back to article EU probe into Apple's taxes: It's NOT to do with double-Dutch-Irish anything sandwiches

As already reported here at El Reg, Apple is being investigated by the EU over its tax “deal” in Ireland. The interesting part of the whole story is that it has pretty much nothing at all to do with all of the things that people normally complain about concerning Apple's taxes. It isn't, for example, about the way that the …

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Anonymous Coward

You can't really win since Microsoft, Apple and Google are all in Ireland using it for their own tax purposes.

Whenever you used to buy a M$ product on CD-ROM the address was in Ireland (some packaging factory within an airport?).

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Hello from across the road

... from one of Microsoft's two facilities in leafy Sandyford, Dublin. Both of which are pretty big, neither of which strike me as big enough to be a European physical media distribution centre. If I remember, when I used to get physical media for MSDN developer stuff, it came from Germany.

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As it's remarkably hard

To find Apple devices from third party companies at much less than RRP then one suspects that they aren't allowing a big margin to distributors.

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Apple retail markups

The story I heard from a middleman supplier of Apple kit a long while back was that they frowned on deep discounting or even shallow discounting by suppliers to consumers. Discount too much, too deeply or too often and supplies would dry up and contracts would be difficult to renegotiate. This was before Apple direct sales really took off with the internet and high street iAquariums though.

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Re: Apple retail markups

"The story I heard from a middleman supplier of Apple kit a long while back was that they frowned on deep discounting or even shallow discounting by suppliers to consumers."

True. But this is how much third-party suppliers get the stuff for *from Apple*. If retailers buy the stock from Apple cheaper than Apple UK does, then it's transferring of profits. That's why we need inside people to get us this information. (Essentially, anonymously leak commerical deals...)

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So is this similar to what Starbucks do?

When they sell their magic* coffee* from their Swiss subsidiary to their British subsidiary, at an inflated price, causing the British subsidiary to show an operating loss on their books?

* It's not magic.

** I'm not entirely convinced it's coffee.

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Re: So is this similar to what Starbucks do?

Yes and it's totally legal for a monopoly.

What would be illegal, and what Apple are accused of doing, would be if Starbucks sold the coffee to supermarkets at 1.00 allowing the supermarket to make a profit but sold it to it's own stores for 2.00 so they didn't.

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Re: So is this similar to what Starbucks do?

"Yes and it's totally legal for a monopoly.

What would be illegal, and what Apple are accused of doing, would be if Starbucks sold the coffee to supermarkets at 1.00 allowing the supermarket to make a profit but sold it to it's own stores for 2.00 so they didn't."

They would have difficulty justifying selling their magic coffee for ten times as much as you can buy similar coffee in supermarkets and coffee retailers though, so they might be next on the chopping block.

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Re: So is this similar to what Starbucks do?

Apple Ireland sells iDevices to Apple Retail UK, as well as to the likes of Dixons, Carphone Warehouse and the mobile networks. The wholesale price that it sells stuff to Dixons et al is the market price, and that is the price it should charge Apple Retail.

Starbucks doesn't sell its coffee beans to anyone other than its own retail stores, so it is more difficult to establish a market price.

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Re: So is this similar to what Starbucks do?

This one has always amused me.

Starbucks paid that Swiss subsidiary the original price of the coffee plus 20%. The actual cost of coffee beans is trivial. Perhaps 5 p of the retail price of a latte, something of that sort of order. So they certainly weren't moving much profit to Switzerland. And even when you add that back in (and all the other stuff) to the UK accounts, Starbucks were *still* making a loss.

But what's much more fun is that if Starbucks didn't pay some margin to Switzerland then that would be illegal. Because of these transfer pricing rules again. The Swiss subsidiary must sell to the UK one at something close to free market prices, as if the two companies were not related. So which broker of coffee beans does not add some margin to cover its costs? What should that margin be? 20% over cost price seems fair enough. So would 30 or 10%.

But a margin of 0% would very definitely be not an arms length transaction price and thus illegal.

So in this particular instance everyone's shouting at Starbucks for the manner in which they obeyed tax law.

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sorry but....

