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Apple’s Cost-Sharing Arrangement: Frankenstein’s Monster, Part 2

Posted on Aug. 23, 2021
[Editor's Note:

This article originally appeared in the August 23, 2021, issue of Tax Notes Federal.

]
David G. Chamberlain
David G. Chamberlain
Stephen L. Curtis
Stephen L. Curtis

Stephen L. Curtis is a transfer pricing economist and the president of Cross Border Analytics Inc. David G. Chamberlain is an assistant professor of accounting and tax at California Polytechnic State University in San Luis Obispo.

In this final installment of their two-part report, Curtis and Chamberlain apply the periodic adjustment rules to Apple’s cost-sharing arrangement, and they propose alternative ways to tax some of the U.S. profit that Apple has been able to shift offshore by exploiting the cost-sharing regulations and other U.S. taxation mechanisms.

Copyright 2021 Stephen L. Curtis and David G. Chamberlain.
All rights reserved.

Part 1 of this report broke down Apple’s cost-sharing arrangement and explained how corporate taxpayers have been able to exploit the cost-sharing regulations to shift hundreds of billions of dollars or even trillions of dollars in U.S. profits offshore with little or no IRS detection or enforcement.1 In this report, we undertake a forensic transfer pricing analysis of the evidence disclosed in the U.S. Senate and European Commission investigations of Apple — or provided by the company in filings with those bodies, the SEC, courts, and other sources — regarding its compliance with U.S. transfer pricing laws. We find that Apple could be subject to a U.S. tax adjustment under reg. section 1.482-7(i)(6) that could exceed by several multiples the amount of taxes at issue in the European Commission state aid case (now under appeal) and Apple’s reserves for uncertain tax positions. In this final installment of the report, we discuss that result and the calculations behind it.

IV. Apple’s Periodic Adjustment

Congress adopted the commensurate-with-income standard in 1986 by adding the following sentence to section 482:

In the case of any transfer (or license) of intangible property (within the meaning of [section 367(d)(4)]), the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible.2

Obviously, profits that are expected at the time of the transfer or license of intellectual property would be taken into account in determining the price or royalty rate. The relevant question is what happens when actual profits are greater or less than expected profits. It is indisputable that actual profits can be used by any tax authority worldwide as evidence of what profits should have been forecast at the time of the initial transfer or license. There is strong evidence that Congress intended that material future changes (or “major variations”) in the profits attributable to transferred IP away from the projections used to value this IP also give rise to adjustments to taxable income (periodic adjustments).3

Treasury regulations have implemented the concept of periodic adjustments. Notably, as shown in the next section, the IRS can make periodic adjustments to taxable income in any later year, even if the statute of limitations has run out on the year of the original transfer. In 1993 Treasury promulgated reg. section 1.482-4(f)(2), providing guidance for the application of periodic adjustments in any type of IP transaction. That guidance is not very specific, and it has rarely, if ever, been applied in practice. Rules for periodic adjustments in the context of cost-sharing agreements (CSAs) were promulgated in 2008, in reg. section 1.482-7(i)(6). Those rules, which are the subject of the following sections, are detailed and specific. Although the rules do not appear to have been applied in practice yet, CSAs that began in 2009 or later are just now reaching a level of maturity that makes implementation of the rules practical.

In a CSA, periodic adjustments may apply if there have been any contributions of IP to the research program. These contributions are known as platform contribution transactions (PCTs). Platform contributions are broadly defined by reg. section 1.482-7(c)(1) as “any resource, capability, or right that a controlled participant has developed, maintained, or acquired externally to the [CSA] . . . that is reasonably anticipated to contribute to developing cost shared intangibles.” Consistent with the broad mandate of the committee report,4 Treasury adopted this broad definition to ensure that valuable contributions are covered by the regulations even if the taxpayer would argue that they are technically not within the definition of intangible. The calculation of periodic adjustments will also take into account so-called operating contributions, which are defined similarly to platform contributions in reg. section 1.482-7(j)(1)(i) (“any resource, capability, or right”), but which contribute to operating the ongoing business rather than being used specifically in the research program.

For periodic adjustments to apply to the profits of Apple Operations International (AOI), there must be PCTs attributable to Apple Inc. The case is complicated by the fact that AOI (or its predecessors) and Apple Inc. had preexisting CSAs that dated back to 1980 that we are assuming, for purposes of this report, were valid until the January 5, 2009, effective date of the 2008 cost-sharing regulations.5 AOI therefore owned exclusive rights to legacy Apple product IP in the rest of the world other than the Americas.

In Part 1, based on our analysis of the transition rules of the 2008 cost-sharing regulation and Apple’s restated 2009 CSA, we determined that AOI and Apple Inc. entered into a new CSA on January 5, 2009. The question that arises is whether Apple Inc. made any platform contributions to the new CSA, given that AOI already owned rest-of-the-world rights to product IP. The answer is a definitive yes. Apple Inc. contributed (1) exclusive rights to use legacy Apple product IP in the Americas, which would include the rights to use them in the research program (which required undivided rights to the global product IP); (2) IP related to workforce in place and facilities (which are part of going concern value) that are used in the research and development program; and (3) IP that it acquired in connection with corporate acquisitions in 2009 and later years. Further, all the IP used in the global business other than in the R&D program (that is, operating contributions), including IP related to the world’s best supply chain, belongs exclusively to Apple Inc., as was shown in Part 1, in our analysis of the investigations by the Senate and the European Commission.

There are two overarching steps in determining the amount of the periodic adjustments that the IRS can make. First, the IRS must determine whether there is a periodic trigger, which would result from AOI earning more than an investor’s return on investments it has made in the CSA (that is, cost-sharing payments and PCT payments). Second, the periodic adjustment itself must be calculated by applying the detailed rules in the regulations. The analysis in the following sections clearly shows that there have been periodic triggers and that substantial periodic adjustments can be made. It is in the second step (the calculation of the periodic adjustments) that AOI’s ownership of rest-of-the-world rights to legacy Apple product IP is taken into account as a PCT attributable to AOI. This is achieved through the mandatory application of a residual profit-split method (RPSM) that gives AOI a ratable share of the profits in its territory that exceed the routine return that it properly earned for its actual activities (for example, routine sales and marketing, customer support, logistics, etc.).

A final note is warranted. Reg. section 1.482-7(i)(6) gives the IRS discretion in whether to apply periodic adjustments. We conclude that it is appropriate for the IRS to impose periodic adjustments in this case because (1) Apple Inc. makes nearly all the valuable contributions to both the research program and the ongoing global business, while AOI makes only financial contributions (PCT payments and cost-sharing payments) and performs some routine activities; and (2) Apple’s representations to the Senate and the commission are contradictory and demonstrate an abusive mind-set. In the following sections, we use publicly available information to show that there has been a periodic trigger and to estimate the magnitude of the periodic adjustments that would apply.

A. No Statute of Limitations

The 2008 CSA regulations provide the following guidance regarding a periodic trigger:

Determination of periodic adjustments. In the event of a Periodic Trigger, subject to paragraph (i)(6)(vi) of this section, the Commissioner may make periodic adjustments with respect to all PCT Payments between all PCT Payors and PCT Payees for the Adjustment Year and all subsequent years for the duration of the CSA Activity pursuant to the residual profit split method as provided in paragraph (g)(7) of this section, subject to the further modifications in this paragraph (i)(6)(v). A periodic adjustment may be made for a particular taxable year without regard to whether the taxable years of the Trigger PCT or other PCTs remain open for statute of limitation purposes.6 [Emphasis added.]

Note that in general, according to reg. section 1.482-7(i)(6)(i), there is no statute of limitations for the application of a periodic adjustment in an open year pertaining to a PCT in a closed year:

Subject to the exceptions in paragraph (i)(6)(vi) of this section, the Commissioner may make periodic adjustments for an open taxable year (the Adjustment Year) and for all subsequent taxable years for the duration of the CSA Activity. . . . The failure of the Commissioner to determine for an earlier taxable year that a PCT Payment was not arm’s length will not preclude the Commissioner from making a periodic adjustment for a subsequent year. A periodic adjustment under this paragraph (i)(6) may be made without regard to whether the taxable year of the Trigger PCT or any other PCT remains open for statute of limitations purposes or whether a periodic adjustment has previously been made with respect to any PCT Payment.

