The Apple Structure to Parking Profits in Bermuda

British economist Andrew Watt tells us how he really feels about the European Commission’s slam of Apple’s transfer pricing:

Without delving too deeply into the specifics of the case, a number of crucial issues are raised by this controversy, not just in the narrow area of taxation but for the European integeration process more generally...The ability of internationally active and thus “mobile” companies to play off national tax jurisdictions against one another and to use transfer pricing and other tricks to concentrate book profits in low-tax jurisdictions is one of the most pernicious effects of globalisation as it has been implemented over the past three or four decades. Whole armies of corporate (tax) lawyers optimise financial flows so as to minimise tax liabilities. The largest companies reach tailor-made deals, primarily with smaller economies, The resultant “race to the bottom” is an important reason why capital (and higher-skilled , also mobile wage-earners) have reaped most if not all the gains, while most workers have been left out or seen declines in living standards. The tax burden is shifted onto “immobile” factors, especially labour and the ability of national governments to finance compensatory measures (welfare benefits, active labour market policies) to offset the losses caused to some by globalisation has been constrained. The fact (according to the FT) that Apple, one of the world’s wealthiest companies, pays a (sic) 2% rate of corporation tax thanks to its deal with Ireland is a particularly egregious

Of course other hi-tech and life science multinationals are playing the same game which is often dubbed the “Apple Structure”. How this works is actually quite simple. Imagine Apple Ireland sells $100 billion in either smart phones or personal computers (a conservative estimate given the US share of sales is only 40%) with total operating costs being $70 billion - $30 billion in profits to be divided among the tax authorities. Ireland’s share of Californian based R&D costs represent $10 billion when one includes the cost of employee stock options. Given how the game is played, the US tax base would include no profit and might not even include those cost of employee stock options. Selling costs represent another $10 billion, which are incurred by the foreign distribution affiliates, which likely pick up only $1 billion in profits. The remaining $29 billion are either taxed in Ireland at 12.5% or sourced in Bermuda where they are not taxed at all. Back in 2007, Apple’s 10-K noted that their products were assembled in Cork, Ireland:

Most of the Company's components and products are manufactured in whole or in part by third-party manufacturers, most of which are located outside of the U.S...Final assembly of the Company's products is currently performed in the Company's manufacturing facility in Cork, Ireland, and by external vendors in California, Korea, China and the Czech Republic.

Let’s assume that total production costs are $50 billion with $45 billion being components supplied by third parties. Cork incurs $5 billion in labor costs and the tax deal gave Ireland a 20% markup or $1 billion in profits. So $28 billion ended up in Bermuda. Today, Apple’s products are assembled by Foxconn so Ireland gets even less in profits. Aggressive tax planning indeed but Tim Cook says it is “all perfectly legal”. Andrew also linked to Aidan Regan:

Wow! Exports are up 34%; Investment is up 27%; imports are up 22%. Wham, bam, the economy grew by 26%. Sensational. Per capita income per person in employment has increased from a whopping 88k in 2010 to 130k in 2015. I’m sure you can feel the booming economy in your pocket? Of course you can’t, the national accounts are a sham. So what’s really going on? The increase in investment, although you can’t see it in the national accounts, is being driven by airline leasing. My hunch is that this has increased by about 110%. Airline companies of the world are effectively transferring their financial activities (as new aircraft machinery) into Ireland for tax purposes...imagine all those massive Boeing planes flying around the world, then imagine them in Ireland, and hundreds of people working on them. Where are they? In truth. We couldn’t even fit these planes in Ireland. It’s just around 20 people managing a financial fund for tax avoidance purposes. Then using the generated money for profit redistribution. That’s what’s really go on.

Enough transfer pricing for one day so I will elaborate on this scam tomorrow.