Apple Inc and the arms length standard

In the light of the EC letter to Ireland on Apple’s “APA” I decided to take a look at Apple Inc tax policy in the light of the EC comments. My starting point was the Financial Statements on the website, but the notes on taxes don’t tell us much about tax beyond what is described in US GAAP.

My next step was to look at the testimony from this time last year and I would encourage readers to look at this:



It’s 15 pages long and I can’t find any reference to the “arms length standard” in it. You might think this isn’t important, but the rest of the testimony makes clear that the biggest tax issue which Apple has, is transfer pricing. So why isn’t there a statement that Apple adheres to the arms length standard in its intercompany pricing? Other companies do this, and business representative bodies such as ICC, BIAC, BE and USCIB all do this. Recently here in the UK, there was a furore because the leader of the opposition forgot to mention the deficit in a keynote speech. Not mentioning the arms length standard in its testimony is a similar Freudian slip by Apple?


Perhaps the EC has unearthed why this omission has been made. What did the EC unearth? Well here is a quote from the letter the EC sent to Ireland (which I’m posting on the site on the transfer pricing page):


“[the tax advisor’s employee representing Apple] mentioned by way of

background information that Apple was now the largest employer in the Cork

area with 1,000 direct employees and 500 persons engaged on a sub-contract

basis. It was stated that the company is at present reviewing it’s worldwide

operations and wishes to establish a profit margin on it’s Irish operations. [The

tax advisor’s employee representing Apple] produced the accounts prepared for

the Irish branch for the accounting period ended […] 1989 which showed a net

profit of $270m on a turnover of $751m. It was submitted that no quoted Irish

company produced a similar net profit ratio. In [the [tax advisor’s] employee

representing Apple]’s view the profit is derived from three sources-technology,

marketing and manufacturing. Only the manufacturing element relates to the

Irish branch.

[The representative of Irish Revenue] pointed out that in the proposed scheme

the level of fee charged would be critical. [The tax advisor’s employee

representing Apple] stated that the company would be prepared to accept a

profit of $30-40m assuming that will make such a profit.

(The computer industry is subject to cyclical variations). Assuming that Apple

makes a profit of £100m it will be accepted that $30-40m (or whatever figure is

negotiated) will be attributable to the manufacturing activity. However if the

company suffered a downturn and had profits of less than $30-40m then all

profits would be attribitable [sic] to the manufacturing activity. The proposal

essentially is that all profits subject to a ceiling of $30-40m will be attributable

to the manufacturing activity.


[The representative of Irish Revenue] asked [the tax advisor’s employee

representing Apple] to state if was there any basis for the figure of $30-40m and

he confessed that there was no scientific basis for the figure. However the figure

was of such magnitude that he hoped it would be seen to be a bona-fide

proposal. As it was not possible to gauge the figure in isolation [the tax advisor’s

employee representing Apple] undertook to extract details of the actual costs

attributable to the Irish branch.”


Now I assume this is accurate. To be clear, cost plus is an acceptable method for transfer pricing which is generally acceptable for low value, routine functions. It would appear a stretch for it to be appropriate in this fact pattern. In addition the incorporation of filters to ensure the “method” doesn’t generate too much profit in Ireland seems unusual to say the least and isn’t something you would see in an arms length agreement in my experience. This issue would normally be dealt with by the term of the agreement and the notice period to unwind the agreement.


But here another contradiction comes into play, this is an APA (advance pricing agreement) which provides for certainty for a period of time (if the facts remain the same) for the tax treatment of a transaction or transactions. Normally APAs last for 3 to 5 years and are then renegotiated. This agreement lasted 16 years! The agreement isn’t supported by a transfer pricing report – which is standard procedure in an APA.


So what we have is an APA which applies for a period far in excess of a conventional APA, which isn’t renegotiable if the facts change and which is not supported by a transfer pricing report. The agreement isn’t based on transfer pricing principles appropriate to the transaction and there is a filter to ensure the taxpayer doesn’t pay too much tax if the fact pattern changes.


Now according to the Senate testimony :


“Apple complies fully with both the laws and spirit of the laws.”


In terms of transfer pricing, the law and spirit of the law is based on the arms length principle. This “APA” from 1991, is not based on the arms length principle. How it is complying with the spirit of international tax law is difficult to comprehend. More dangerously, behaviour like this undermines support for the arms length principle as the basis for international taxing rights.





One Response to Apple Inc and the arms length standard

  1. Johann Muller October 25, 2014 at 4:29 pm #


    I agree with your analysis above. I would like to add one thing further, which came up from discussions about Apple at IFA in Mumbai:

    People inferred from the Commission’s reference to the OECD TP guidelines that the Commission is arguing that if a member state deviates from the OECD TP guidelines, then that is state aid.

    This is obviously not the case.

    The alleged state aid is constituted by the fact that the Ireland is applying to the OECD TP guidelines to most other taxpayers, but seemingly not to Apple.

Leave a Reply