B. Key Assumptions Regarding Inputs

We explained in Part 1 that the Apple Inc./AOI CSA should be treated as a new CSA as of January 5, 2009. Because of this, it is necessary to consider what each of Apple Inc. and AOI brought to the table in the way of platform contributions as of that date. This information is important because the reg. section 1.482-7(i)(6) calculations require the application of an RPSM that is based in part on the platform contributions provided by each CSA participant.

From a conservative perspective, the calculations in this report assume that at the initiation of the December 1980 CSA, Apple Inc. transferred to its then-Irish subsidiaries the applicable foreign rights that would allow them to manufacture Apple products and then sell those products within the company’s defined geographic territory, which is understood to be the rest of the world other than the Americas. No buy-in payment was made for this IP transfer,7 which was allowed under then-applicable law. Since 1980, with the continued existence of CSAs that were amended from time to time, AOI (or its predecessors) would presumably have made appropriate payments for its share of intangible development costs.

Although Apple undoubtedly made other acquisitions before January 2009, in hindsight, the 1997 acquisition of NeXT Software is notable for its size and importance to the future of the company. In December 1997 Apple was having difficulty financially, and its share price was equivalent to that on its IPO date 17 years earlier. The NeXT acquisition brought Steve Jobs back to the company. And with the NeXT design team he had assembled, Jobs began restructuring the company, eliminating 11 of its 15 product lines while seeking a $150 million investment from Microsoft Corp.8 The value of Apple’s IP in 1997 appeared tenuous, which is highlighted by the different direction that Apple took after the NeXT acquisition:

Most college students today have only known Apple as the fashionable, popular, commercially competent, and trend setting global technology giant it is today. However, 23 years ago Apple Computer, Inc. was struggling to survive while trying to sell Macs in a PC world centered around Microsoft Windows. Things began to change after Apple acquired NeXT . . . on February 7, 1997. . . . Apple’s acquisition of NeXT Software 23 years ago most obviously provided the company with a modern operating system foundation. . . . Apple cracked open the highly proprietary worlds of audio streaming, video encoding and distribution . . . video playback streaming on the Internet. . . . In the same way that Jobs’ NeXT built its own development frameworks and operating environment, Apple has built its own technology for iMessages, for Siri, Maps, for new technologies.9

Relevant here is whether AOI made any buy-in payment to Apple Inc. for the PCTs that became available to the CSA’s intangible development activity. With the NeXT acquisition would have come both important intangibles and personnel (for example, Jobs and many other knowledgeable and skillful team members) who would have contributed significantly to the development team within Apple Inc. It is unknown whether Apple’s Irish CSA participants made PCT payments for the NeXT acquisition or for later or prior acquisitions related to Apple’s new strategy. The important point is that if there were in fact no PCT payments by AOI for those pre-2009 acquisitions, especially the NeXT acquisition, that would substantially reduce AOI’s relative share of the PCTs and legacy IP as of January 5, 2009.10 For purposes of this report, it is conservatively assumed that AOI made appropriate PCT payments and therefore legally owns the rest-of-the-world rights to the associated IP.

C. Estimates for 2009 Initial PCTs

All the examples in reg. section 1.482-7(i)(6)(vii) assume that there is a new CSA where only one participant owns preexisting IP, and an initial PCT payment is therefore due exclusively from the other (usually foreign) participant. In Apple’s case, as previously explained, the rest-of-the-world rights to the existing IP were already owned by AOI because of its legacy participation in the CSAs that were in place before January 5, 2009. As a result, on the January 5, 2009, commencement of the new CSA, AOI would be deemed to have made a platform contribution consisting of those rights. For its part, Apple Inc. would be deemed to have made a platform contribution of all other rights to legacy IP related to the CSA, in addition to owning all other IP rights related to the global business (known as operating contributions).

To calculate periodic adjustments, the relative values of Apple Inc.’s and AOI’s platform and operating contributions must be determined. These relative values are used to determine for AOI the portion of the profits related to its territory that are properly allocated to AOI in a residual profit-split analysis. One valuation method that would produce a maximum (and therefore conservative) value for AOI’s platform contribution of legacy IP existing on January 5, 2009, would be based on an allocation of Apple’s global market capitalization among the various IP assets owned by Apple Inc. and AOI.

Apple’s market capitalization on January 5, 2009, was $80.7 billion.11 The value of Apple’s tangible assets on December 27, 2008, reported in SEC filings was $39.1 billion, so the market value of Apple’s intangible assets was $41.6 billion. Importantly, this value represents all of the Apple group’s IP — including both technology IP and exploitation IP, the latter of which belonged solely to Apple Inc. The allocation of this value among the various IP assets is discussed here and is further documented in Appendix 2 (including Table A2.1).

Economic research has shown that exploitation attracts as much as 80 percent of system profits.12 The preponderance of this value would be attributable to Apple’s exploitation capability, including the world’s best supply chain. Relatively speaking, AOI has few exploitation capabilities and relies on Apple U.S. to conduct virtually all nonroutine critical business functions through which its IP is exploited. We must therefore exclude the IP value of that exploitation capability conducted by Apple U.S. from AOI’s legacy IP value. For this exercise, the calculations conservatively assume that exploitation IP represents only 50 percent (well under the above-noted 80 percent) of the $41.6 billion of intangible assets, or $20.8 billion.

The remaining $20.8 billion represents the value of all technology-related IP. Technology-related IP must be further allocated between product IP (including the Apple trademark and any similar IP assets), which both Apple Inc. and AOI own, and other IP related to the development program, which belongs solely to Apple Inc. This development program IP includes R&D employee workforce in place and the going concern value of research facilities. Although there is some debate about whether these items are truly “intangible property” as defined in the tax code, the cost-sharing regulations broadly define platform contributions to include them. Specifically, platform contributions include any “resource or capability” that a cost-sharing participant has developed, maintained, or acquired that is reasonably anticipated to contribute to developing cost-shared intangibles. As has been clearly stated in the various documents from the European Commission and the General Court of the European Union (GCEU), only Apple Inc. has the personnel and facilities through which the intangible development activity is conducted. It is therefore necessary to establish a PCT value for these Apple Inc. research teams and facilities as they existed on January 5, 2009.13 We have estimated that one-third of the $20.8 billion value of technology-related IP should be allocated to development program IP and two-thirds to product IP.

The amount allocated to product IP is $13.874 billion (two-thirds of $20.8 billion). Because both Apple Inc. and AOI own rights to Apple’s legacy product IP in their respective territories, this value is multiplied by AOI’s estimated 2008 year-end reasonably anticipated benefit (RAB) territory share of 34.5 percent to yield a value of approximately $4.8 billion for AOI’s legacy IP. Because AOI owns no other IP, this is AOI’s entire IP contribution.

Under the applicable rules, each participant in a CSA must also take into account in the periodic adjustment calculations any actual PCT payments that it made in connection with the contribution by the other participants at the initiation of that CSA. Because Apple Inc. and AOI treated their CSA under the 2008 regulations as being grandfathered, they would not have made any actual PCT payments. Although alternatives may be possible, this exercise is more than sufficient to conservatively analyze AOI’s position at the commencement of the new CSA on January 5, 2009.

D. Estimated 2009 PCT Payments

Apple disclosed to the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations (PSI) that Apple Sales International (ASI) and Apple Operations Europe (AOE) paid Apple Inc. for their respective shares of PCTs, consisting of (1) their shares of third-party technology acquisitions and (2) their shares of other contributed IP (such as IP covered by reg. section 1.482-4). For some years, Apple also disclosed the actual amounts of those PCT payments, together with actual cost-sharing payments and information on actual RAB shares, total CSA-related payments, and payments from ASI. Several of those inputs are shown below in figures 4 and 5:

Figure 4. Apple's Reported PCT Payments in 2012
Figure 5. Apple's Reported ASI Cost Sharing Payments

Moreover, Apple reports other key information in SEC filings, including U.S. and foreign pretax earnings and revenues. Information on acquisitions is available from public sources, including Apple’s websites. Those public sources were used to estimate the cost-sharing payments and PCT payments, which were then calibrated against actual results reported by Apple to the Senate PSI. The resulting adjustments were then applied to all years in the periodic adjustment calculations.