I've bought Starbucks beans at Tescos in the past. They were on reduction from a mouth watering 3.99/227g down to 2.50/227g. Still expensive (my wife is Brazilian and we bring over suitcases full of best beans at very cheap prices), but fancied a change of bean.

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Flame

Re: sorry but....

Why on earth would you fancy "a change of bean" from a good Brazilian (the Brazilian Yellow Bourbon is an amazing bean) to Starbucks? If you want a change of pace, just detour a trip through Costa Rica and grab some of their coffee, or for a completely different bean, try some Balinese.

...Or just get what ever beans, douse 'em in Napthaline and light it. Still better (and cheaper) than Starbucks.

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Whenever I've tried to buy Apple kit we've never been able to get the same sort of discounts we could get on (eg) Dell or HP kit. The distributors we've used (mainly Insight, but some others) have usually complained that it's almost impossible for them to make a profit on Apple gear as the cost price was .

(The only way to get a meaningful discount afaik is to be in education)

I'd always assumed that this was Apple charging third parties more to reduce the competition for their own retail stores, but it sounds like tax might be the ultimate reason.

It's hard to see how to fix this situation, without forcing Apple to reduce their prices which would be tricky. After all, what price *should* an iMac retail for? Cost + 10%? But what about R&D costs?

Very tricky all round.

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There'll never be a good solution for tax shenanigans.

On one side you have a company with billions of dollars and legions of tax lawyers and accounts with incentives to find loop holes. The more money they get to keep, the more lawyers and accountants added to the ranks.

On the other side you have a bunch of bureaucrats doing the bare minimum to avoid being fired led by a bunch of Old White Guys doing just enough to convince voters to keep them in office after the next election.

And here we are in the middle getting screwed over from both sides believing that things will change. We can't just stop buying stuff nor does petitioning the government do much. Sure they'll do a half-hearted press conference to denounce companies for not paying taxes, and if you're lucky they'll sponsor some kind of tax reformation bill that will be tabled until the end of time. And if you are really lucky, the bill might actually pass but still leave gaping holes big enough to drive a truck filled with money through.

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Re: There'll never be a good solution for tax shenanigans.

You can boycott stuff. But consumers tend not to. I believe that enough people stopped going to Starbucks that this persuaded them the loss of sales and damage to their reputation were too high. Hence they're moving their European HQ to the UK, where the vast majority of their European sales are.

However, there's always going to be a problem. Accountancy is an art, not a science. There's just no way to write rules to cover all situations. Companies frequently have legitimate fights with their own auditors. I can remember, from my bean-counter days at a US multi-national, that our auditors thought we'd saved too much money for a rainy day (in part international tax liabilities as happens) - and they forced us to halve our provisions and report it as profit to the shareholders instead.

We thought we were legitimately keeping a bit of money in reserve for several major issues we could see coming. But the auditors seemed to feel that it would be better to have a bigger profit this year (and possibly artificially boost the share price), and then if this stuff came up next year we'd have to report an unexpected cost, thus cutting profits, surprising Wall Street, and thus causing the share price to plunge. The company never paid dividends, so I've absolutely no idea what the auditors thought they were playing at.

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Anonymous Coward

Re: There'll never be a good solution for tax shenanigans.

"On one side you have a company with billions of dollars and legions of tax lawyers and accounts with incentives to find loop holes. The more money they get to keep, the more lawyers and accountants added to the ranks."

Let's not forget the shareholders: mostly yours and my pension funds, who are driven to see their returns maximised (because, frankly, that's where savers move their money). Corporations would be failing in their fiduciary duties towards their shareholders (i.e. you and me) if they voluntarily decided to give away more tax than is absolutely required by law. Plus they would suffer relative to any competitors who do avail themselves of these legitimate and legal tax incentives.

So, we can't exactly blame companies for doing what they are OBLIGED to do both by virtue of their fiduciary duties to their shareholders and by virtue of economic necessity in a competitive market.

"On the other side you have a bunch of bureaucrats doing the bare minimum to avoid being fired led by a bunch of Old White Guys doing just enough to convince voters to keep them in office after the next election."

