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

So WTF is this investigation all about then?

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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 profits pile up offshore and that Cupertino isn't required to pay US corporate income tax. It's not about the Double Dutch or an Irish Sandwich; it's not about the Irish tax rate that is applied to the profits it does declare. Nor is it anything to do with that mysterious company that wasn't actually, for tax purposes, based anywhere at all. All of those things are a) well known and b) entirely and obviously legal. So there's no point in anyone investigating them.

What this is all about instead is “transfer pricing”. And that is all about the method by which Apple gets all the profits into Ireland before it does all of that other stuff. Further, given the knowledge base of El Reg's commentards, we might well be able to crowdsource the answer as to whether Apple's going to have any problems over this.

How it all works

Stripped of all of the legal complexity and jargon, the way that Apple operates outside the US is this: the main company is an Irish subsidiary of Apple. This buys all of the parts for all iKit, makes the contracts with the factories that assembles it, ships it all on (there's all sorts of fun stages in Singapore and so on but they're irrelevant for our purposes) and then sells it to the various Apple country operating companies. To Apple UK, Apple AG, Apple Oz and so on.

Clearly, the price at which Apple Ireland (recall, the company with all those lovely deals like the Double Dutch and so on) sells to those Apple country companies is going to determine where the profits get booked. Sell at a low price and Apple UK will, heaven forfend, make a good profit to be taxed by Osborne. Sell at a high price and the profit will be in Apple.ie where no one seems to think very much about taxing it. And the price at which such sales take place, the entire subject of those prices, is called “transfer pricing”.

The argument is that in order not to artificially move profits around, move them out of a high tax jurisdiction and into a low tax one, that such prices should be at market, or “arm's length” prices. One corporate subsidiary should sell to another corporate subsidiary at the same price that they would be willing to sell to an entirely unrelated entity out there in the free market.

This isn't a precise science, more of an art. And it is the local tax authorities who are supposed to police whether companies are actually doing this.

In practice, Apple tends to sell from Apple.ie into the other national subsidiaries at a price where those national companies just about scrape a profit but not very much. They can cover their retail and wholesale, their marketing costs, wages and so on, but leave only a lean slice of extra cash that gets taxed. Almost all of the profits end up in Ireland.

This isn't, however cute we might think it is, illegal nor even naughty in a tax sense. What would be both is if Apple is selling to its national subsidiaries at a higher price than it is willing to sell to unrelated third parties. For that would be artificially shifting profits to Ireland, rather than it just so happening that the prices Apple can charge lead to high profits in Ireland.

Which is where you commentards come in. At least some of you will be working in the distributor/retail chain and be handling Apple products. What are the sort of margins that the company offers to third parties? If they're pretty meagre, the sort of margins that just about cover costs but little more, then Apple will probably be OK after this investigation. For that, from the accounts, is what they offer their own subsidiaries.

However, if the channel margins are quite juicy, allowing those third-party distributors to make healthy profit margins, then the EU is going to be looking very askance at Apple's own internal pricing that doesn't seem to generate those sort of margins in the UK, Germany and so on.

So, anyone want to chip in on that?

Finally, it's not actually Apple that's really in peril here. It's about whether the Irish authorities have been letting them get away with buggering around with these transfer prices. For that, if they have been, would be described as state aid to the company and that in the EU is verboten.

It's not about whether Apple has been paying too little tax: we all know that it has been. It's whether it has had a special deal that allows it. If everyone can do it (and the Double Dutch and so on is available to all), then there's no EU angle to it. It's only if Ireland has had a special deal on transfer pricing, as above, that either the country or Apple have anything at all to fear from this investigation. ®

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