Perhaps the most important input to be estimated for this calculation involves acquisitions from January 5, 2009, by Apple Inc.14 that include intangibles or personnel and facilities that will contribute to the cost-shared intangibles under the CSA. This is a difficult exercise using only public information because Apple acquires a company every few weeks, according to its CEO,15 and few of those acquisitions are publicly announced. It is unknown whether, or to what extent, any of the acquisitions include intangibles that would be within the scope of the Apple Inc./AOI CSA and thus contribute as PCTs to cost-shared intangibles. However, because Apple makes so many acquisitions, these acquisitions cannot be ignored. For example, in April 2010 Apple acquired Siri. Soon after, in October 2011, Siri was included in the Apple iPhone 4S.16

Generally, an acquisition or portions thereof would give rise to a PCT only if it involved capabilities, resources, or rights that were “reasonably anticipated to contribute to the intangible development activities.” The value of the platform contribution would be estimated according to methods in reg. section 1.482-7(g)(1)(i) through (vi) (which include unspecified methods). However, under appropriate circumstances, the foreign share of the entire adjusted acquisition value would be the PCT value according to reg. section 1.482-7(g)(5)(iii). Under that method, the full acquisition price plus any assumed liabilities and minus the value of any tangible assets would be the adjusted acquisition value. Although this acquisition price method is rarely used, it may be helpful for many Apple acquisitions because Apple often acquires small independent enterprises for their intangible properties and knowledgeable employees.

The approach taken here is to account for all publicly known acquisitions since January 5, 2009, at their reported or estimated full acquisition price (because the amounts of liabilities, tangible assets, or portions of acquisition values constituting PCT values are unknown). When an acquisition is disclosed but its value isn’t, the value to be substituted in this computation is the average of all the disclosed acquisition values for acquisitions from January 5, 2009. The average was determined after removing the two highest- and lowest-value acquisitions from the calculation to reduce bias.

This approach may conservatively overvalue the PCTs to some extent because (1) it is almost a certainty that not all acquisitions will include intangibles that will contribute to CSA cost-shared intangibles at a partial or full acquisition price; and (2) most, if not all, of the publicly announced acquisitions are expected to be among the largest ones, so the use of the average of these larger acquisition values is expected to capture or exceed the value of the omitted acquisition values. We were able to benchmark our estimates for PCTs with one year of actual PCTs reported by Apple to the Senate PSI for 2012. Our calculations to estimate the PCTs for all years matched very closely (within +$277 million to actual, or 11 percent overestimation) the actual PCT payments in 2012 that Apple reported to the Senate, shown in Table 5.

Table 5. Estimated Cost-Sharing and PCT Payments by AOI Since 2009
($ million)

Year

Estimated Cost-Sharing Payments

Estimated Acquisition-Related PCTs

Estimated Other PCTs

Total Estimated CSA Investments

2012 Actual Payments

Difference (Est. - Actual)

2009

$489

$85

$65

$639

 

 

2010

$758

$407

$131

$1,297

 

 

2011

$1,400

$132

$173

$1,705

 

 

2012

$1,658

$609

$255

$2,522

$2,245

$277

2013

$2,207

$83

$258

$2,548

 

 

2014

$3,061

$2,694

$649

$6,404

 

 

2015

$4,376

$600

$561

$5,536

 

 

2016

$5,433

$743

$696

$6,872

 

 

2017

$6,006

$554

$739

$7,299

 

 

2018

$7,358

$915

$932

$9,206

 

 

2019

$7,876

$1,350

$1,040

$10,265

 

 

2020

$8,992

$835

$1,107

$10,934

 

 

The calculations here assume that all acquisitions were made by Apple Inc. and contributed to the CSA cost pool as PCTs, requiring payment by AOI, consistent with information provided in Figure 4. The European Commission documents allege that AOI (that is, ASI and AOE) has made payments to Apple Inc. for only intangible development cost and some marketing services.17 The Senate PSI documents, however, disclosed that AOI made substantial PCT payments for both U.S. and foreign acquisitions and other IP covered by reg. section 1.482-4, at least in 2012. It seems likely that these PCT payments were included in the cost-sharing payments in the commission’s report. The calculations therefore assume that AOI has contributed through buy-in payments to PCTs acquired through acquisitions made by the U.S. company.

Our method for estimating AOI’s PCT payments is conservative. This is because the periodic adjustment calculations treat PCT payments as investments on which AOI would be entitled to earn an appropriate return. By assuming that AOI made required PCT payments and by using an estimation method that likely overvalues the amount of the PCT payments, the total investment amount is increased. If PCT payments were not made or were smaller in amount, the size of the periodic adjustments we calculate would be larger.

A summary of Apple’s acquisitions is shown in Appendix 1, together with the references for these acquisitions and their values, if disclosed.

Combining the PCT payments for these acquisitions with the totals for other PCT payments and cost-sharing payments (as calibrated using actuals reported for 2012, shown in Figure 4), the payments shown in Table 5 were estimated as the basis for the periodic adjustment calculations. In general, these results are expected to provide a fairly accurate, if not slightly overstated, value of identified PCTs in each year on average. This is because we use the acquisition price method for acquisitions and assume generous “other IP” contributions in every year (when those contributions would be anticipated for only some years), combined with the referenced calibrations and adjustments (for instance, adjusting the foreign pretax income reported in SEC filings to the Americas and rest-of-the-world pretax income based on ratios determined from Senate PSI disclosures). The calculations conservatively assume that the 2012 PCT results shown in Figure 4 above are indicative of all the years between 2009 and 2020, which may not be the case.

E. Exceptions to Periodic Adjustments

Reg. section 1.482-7(i)(6)(vi)(A)(1)-(4) identifies four exceptions that could prevent a periodic adjustment. In Apple’s case, the applicable period when these exceptions could apply would start on January 5, 2009. This is a result of Apple’s earlier-described lack of compliance with the 2008 regulation transition rule of reg. section 1.482-7(m)(1), which caused a new CSA as of that date.

The first exception concerns when a taxpayer has transferred the cost-shared IP to an unrelated party under conditions that are similar to the contribution to the controlled CSA participant, and the unrelated transfer price was used as the basis for pricing the PCT. No instances of this can be found in the public domain, and it seems doubtful that those situations would exist.

The second exception occurs when the indicated periodic trigger was the result of extraordinary events, beyond the control of the controlled participants, that could not reasonably have been anticipated at the time of the trigger PCT. Note that this exception assumes that the taxpayer otherwise complied with the CSA regulations. One might suggest that the incredible success of the iPhone could not have been reasonably anticipated, but actually the opposite occurred — the unexpected rise of Google’s Android-based smartphones, which competed directly with Apple’s iPhone, ensured that Apple would not become a monopolist in the smartphone market. In fact, Android’s rise relegated Apple’s market share to second place. No facts appear to support this exception.

The third exception is difficult to understand, even after reviewing the IRS’s discussion of it in the preambles to the regulations. It appears to apply when the periodic trigger occurs as the result of contributions other than platform contributions. Because it is quite clear that platform contributions add significantly to AOI’s extremely high profits, this exception would not apply.

The fourth exception would apply if a periodic trigger would not have occurred if anticipated profit and losses in future years were taken into account in the current year. Our analysis shows that AOI’s profits increase year after year, which indicates that the periodic trigger would occur no matter how many future years were considered.

In addition to these four exceptions, there are five- and 10-year safe harbors. The five-year safe harbor states that if AOI’s CSA-related results are so low that they fall below the periodic trigger range, no periodic trigger will be allowed to exist for the first five years of the CSA (which, in our analysis, is from January 5, 2009). Under the 10-year safe harbor, if the taxpayer has no periodic trigger in the first 10 years of its CSA under the 2008 regulations, the taxpayer will be exempt from a periodic adjustment for the remaining life of the CSA arrangement. Apple Inc. qualifies for neither of these safe harbors because it appears to trigger a periodic adjustment in every year since 2009.

In summary, Apple does not appear to qualify for any of these exceptions or safe harbors that would prevent a periodic adjustment under reg. section 1.482-7(i)(6).

