc., ASI and AOE in all its variations since 1989 until the last modification.
- Describe in detail the type of intellectual property covered by the cost sharing agreement.
It is clear the Commission are focusing on the ASI subsidiary as a whole and not just its Irish branch. The key issue is whether any of the intellectual property rights held by ASI are located in Ireland. Last year’s US Senate report contained a good deal of information on ASI. The post continues below the fold with a a selection of quotes relating to ASI, and its parent AOE, in the Senate report.