Therein lies your problem. If the public don't like the tax laws that the politicians have created, they should elect different politicians. Until then, can't really blame the companies for being responsible fiduciaries.

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Re: There'll never be a good solution for tax shenanigans.

I keep getting this feeling that if they let *kernel* developers at the tax rules, something interesting might arise. The kind of developers who've stared down the abyss while subsisting just on their own dogfood, in the full knowledge that hell is real and that everyone and everything else is always trying to exploit anything they create.

Code and law must eventually meet and Accountancy speaks both their languages...

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Re: There'll never be a good solution for tax shenanigans.

I am an auditor. You are not allowed to charge predicted future expenditure to provisions in the current year, but that doesn't stop you having a dividend policy that takes these things into account. You do have to pay the tax though.

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Re: There'll never be a good solution for tax shenanigans.

"Corporations would be failing in their fiduciary duties towards their shareholders (i.e. you and me) if they voluntarily decided to give away more tax than is absolutely required by law. "

However, if Apple are keeping their profits overseas as a result of these shenanigans, the shareholders don't benefit because the money isn't brought home to be distributed as a dividend.

I read one interesting comment that the Beats purchase deal was effectively a money "laundering" scheme to spend a big junk of that untouchable money in order to have local royalty income without paying the hefty tax to bring the cash home first.

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Anonymous Coward

Re: There'll never be a good solution for tax shenanigans.

"However, if Apple are keeping their profits overseas as a result of these shenanigans, the shareholders don't benefit because the money isn't brought home to be distributed as a dividend."

Not true. Market cap = Enterprise value - Net debt. Increase cash, share price goes up. Why? Because whilst the cash may not get directly distributed by way of dividend, it ultimately increases the money available to shareholders upon winding up. It is their money, whether Apple pay it to them or not.

Also, less directly, shareholders benefit from the fact that the company in which they invested has a huge pile of cash resources with which to invest in future growth (acquisitions, R&D, etc) or defend against competitive actions (patent enforcement, marketing, etc). Even if they don't spend it, the returns they will earn on investing somewhere (even if merely a high interest bank account) goes straight to profit.

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Re: There'll never be a good solution for tax shenanigans.

"However, if Apple are keeping their profits overseas as a result of these shenanigans, the shareholders don't benefit because the money isn't brought home to be distributed as a dividend."

Dividends? Where have you been for the last couple of decades?

Nobody invests in Amazon/Google/Apple for the dividend, the "return" is expected to come from buying low and selling high.

Apple didn't pay ANY dividends between 1995 and 2012, though since then it has been paying about $3/share per quarter - say $12 over two years. In the same time period the share price has increased by between $40 and $60 (it was $60 last week, it's only $40 this afternoon).

Amazon and Google have never declared a dividend, as far as I know.

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It is not that <insert company> is not paying enough tax

They are paying the right amount of tax demanded by that particular Government. Apple/MS/Adobe/Google/etc have legally binding agreements with governments. This will dictate the legal amount of tax they have to pay.

Sure this sucks royally. Don't bitch at these Companies, bitch at the Governments that entered into these agreements.

They are not avopiding tax. They are paying their dues. Sadly these dues are far lower due to these agreements than they should be.

Don't like it? Vote the Governments out and replace them with one that will collect a proper level of Taxation.

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Re: It is not that <insert company> is not paying enough tax

"Sure this sucks royally. Don't bitch at these Companies, bitch at the Governments that entered into these agreements."

Actually, we generally bitch at people for being immoral, so why shouldn't we bitch at companies for being immoral. Remember all those dodgy, but legal MPs' expenses? We bitched at MPs for their expenses, not bitching at MPs for not making the law......hmm.

"They are not avopiding tax. They are paying their dues. Sadly these dues are far lower due to these agreements than they should be."

They are avoiding tax. They are not *evading* tax. Or maybe they are, if this investigation decides they are. Artifical corporate structures whose sole purpose is to lower tax rates are the definition of a tax avoidance scheme according to HMRC.