F. Periodic Trigger Calculation

Having concluded thus far that Apple did not meet the transition rules or grandfathering requirements to be exempt from a periodic adjustment under reg. section 1.482-7(i)(6) and would not meet any of the exceptions or safe harbors, the next step in this analysis is to perform a periodic trigger calculation. If the calculation shows that a periodic adjustment is triggered, the adjustment is calculated.

Table 6. Key Inputs to AOI Periodic Trigger and Periodic Adjustment Calculations
($ million)

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(j) = e - h

(k) = j/e

(l)

(m) = k * l

(n)

(o) = k * n

(p)

Year

Discount Term

ADR

Discount Factors

Total Apple Rev. per SEC Filings

U.S. Rev. per SEC Filings

Foreign Rev. per SEC Filings

Est. Americas Territory Revenues

Est. AOI Pretax Income

Est. Apple Ireland CSA-Related Territory Revenues per SEC Filings

Est. AOI RAB % Based on Territory Rev. Share

Total R&D Costs Reported in SEC Filings

Est. AOI RAB Share of R&D Costs

Est. Total Tech Acquisitions

Est. AOI Share of Tech Acquisitions = PCT Payments

Est. AOI Share of “Other” U.S. Contributed PCTs

FY2009

0.73

12.23%

0.92

$30,892

$16,074

$14,818

$15,144

$2,880

$15,748

51%

$960

$489

$168

$85

$65

FY2010

1.73

12.23%

0.82

$65,225

$28,633

$36,592

$37,466

$12,000

$27,759

43%

$1,782

$758

$957

$407

$131

FY2011

2.73

12.23%

0.73

$108,249

$41,812

$66,437

$54,711

$22,000

$53,538

49%

$2,429

$1,201

$267

$132

$150

FY2012

3.73

12.23%

0.65

$156,508

$60,949

$95,559

$79,752

$36,000

$76,756

49%

$3,381

$1,658

$1,241

$609

$255

FY2013

4.73

12.23%

0.58

$170,910

$66,197

$104,713

$86,619

$28,500

$84,291

49%

$4,475

$2,207

$168

$83

$258

FY2014

5.73

12.23%

0.52

$182,795

$68,909

$113,886

$90,167

$31,600

$92,628

51%

$6,041

$3,061

$5,316

$2,694

$649

FY2015

6.73

12.23%

0.46

$233,715

$81,732

$151,983

$106,946

$45,600

$126,769

54%

$8,067

$4,376

$1,106

$600

$561

FY2016

7.73

12.23%

0.41

$215,639

$75,667

$139,972

$99,010

$39,100

$116,629

54%

$10,045

$5,433

$1,373

$743

$696

FY2017

8.73

12.23%

0.37

$229,234

$84,339

$144,895

$110,358

$42,700

$118,876

52%

$11,581

$6,006

$1,068

$554

$739

FY2018

9.73

12.23%

0.33

$265,595

$98,061

$167,534

$128,313

$46,000

$137,282

52%

$14,236

$7,358

$1,771

$915

$932

FY2019

10.73

12.23%

0.29

$260,174

$102,266

$157,908

$133,815

$42,300

$126,359

49%

$16,217

$7,876

$2,779

$1,350

$1,040

FY2020

11.73

12.23%

0.26

$274,515

$109,197

$165,318

$142,884

$36,347

$131,631

48%

$18,752

$8,992

$1,741

$835

$1,107

WACC

12.23%

 

Sum

$2,193,451

$833,836

$1,359,615

$1,085,185

$385,027

$1,108,265

n/a

$97,966

$49,416

$17,953

$9,006

$6,584

Table 7. Estimated AOI Periodic Trigger Calculation
Periodic Trigger Calculation per Reg. Section 1.482-7(i)(6) for All PCTs
($ million)

 

(a)

(b)

(c)

(d)

(e)

(f) = d + e

(g) = b - c

(h) = g/f

(i)

(j) = h - 1.25

Year

Year No.

Apple Ireland Territory CSA-Related Sales

Non-CC/ Non-IDC Costs (Est.)

CC/IDCs (Est.)

Current Year PCTs

PVI = Est. Total Investment Costs

PVTP = Est. Divisional Profit (Loss)

AERR = PVTP/PVI

AERR > 1.5 OR 1.25*

“Excess” AERR (versus 1.25 limitation)

FY2009

1

$15,748

$12,293

$489

$150

$639

$3,455

 

 

 

FY2010

2

$27,759

$14,593

$758

$539

$1,297

$13,166

 

 

 

FY2011

3

$53,538

$30,205

$1,201

$282

$1,484

$23,333

 

 

 

FY2012

4

$76,756

$38,489

$1,658

$864

$2,522

$38,267

 

 

 

FY2013

5

$84,291

$53,502

$2,207

$341

$2,548

$30,790

 

 

 

FY2014

6

$92,628

$55,273

$3,061

$3,342

$6,404

$37,355

 

 

 

FY2015

7

$126,769

$76,193

$4,376

$1,160

$5,536

$50,575

 

 

 

FY2016

8

$116,629

$71,353

$5,433

$1,439

$6,872

$45,276

 

 

 

FY2017

9

$118,876

$69,617

$6,006

$1,293

$7,299

$49,260

 

 

 

Yr 0 NPV Thru Yr 1

$14,476

$11,300

$450

$138

$588

$3,176

5.40

Yes

415%

Yr 0 NPV Thru Yr 2

$37,212

$23,253

$1,071

$579

$1,650

$13,959

8.46

Yes

721%

Yr 0 NPV Thru Yr 3

$76,284

$45,296

$1,948

$785

$2,733

$30,988

11.3

Yes

1009%

Yr 0 NPV Thru Yr 4

$126,196

$70,324

$3,026

$1,347

$4,373

$55,871

12.8

Yes

1153%

Yr 0 NPV Thru Yr 5

$175,035

$101,324

$4,305

$1,545

$5,849

$73,711

12.6

Yes

1135%

Yr 0 NPV Thru Yr 6

$222,856

$129,859

$5,885

$3,270

$9,155

$92,996

10.2

Yes

891%

Yr 0 NPV Thru Yr 7

$281,170

$164,909

$7,898

$3,804

$11,702

$116,261

9.9

Yes

865%

Yr 0 NPV Thru Yr 8

$328,974

$194,155

$10,125

$4,394

$14,518

$134,819

9.3

Yes

804%

Yr 0 NPV Thru Yr 9

$372,390

$219,580

$12,318

$4,866

$17,184

$152,809

8.9

Yes

764%

Table 8. Estimated AOI Periodic Adjustment Calculations With a 66.7% Residual Profit Split to Apple US in Adjustment Year 2017
Periodic Adjustment per Reg. Section 1.482-7(i)(6)
($ million)

Year

(a)

(b)

(c)

(d) = b * c

(e)

(f) = d - e

(g) = f / (Det Year ADR)

Year No.

Divisional Profit and Loss

Royalty Rate in Determination Year

Nominal Royalty Due Under Adjusted RPSM

Nominal Payments Made (PCTs)

Additional PCT Owed

Present Value of The Owed PCT In Determination Year (2017)

FY2009

1

$3,455

50%

$1,732

$150

$1,582

Convert Year 0 Amounts to PV in 2017 Determination Year

FY2010

2

$13,166

50%

$6,601

$539

$6,062

FY2011

3

$23,333

50%

$11,699

$282

$11,416

FY2012

4

$38,267

50%

$19,186

$864

$18,321

FY2013

5

$30,790

50%

$15,437

$341

$15,096

FY2014

6

$37,355

50%

$18,728

$3,342

$15,386

FY2015

7

$50,575

50%

$25,357

$1,160

$24,196

FY2016

8

$45,276

50%

$22,700

$1,439

$21,261

FY2017

9

$49,260

50%

$24,697

$1,293

$23,404

Yr 0 NPV Thru Yr 9

$152,809

 

$76,613

$4,866

$71,747

$196,452

The periodic trigger calculation, which is described in reg. section 1.482-7(i)(6)(i) through (iv), triggers a periodic adjustment if the foreign participant’s actually experienced return ratio is above the periodic return ratio range. The actually experienced return ratio is the present value of the total profits of the foreign CSA participants divided by the present value of the CSA-related investments (the sum of PCTs and cost-sharing payments), known as PVI. The upper bound of the periodic return ratio range is 1.5. However, if the taxpayer has not substantially complied with the documentation requirements referenced in reg. section 1.482-7(k), that threshold is reduced to 1.25. (Note that preparing a CSA contract that includes intentionally misleading and false information on the functions and risks that each CSA participant undertakes18 — information required by reg. section 1.482-7(k)(1)(ii)(C) — should qualify as noncompliance.) Because Apple is publicly traded, the applicable discount rate is Apple’s weighted average cost of capital in the year in which the trigger PCT occurs, according to reg. section 1.482-7(i)(6)(iv)(B).

The calculations that follow use Apple’s 2017 fiscal year as the adjustment year (which is not yet under examination according to the most recent annual SEC filing). The trigger PCT occurred in 2009, and Apple’s applicable discount rate in 2009 is reported on a financial website to have been 12.23 percent.19 All the tables in the appendix use that applicable discount rate.

The calculations of the periodic trigger for Apple are based on SEC filings and other information and may differ to some extent from tax information. First, the information used as inputs to the periodic trigger calculation is shown below. Note that Apple has a September 30 year-end, and the CSA start date for this exercise is January 5, 2009. Therefore, year 1 in this exercise is a partial year, from January 5, 2009, to September 30, 2009, and year 2 and onward are 12-month periods from October 1 to September 30 of the following year. The year 1 financial inputs were estimated based on the proportion of annual revenues that occurred between the second and fourth quarters. The discount term was based on the number of days between January 5, 2009, and September 30, 2009. (Note that Apple Inc. uses a 52/53 week fiscal year in its SEC filings. For the convenience of the reader, we refer herein to September 30 year-ends.)

The periodic trigger calculation is shown below in Table 7, and it follows the process and formatting shown in reg. section 1.482-7(i)(6)(vii), Example 1.

As can be seen, a periodic trigger is indicated by this calculation beginning in year 1 of the January 5, 2009, CSA.

G. Periodic Adjustment Calculations

The five steps laid out below are formulaic. The background to them, though, is the commensurate-with-income concept that was inserted into section 482 (and section 367(d)) in the Tax Reform Act of 1986. In short, the concept behind these formulaic steps is to allow a CSA participant to earn a return only to the extent of two factors:

  • The first factor is the routine exploitation functions performed. Normal transfer pricing concepts and applicable regulations under section 482 will determine the return for these functions. For AOI, these functions include the sales and marketing, customer support, logistics, and other functions performed by AOI’s disregarded entity subsidiaries around the world. Because Apple U.S. performs all production functions, AOI’s routine exploitation returns would exclude any return for those functions.

  • The second factor is the platform contributions that each CSA participant brought to the table at the initiation of the CSA. Thus, the RPSM is used by applying the relative value of each participant’s PCTs to determine that participant’s share of actual profits that exceed the calculated routine returns. Say, for example, that one participant has existing product IP that will contribute to the intangible development activity and has personnel and facilities that will conduct the joint development of the cost-shared intangibles. The other participant holds different IP that will also contribute to the intangible development activity. Their relative values are 75 percent for the first participant and 25 percent for the second participant. These relative values are used by applying the RPSM in the periodic adjustment calculation to place appropriate levels of nonroutine profits in the hands of each participant.

The five formulaic steps to calculate the periodic adjustment are set out in reg. section 1.482-7(i)(6)(v) as follows.

As of the date of the trigger PCT, determine the present value of the PCT payments using the adjusted RPSM as described in paragraph (i)(6)(v)(B) of the CSA regulations. (Note that for this purpose, these PCT payments are mostly those related to the Apple Inc. acquisitions.)

Convert the present value of the PCT payments determined in the first step into a level royalty rate as a percentage of the reasonably anticipated divisional profits or losses over the entire duration of the CSA activity.

Multiply the second-step royalty rate by the actual divisional profit or loss for tax years preceding and including the adjustment year to yield a stream of contingent payments in each year, and convert these payments to a present value as of the CSA start date. In the event of a loss in a year, the result will be a negative contingent payment for that year.

First, convert any actual PCT payments through the adjustment year to a present value as of the CSA start date (January 5, 2009). Second, subtract this present value from the present value result determined in the previous step. This difference is the amount in present value terms of the participant’s deficiency in PCT payments. Third, convert this present value payment to a nominal amount in the adjustment year. This nominal amount is the periodic adjustment to be recognized by the U.S. taxpayer as additional taxable income in the adjustment year.

Table 9. Estimated AOI Periodic Adjustment Calculations for Years Between Adjustment Year and Determination Date
Periodic Adjustment per Reg. Section 1.482-7(i)(6)
($ million)

 

(a)

(b)

(c)

(d) = b * c

(e)

(f) = d - e

Year

Year No.

Divisional Profit and Loss

Royalty Rate In Adjustment Year

Nominal Royalty Due Under Adjusted RPSM

Nominal Payments Made (PCTs)

Additional Periodic Adjustment to Be Made

FY2018

10

$54,274

50%

$27,211

$1,848

$25,363

FY2019

11

$51,526

50%

$25,833

$2,389

$23,444

FY2020

12

$46,174

50%

$23,150

$1,942

$21,208

Table 10. Estimated Federal Taxes for a Periodic Adjustment Covering the Adjustment Year and Through the Determination Date ($ million)

Description

Applicable Year

Periodic Adjustment

Statutory Federal Rate

Estimated Federal Taxes

Initial Periodic Adjustment

2017

$196,452

35%

$68,758

Subsequent Periodic Adjustment

2018

$25,363

24.5%

$6,214

Subsequent Periodic Adjustment

2019

$23,444

21%

$4,923

Subsequent Periodic Adjustment

2020

$21,208

21%

$4,454

Total

$84,349

Importantly, step 4 actually includes three substeps as noted. In Appendix 2, step 4 is separated into steps 4a, 4b, and 4c for clarity. After a periodic adjustment has been calculated for an adjustment year, every subsequent year will automatically be subject to a periodic adjustment in accordance with the following guidance.

Apply the second-step royalty rate to the actual divisional profit or loss for each tax year after the adjustment year to calculate amounts for each year. Then subtract from each year’s amount any actual PCT payment made for the same year. The differences are the periodic adjustment for each post-adjustment tax year.

Reg. section 1.482-7(i)(6)(v)(B)(2) contains the following guidance regarding the determination of the applicable royalty:

Projected results for the balance of the CSA Activity after the Determination Date, as reasonably anticipated as of the Determination Date, shall be substituted for what otherwise were the projected results over such period, as reasonably anticipated as of the date of the Trigger PCT.

The detailed guidance, as reflected in reg. section 1.482-7(i)(6)(vii), Example 1, paragraphs (v) through (vii), requires that the entire projected life of a CSA be included in the calculation of the level royalty rate. As a result, in making calculations for the Apple Inc./AOI CSA, which presumably is intended to have a perpetual life, our calculation of the level royalty rate in Table A2.3 includes a terminal value. (This is described in Appendix 2, section C.3.)

The calculation steps described above as applied to Apple’s CSA, together with relevant assumptions, are shown in Appendix 2. Tables 9 and 10 show the results of steps 4 and 5, representing the periodic adjustment calculations through the fiscal 2017 adjustment year.

Once the adjustment year result is obtained, step 5 computes the periodic adjustment due for the remaining years for which information is available (the last year representing the determination date), using the adjustment year royalty rate. Because Apple has reported book financial results through 2020, Table 9 shows results for fiscal 2018 through fiscal 2020, in which the 2020 tax year is the determination date.

The total estimated taxes that the IRS could impose on an audit cycle covering years through the determination date based on this analysis are shown below.

H. Impact of Deemed Repatriation Tax

Importantly, Apple stated in its fiscal 2018 Form 10-K the following regarding its deemed repatriation taxes as part of the Tax Cuts and Jobs Act.20 Beginning with its fiscal 2018 tax return, Apple was required to pay these taxes on all accumulated unrepatriated foreign income since 1986, measured as of approximately November 2017, because of the U.S. implementation of a territorial tax system in 2017:

As of September 30, 2017, the Company had a U.S. deferred tax liability of $36.4 billion for deferred foreign income. During 2018, the Company replaced $36.1 billion of its U.S. deferred tax liability with a deemed repatriation tax payable of $37.3 billion, which was based on the Company’s cumulative post-1986 deferred foreign income. . . . The Company plans to pay the tax in installments in accordance with the Act. [Emphasis added.]