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Re: It is not that <insert company> is not paying enough tax

Totally agree, I will not vote for a political party going forward unless it has a proper plan to sort out tax avoidance. I actually have quite a neat solution, you scrap corporation tax on profits and instead create an additional sales tax paid by the company on its sales and not its profits (perhaps at a lower rate like 10%). Get rid of all the exemptions, all the allowances, make it illegal to offset loans and any other form of mitigation against that tax liability, and make it enforceable where the CUSTOMER is based, not where the firm is. That would sort out the problems overnight.

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Re: It is not that <insert company> is not paying enough tax

TLDNR: Damn you Apple for following the law I don't agree with!

There are two solutions, one simple and one complex to this problem.

Simple: scrap corporate income tax all together, rely on sales tax (they are passing it on to you anyway)

Complex: get every nation in the world to give up a big chunk of their sovereignty and establish a world-wide corporate tax law. (yeah, right)

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" ... the Double Dutch and so on is available to all"

I'm sure it's not available to me. If it is, can someone please explain how I can do it?

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Devil

Re: " ... the Double Dutch and so on is available to all"

Move to Luxemburg and operate via a personal company as a contractor from there.

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Coat

Re: " ... the Double Dutch and so on is available to all"

search on ebay for "Malcolm Maclaren single"?

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Re: " ... the Double Dutch and so on is available to all"

If you are doing the actual work in the UK, the Lux company will need to subcontract the work to a UK based service company, otherwise the Lux company will be trading in the UK and have to pay UK tax.

You then need to justify the price that the UK service company charges the Lux company.

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Selling apple kit is a loss leader, almost

The margins that the authorised Apple resellers have are very small, so small it's effectively a loss leader when business costs are taken into account. Most of these guys who have a successful Apple business make their money on pre-configuration, support, and selling the accessories and peripherals.

The only people who make money purely out of selling Apple gear are Apple themselves.

I've been the industry for a couple of decades now so trust me.

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Anonymous Coward

Re: Selling apple kit is a loss leader, almost

Too Right!

When I was selling imacs, I was lucky if I made £50 profit. The real profit was in whatever else I could sell with it - and support/installation.

However, I note that Costco in the UK are selling imacs again - and cheaper than John Lewis etc., (and they also have Mac Pros (the new ones) to take away (assuming you pay of course).

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Re: Selling apple kit is a loss leader, almost

So ironically it is legal for Apple to do these tax dodges so long as they effectively ban anyone else from selling their kit profitably. But an HP or IBM or Lenovo couldn't

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Re: Selling apple kit is a loss leader, almost

Not sure I get you - they are all probably at it to a greater or lesser degree. Transfer pricing goes on in any multinational.

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Re: Selling apple kit is a loss leader, almost

That's roughly what I thought but I wanted to hear it from within the industry to be sure.

So thanks.

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Re: Selling apple kit is a loss leader, almost

Since Costco is a US company, what's to stop them importing from the US, where they may be getting a better deal from Apple? Who knows, maybe they have their execs smuggling MacPro's in the suitcases.

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I think Apple's tax people are too smart to have any trouble here

They will have anticipated all possible questions and be ready with documentation that shows they're following the letter of the law (whether one agrees with what the law says is, as always, another matter)

Although I don't know the numbers, everything I've heard and seen suggests Apple leaves pretty thin margins for retailers. It is rare to see Apple products discounted at all, except for very large retailers (i.e. Target or Walmart) using them as "loss leaders". They want to get people in the door to buy the latest iPhone (this is typically done when the new one is released) and hope while they're there they'll freely spend on other things they may need/want at the same time.

That said, regulators usually don't investigate a company and come up with absolutely nothing, so I'll not be surprised if eventually it is announced that the regulators found a few things that weren't done quite to the letter of the law, as would be expected with something as complex as tax law, but no deliberate lawbreaking will be found or admitted to. Apple would then pay a token (for them) fine which will more than compensate the government for their costs involved in doing the investigation.

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Anonymous Coward

Ireland is not even the middle man

It is declared as Ireland but Ireland does not mind that money near 100% bypass Ireland.

Even Ireland get f*ck all out of it, not even a measly 1% !