The $37.3 billion appears to represent, for the most part, the 15.5 percent special repatriation tax rate applied to Apple’s unrepatriated foreign income as of the 2017 measurement date, net of foreign tax credits. Secondly, Apple stated that it elected to pay this sum in installments over eight years, consistent with the TCJA. According to the law, the first five of those payments are 8 percent of the repatriation tax amount and escalate in the last three years to 15 percent, 20 percent, and 25 percent, respectively. No interest element is added to these installments. This means that as of mid-2021, Apple has presumably paid two of these installments, or $5.9 billion, which would reduce to some extent the amount of any taxes resulting from a periodic adjustment assessed for the 2017 tax year.

Apple reported in its 2018 Form 10-K that it had established a deferred tax liability for the expected deemed repatriation taxes of $37.3 billion arising from the TCJA. If that is combined with Apple’s unrecognized tax benefits as of September 30, 2020, of $16.5 billion, the result is $53.8 billion, which is about 64 percent of the $84 billion in taxes that would be associated with the periodic adjustment estimated here based on public information.21 It is expected that Apple’s internal accounting information will differ, perhaps significantly, from the estimates established here, which are based on publicly available information and on factual assumptions made when public information is unavailable. For instance, this analysis intentionally seeks to apply maximum possible values for acquisition and other PCTs and routine returns, and minimum values for projected CSA returns, to produce a “lower bound” conservative periodic adjustment estimate. An actual calculation based on Apple’s proprietary tax and accounting results could determine periodic adjustments significantly higher than the $84 billion estimated here.

V. Alternative Adjustments to AOI

Regardless of whether the IRS chooses to apply a periodic adjustment under reg. section 1.482-7(i)(6), the publicly available facts strongly support two additional approaches for the IRS to consider. One of them — the application of effectively connected income taxation and the subpart F branch rule to AOI — can be pursued simultaneously with transfer pricing adjustments, including the periodic adjustment and adjustments under other transfer pricing regulations.

A. ECI Taxation and Subpart F Branch Rule

ECI taxation is applied to foreign persons, including controlled foreign corporations, such as AOI. This taxation requires that the foreign person factually conduct a trade or business within the United States. Part 1 of this report documented how AOI conducts much of its business through the actions of U.S.-based personnel, whether its own personnel22 or Apple Inc. personnel who are making decisions and conducting commercial sales and production activities on behalf of AOI. These activities, conducted regularly and continuously, are more than enough to cause AOI to be engaged in a trade or business within the United States.

The application of ECI taxation is procedurally easier when there is a partnership. Accordingly, how Apple Inc. and AOI conduct the Apple group’s worldwide business must be examined in light of the reg. section 301.7701-1 and -3 entity classification rules. In short, with one management and operational structure that conducts the business of both Apple Inc. and AOI, there is clearly a joint business that constitutes an entity for federal tax purposes and will be treated as a partnership under the entity classification default rule in the absence of an active election.23 With AOI thereby being treated as a partner in a partnership that conducts the joint worldwide business of the Apple group,24 AOI will be treated by statute (section 875) as being engaged in a trade or business within the United States.

Once AOI is found to be engaged in a trade or business in the United States (whether directly or through a partnership), each item of gross income must be considered under the applicable sourcing and ECI rules to determine the ECI that will be directly taxable in the hands of AOI. Given the active participation of personnel in the United States in both the sales and production of tangible and intangible products, as well as in managing and operating the internet-based platforms through which cloud services income is earned, it seems certain that there will be significant U.S.-source income that will be treated as ECI under section 864(c)(3).25

It is important to note that ECI taxation may be applied in conjunction with transfer pricing adjustments. Assume that the IRS chooses to apply and eventually sustains periodic adjustments under reg. section 1.482-7(i)(6) or other transfer pricing adjustments, such as intercompany service fee adjustments under reg. section 1.482-9. Following those adjustments, AOI’s profits will have been reduced under the correlative adjustment rules of reg. section 1.482-1(g)(2). ECI taxation will be applied to the post-correlative adjustment profits of AOI.

The status of open and closed years for the application of ECI taxation to a CFC, such as AOI, does not follow the status of the Apple U.S. affiliated group’s open and closed years. This is because any CFC is a separate taxpayer with its own filing requirements on Form 1120-F, “U.S. Income Tax Return of a Foreign Corporation.” If AOI hasn’t filed Form 1120-F for a prior year, then under section 6501(c)(3), that year will still be open for adjustment. Further, the above-described facts show how Apple Inc. has conducted major portions of AOI’s business and show the conflicting information that the group has provided to different authorities, including the GCEU. Considering this, even if AOI has filed protective Forms 1120-F for all prior years going back to its predecessor’s 1980 formation claiming that it had no trade or business in the United States, many of those years should still be open under either section 6501(c)(1) or (2), which respectively deal with the filing of a false or fraudulent return and the willful attempt to evade tax.

The Form 10-K filed by Apple Inc. for its year that ended in September 2020 disclosed that all prior years through 2015 are closed for further adjustment by the IRS. Despite this, many or all of those prior years will likely still be open for ECI taxation of AOI.

ECI taxation includes not only the normal corporate tax at the rate applicable for the tax year but also the section 884 branch profits tax.26 Further, if a tax return has not been timely filed,27 the amount of ECI will be increased by the section 882(c)(2) denial of deductions and credits.28

To the extent that AOI’s income from sales is foreign-source and escapes ECI taxation, it will still be potentially subject to U.S. taxation in the hands of its U.S. shareholder under subpart F. In short, the branch rule of section 954(d)(2) and reg. section 1.954-3(b) should apply to some portion of AOI’s sales transactions.29 Because subpart F results in taxation in the hands of the U.S. shareholder and not the applicable CFC, this additional tax should apply only to Apple Inc.’s 2016 tax year and later, unless some exception were to apply. For example, section 6501(c)(8) could potentially apply depending on what disclosures Apple Inc. has made or not made in its U.S. tax filings.

B. Recharacterization

The second possible approach that the IRS could consider is recharacterization. Although the above ECI and subpart F branch rule approach can be applied on its own or in conjunction with periodic adjustments, recharacterization would be appropriate only if the IRS were to decline to initiate periodic adjustments.

Any in-depth discussion of recharacterization is beyond the scope of this report. Suffice it to say that the background facts of how Apple Inc. manages the entire business of AOI and conducts major portions of its business on its behalf (for example, sales to major customers, full conduct of AOI’s supply chain, and operation of the internet-based platforms through which AOI makes sales and earns cloud services revenues) strongly support a position that AOI is nothing more than an agent of Apple Inc. That position is consistent with the factual situation that Apple has presented to the European Commission and the GCEU.

Note that a recharacterization approach could be applied only to Apple Inc.’s open years, which are 2016 through the present. In contrast, both periodic adjustments and ECI taxation allow some taxation of AOI income earned in earlier years.

VI. Conclusion

The conclusions of this report are based on reliable public information, including disclosures related to investigations conducted by the Senate PSI and the European Commission, which include information provided by Apple Inc. to these organizations and to the GCEU. Our findings include that Apple Inc. did not comply with the transition rules in the 2008 temporary cost-sharing regulations (in particular, reg. section 1.482-7(m)(1)). Although this would disqualify the Apple Inc./AOI CSA from being a valid CSA from January 5, 2009, the IRS’s apparent acceptance of the CSA in now-closed tax years from 2009 through 2015 means that Apple Inc. and AOI’s CSA must be considered to be a new CSA effective from January 5, 2009, with no benefit of any grandfathering provisions in reg. section 1.482-7(m)(2). As a result, Apple would not qualify for exemption from compliance with the 2008 periodic adjustment regulations in reg. section 1.482-7(i)(6). An indicative calculation of this periodic adjustment according to these regulations and based on conservative assumptions shows that Apple Inc. appears to be subject to a substantial periodic adjustment, the tax payments for which would exceed the amounts of tax underpayments reserved in Apple’s UTPs combined with its deferred tax liabilities for the TCJA deemed repatriation taxes.

In conjunction with, or as an alternative to, making periodic adjustments, the IRS has a particularly strong basis for assessing ECI taxation directly on AOI and treating some portion of AOI’s transactions as creating subpart F income within Apple Inc. under the foreign base company income branch rule. Further, as an alternative to making periodic adjustments, the IRS could consider recharacterizing the Apple Inc./AOI relationship to treat AOI as nothing more than an agent of Apple Inc.

Importantly, the apparent recognition within AOI of significant profits that should have been reflected within the United States, as demonstrated in this report, affects state taxes, especially for any states that apply their state income taxes on a water’s-edge or other approach that excludes AOI’s profits from the allocable tax base. In addition, these findings should provide a basis for state tax audits to recoup significant amounts of underpaid taxes where a state has applicable transfer pricing rules in place.

That so many code sections appear to have been violated by Apple Inc.’s potentially sham, and almost certainly nonqualifying, CSA without IRS detection or enforcement, despite a plethora of publicly available evidence and information, raises possibly the most spectacular enforcement failure yet produced by this Frankenstein regulation. It does appear that Frankenstein’s monster is alive and well, and on the rampage at Apple Inc.

VII. Appendix 1: Apple Acquisitions

Publicly known acquisitions are shown in Table A1.1. All references for these acquisitions were retrieved in May 2021 and are shown in Table A1.2. The years shown are September year-end.

Table A1.1

No.

Date

Acquisition

Technology

Location

Public Value ($ mil)

Application

Reference

PCT Value Used ($ mil)

1

2-Mar-88

Network Innovations

Software

United States

Data Access Language (DAL)

[1]

$70.8

2

7-Jun-88

Orion Network Sys.

Computer Software

United States

SNA*ps

[2]

$70.8

3

27-Jun-88

Styleware

Computer software

United States

AppleWorks GS, iWork, iLife

[3]

$70.8

4

11-Jul-88

Nashoba Systems

Computer software

United States

FileMaker

[4]

$70.8

5

3-Jan-89

Coral Software

YE

United States

Macintosh Common Lisp

[5]

$70.8

6

7-Feb-97

NeXT

Unix-like hardw./softw. platform

United States

$404.0

Mac OS X/macOS, iOS

[6]

$404.0

7

2-Sep-97

Power Computing Corp.

Macintosh clones

United States

$110.0

[7]

$110.0

8

8-Jan-99

Xemplar Education

Software

United Kingdom

$4.9

[8]

$4.9

9

3-Nov-99

Raycer Graphics

Computer graphic chips

United States

$15.0

[9]

$15.0

10

7-Jan-00

NetSelector

Internet software

United States

[10]

$70.8

11

11-Apr-00

Astarte-DVD Software

Software

Germany

DVD Studio Pro, iDVD

[11]

$70.8

12

1-Nov-00

SoundJam MP

Software

United States

iTunes

[12]

$70.8

13

1-Mar-01

Bluefish Labs

Productivity software

United States

iWork

[13]

$70.8

14

11-May-01

bluebuzz

Internet service provider (ISP)

United States

[14]

$70.8

15

9-Jul-01

Spruce Technologies

Graphics software

United States

$14.9

DVD Studio Pro

[15]

$14.9

16

31-Dec-01

PowerSchool

Online info systems services

United States

$66.1

PowerSchool

[16]

$66.1

17

1-Feb-02

Nothing Real

Special effects software

United States

$15.0

Shake

[17]

$15.0

18

4-Apr-02

Zayante

FireWire chips and software

United States

$13.0

FireWire

[18]

$13.0

19

11-Jun-02

Silicon Grail Corp

Digital effects software

United States

$20.0

Motion

[19]

$20.0

20

20-Jun-02

Propel Software

Internet & network wireless opt.

United States

Safari

[20]

$70.8

21

21-Jun-02

Prismo Graphics

Film/video special-effects softw.

United States

$20.0

LiveType (Final Cut Studio)

[21]

$20.0

22

1-Jul-02

Emagic

Music production software

Germany

$30.0

Logic Pro, GarageBand

[22]

$30.0

23

1-Mar-05

SchemaSoft

Software

Canada

iWork

[23]

$70.8

24

1-Apr-05

FingerWorks

Gesture recognition company

United States

iOS

[24]

$70.8

25

16-Oct-06

Silicon Color

Software

United States

Color (Final Cut Studio)

[25]

$70.8

26

4-Dec-06

Proximity

Software

Australia

Final Cut Server

[26]

$70.8

27

24-Apr-08

P.A. Semi

Semiconductors

United States

$278.0

Apple SoC

[27]

$278.0

28

7-Jul-09

Placebase

Maps

United States

Apple Maps

[28]

$167.6

29

4-Dec-09

Lala.com

Music streaming

United States

$17.0

iCloud, iTunes Match

[29]

$17.0

30

5-Jan-10

Quattro Wireless

Mobile advertising

United States

$275.0

iAd

[30]

$275.0

31

27-Apr-10

Intrinsity

Semiconductors

United States

$121.0

Apple SoC

[31]

$121.0

32

27-Apr-10

Siri

Voice control software

United States

Siri

[32]

$167.6

33

10-May-10

Gipsy Moth Studios

Application Regionalization Firm

$12.0

iPod, iPhone, iPad

[33]

$12.0

34

14-Jul-10

Poly9

Web-based mapping

Canada

Apple Maps

[34]

$167.6

36

14-Sep-10

IMSense

High-dynamic-range photography

United Kingdom

iOS

[35]

$167.6

35

20-Sep-10

Polar Rose

Facial recognition

Sweden

$29.0

iOS

[36]

$29.0

37

1-Aug-11

C3 Technologies

3D mapping

Sweden

$267.0

Maps

[37]

$267.0

38

20-Dec-11

Anobit

Flash memory

Israel

$500.0

iPod, iPhone, iPad

[38]

$500.0

39

23-Feb-12

Chomp

App search engine

United States

$50.0

App Store

[39]

$50.0

40

2-Jun-12

Redmatica

Audio

Italy

Logic Pro, GarageBand

[40]

$167.6

41

27-Jul-12

AuthenTec

PC and mobile security products

United States

$356.0

Touch ID

[41]

$356.0

42

27-Sep-12

Particle

HTML5 Web app firm

United States

iCloud, iAd

[42]

$167.6

43

3-Apr-13

Novauris Tech.

Speech recognition

United Kingdom

Siri

[43,44]

$167.6

44

Oct-13

OttoCat

Search engine

United States

App Store

[45]

$167.6

45

23-Mar-13

WiFiSlam

Indoor location

United States

$20.0

Apple Maps

[46]

$20.0

46

19-Jul-13

Locationary

Maps

Canada

Apple Maps

[47]

$167.6

47

19-Jul-13

HopStop.com

Maps

United States

Apple Maps

[48]

$167.6

48

1-Aug-13

Passif Semiconductor

Semiconductors

United States

Apple SoC

[49]

$167.6

49

13-Aug-13

Matcha

Media discovery app

United States

TV app — Apple TV & iOS

[50]

$167.6

50

22-Aug-13

Embark

Maps

United States

Apple Maps

[51]

$167.6

51

28-Aug-13

AlgoTrim

Mobile data compression

Sweden

iOS

[52,53]

$167.6

52

3-Oct-13

Cue

Personal assistant

United States

$50.0

Siri

[54]

$50.0

53

24-Nov-13

PrimeSense

Structured-light 3D scanners

Israel

$360.0

Face ID, TrueDepth

[55]

$360.0

54

2-Dec-13

Topsy

Analytics

United States

$200.0

App Store, Music, iTunes

[56]

$200.0

55

23-Dec-13

BroadMap

Maps

United States

Apple Maps

[57]

$167.6

56

23-Dec-13

Catch.com

Software

United States

Siri

[58]

$167.6

57

Dec-13

Acunu

Database analytics

United States

iCloud

[59]

$167.6

58

4-Jan-14

SnappyLabs

Photography software

United States

Camera

[60]