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Re: Ireland is not even the middle man

Is that really true though? I don't know the details, but there might be some other type of way they get some money out of all these multinationals that isn't necessarily categorized as income tax. Maybe its a flat fee, maybe the contracts they work out with all these companies specify some type of payment that may be a percentage of this or that.

If you know the details, I wish you'd expand on it or post a link. Otherwise I think it is safe to assume that Ireland is getting something out of this, otherwise why wouldn't they have changed their law to collect a measly 1% or something? That would add up to real money, but would probably still be a better deal than can be had from any other EU country so they wouldn't chase anyone away.

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Re: Ireland is not even the middle man

What Ireland gets is the income tax on the people being employed to do all of this. They think that's a good enough deal.

Obviously, other people can weigh in on whether that is a good deal or not but that's the way that the Irish state thinks about it.

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Go

Alternative history

Isn't it obvious: Apple and company simply have very smart Irish-Dutch employees that add incredible amounts of value to the products? The employees elsewhere are dolts and barely contribute to the bottom line and quite obviously don't contribute to the rather brainy task of developing, producing and marketing modern electronics.

The downside is just as obvious: after all the smart companies hired all the smart Irishmen, only idiots were left to run the country and this created the big local economic crisis. So let's rewrite the history books, there never have been any crooks. (It rhymes, so it must be true!)

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Transfer pricing has been around forever

What Apple does is no different than did the multinational where I was employed 30 years ago. Same result, too. Move the profits to the jurisdiction that taxes the least. And you can bet that it is in Apple's best interests to employ international tax experts to help out. Only difference is that the turnover was only $US4B where I worked. Apple is a much bigger target.

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Anonymous Coward

Clearly arrangements for the purpose of avoiding tax and per se illegal.

The flaw in this is that its is reasonable to expect that a well run set of businesses under common ownership should be expect to run under the same expectations and shareholder demands ie at the the same profit margins overall.

If a business run by one company has 20 barely profitable subsidaries, and one spectacularly profitable one, in a low tax jurisdiction, then this is clearly an arrangement to avoid tax. And arrangements that exist to avoid tax are illegal per se.

Similarly the bogus royalty payment arrangements only exist to avoid tax, without tax advantages, they would be completely insane. These are also clearly per se illegal tax avoidance (well in my country)

Where these arrangements have been done largely within a single jurisdiction, the tax authorities have come down on them, and won in court.

Apple et al, seem to be able to play off the tax authorities of various countries with a mixture of collusion (ireland) and probably a large measure of secrecy, so the tax authorities cannot easily unravel parts of the whole, and thus put it into the too hard basket

A coordinated legal testing of these arrangements by multple tax authorities in courts around the world, would soon see Apple et al trying to stay somewhat closer to legal, instead of piss-taking far into the tax crime area like they are today, when there is no enforcement action against them.

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Anonymous Coward

Killing capitalism.

Yes, biting the hands that feed means a revolution is coming.

Suckers. And once we all get the resulting fall who will be the new US sucker friends?

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The transfer pricing process does not only depend on a mechanical calculation of an arm's length price for particular products. There will also be a look at the overall entity, its risk profile and what an arm's length level of profit might be. So rather than looking at the pricing of individual components or products, an adjustment can be put through to arrive at a target profit margin based on the profile of the business.

A business that has nothing but product stores (UK) takes on much less risk than the other parts of the business that might invest billions in R&D, advertising to build up the brand etc. etc. (US)

It's therefore perfectly acceptable under the OECD guidelines to look at the risk profile of each, decide that the UK is engaged in activities with a comparatively limited amount of entrepreneurial risk and reduce its profits accordingly.

There is therefore nothing surprising (unless you're an ignorant politician) about a company undertaking sales activities that earns a comparatively low profit margin. You can bet that if Apple were to pander to the UK government and put more cost back into the the US (increasing UK profits) that they will soon get a knock on the door from the US tax authorities asking why profits have dropped over there.

It's symmetrical and it usually works, until politicians wade in without understanding the law and guidelines in place. They should be concentrating on pursuing misrepresentations, 'sham' companies where there is no substance and treaty abuses instead.

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