$167.6

59

21-Feb-14

Burstly

Software testing

United States

TestFlight, App Store

[61]

$167.6

60

2-May-14

LuxVue Technology

microLED displays

United States

[62]

$167.6

61

6-Jun-14

Spotsetter

Social search engine

United States

Apple Maps

[63]

$167.6

62

29-Jun-14

Swell

Music streaming

United States

$30.0

Apple Music

[64]

$30.0

63

29-Jun-14

BookLamp

Book analytics

United States

iBooks

[65,66]

$167.6

64

1-Aug-14

Beats Electronics

Headphones, music streaming

United States

$3,000

iPhone, iTunes, Music

[67]

$3,000

65

23-Sep-14

Prss

Digital magazine

Netherlands

Apple News[85]

[68,69]

$167.6

66

Sept-14

Dryft

On-Screen Keyboard

United States

iOS Keyboard

[70]

$167.6

67

Jan-15

Camel Audio

Audio plug-ins/sound libraries

United Kingdom

Logic Pro

[71]

$167.6

68

21-Jan-15

Semetric

Music analytics

United Kingdom

$50.0

Apple Music, iTunes

[72,73]

$50.0

69

24-Mar-15

FoundationDB

Database

United States

iMessage Backend

[74]

$167.6

70

14-Apr-15

LinX

Camera

Israel

$20.0

iPhone Camera

[75]

$20.0

71

Apr-15

Coherent Navigation

GPS

United States

Apple Maps

[76]

$167.6

72

May-15

Metaio

Augmented reality

Germany

ARKit

[77]

$167.6

73

Sep-15

Mapsense

Mapping visualization

United States

$30.0

Apple Maps

[78]

$30.0

74

Sep-15

VocalIQ

Speech technology

United Kingdom

Siri

[79]

$167.6

75

Sep-15

Perceptio

Mach. Learning, Image recogn.

United States

Face ID, Animoji, Photos

[80]

$167.6

76

Nov-15

Faceshift

Realtime Motion Capture

Switzerland

Animoji

[81]

$167.6

77

7-Jan-16

Emotient

Emotion recognition

United States

Face ID, Animoji[103]

[82]

$167.6

78

28-Jan-16

LearnSprout

Education technology

United States

Classroom iPad App

[83]

$167.6

79

29-Jan-16

Flyby Media

Augmented reality

United States

ARKit

[84]

$167.6

80

3-Feb-16

LegbaCore

Platform security

United States

Apple computers

[85]

$167.6

81

5-Aug-16

Turi

Machine learning

United States

$200.0

Xcode, Core ML

[86]

$200.0

82

22-Aug-16

Gliimpse

Personal health info collection

United States

HealthKit, CareKit

[87]

$167.6

83

22-Sep-16

Tuplejump

Machine learning

India

Siri, CoreML

[88,89]

$167.6

84

1-Dec-16

Indoor.io

Indoor mapping and navigation

Finland

Maps, Project Titan

[90]

$167.6

85

23-Mar-17

Workflow

Automation and scripting app

United States

Shortcuts (iOS 12)[119]

[91,92]

$167.6

86

8-May-17

Beddit

Sleep tracking hardware

Finland

iOS, watchOS

[93.94]

$167.6

87

13-May-17

Lattice Data

Artificial intelligence

United States

$200.0

Photos

[95]

$200.0

88

16-Jun-17

SensoMotoric Instr.

Eye tracking hardware/software

Germany

ARKit

[96]

$167.6

89

22-Sep-17

Vrvana

Augmented reality

Canada

$30.0

ARKit

[97]

$30.0

90

29-Sep-17

Regaind

Computer vision

France

Photos

[98]

$167.6

91

Oct-17

init.ai

Messaging assistant

United States

Siri

[99]

$167.6

92

Oct-17

PowerbyProxi

Wireless charging

New Zealand

iPhone, AirPower

[100,101]

$167.6

93

9-Nov-17

InVisage Technologies

Quantum dot-based image sens.

United States

iPhone, iPad

[102]

$167.6

94

5-Dec-17

Pop Up Archive

Search tools for digital speech

United States

iTunes, Apple Music

[103]

$167.6

95

Dec-17

Spektral

Computer vision, real-time editing

Denmark

$30.0

Photos, iOS

[104]

$30.0

96

10-Dec-17

Silicon Valley Data Sci.

Data science, data engineering

United States

Digital Advertising

[105,106]

$167.6

100

2-Jan-18

Buddybuild

Integration/debugging/mobile testing

Canada

Xcode, TestFlight

[107]

$167.6

101

12-Mar-18

Texture

Digital magazine subscription svc.

United States

Apple News+

[108]

$167.6

102

29-Aug-18

Akonia Holographics

Augmented reality glasses lenses

United States

[109,110]

$167.6

103

24-Sep-18

Shazam

Music and Image recognition

United Kingdom

$400.0

iTunes, Siri, Apple Music

[111]

$400.0

104

11-Oct-18

Dialog Semi. (parts)

Chip development

United Kingdom

$600.0

[112,113]

$600.0

105

14-Oct-18

Asaii

Music analytics

United States

 

[114]

$167.6

98

Oct-2018

Silk Labs

Artificial Intelligence, home monitor

United States

[115]

$167.6

99

Nov 2018

Tueo Health

Asthma monitoring

United States

[116,117]

$167.6

106

7-Dec-18

Platoon

Artist development

United Kingdom

[118,119]

$167.6

97

Dec-2018

Laserlike

Machine learning

United States

AI, Siri

[120]

$167.6

107

15-Feb-19

PullString

Speech technology

United States

Siri

[121]

$167.6

108

21-Mar-19

Stamplay

Backend workflow development

Italy

$5.6

[122,123]

$5.6

109

25-Jun-19

Drive.ai

Autonomous vehicles

United States

[124]

$167.6

110

25-Jul-19

Intel smartph. modem

Smartphone modems

United Kingdom

$1,000

Apple SoC

[125]

$1,000

111

3-Oct-19

IKinema

Motion capture

United Kingdom

[126]

$167.6

112

12-Dec-19

Spectral Edge

Low-light photography

United Kingdom

[127]

$167.6

113

15-Jan-20

Xnor.ai

Edge comp., artificial intelligence

United States

$200.0

[128]

$200.0

114

Early 2020

Scout FM

Podcast A.I.

Apple Music, ITunes

[129]

$167.6

115

31-Mar-20

Dark Sky

Weather forecasting and app

United States

[130]

$167.6

116

3-Apr-20

Voysis

Artificial intelligence/voice assistant

Ireland

Siri

[131,132]

$167.6

117

14-May-20

NextVR

Virtual reality events

USA

$100.0

 

[133]

$100.0

118

24-Jun-20

Fleetsmith

Mobile device management

USA

iPhone, iPad, iOS

[134]

$167.6

119

31-Jul-20

Mobeewave

Payments startup

Canada

$100.0

iPhone

[135]

$100.0

120

20-Aug-20

Camerai

AR

Israel

 

[136]

$167.6

121

25-Aug-20

Spaces

VR startup

USA

 

[137]

$167.6

122

15-Jan-21

Curious AI

Core AI startup

Finland

 

[138]

$167.6

 

 

 

 

 

Total

$9,244

Total

$21,367

 

 

 

 

 

Mean

$225.5

Trimmed Mean to 2006

$70.8

Trimmed means were calculated after removing the two highest and two lowest disclosed acquisition values

Trimmed Mean after 2006

$167.6

Table A1.2. List of References for Apple Acquisitions Included in Periodic Adjustment Calculations

[1]

Apple Computer Inc acquires Network Innovations Corp.” Thomson Financial. Archived from the original on Apr 17, 2009. Retrieved May 24, 2021.

[2]

Apple Computer Inc acquires Orion Network Systems Inc.Thomson Financial. Archived from the original on May 11, 2009. Retrieved May 24, 2021

[3]

“Claris Corp (Apple Computer) acquires Styleware Inc.Thomson Financial. Archived from the original on May 11, 2009. Retrieved May 24, 2021.

[4]

“Claris Corp (Apple Computer) acquires Nashoba Systems In..” Thomson Financial. Archived from the original on May 11, 2009. Retrieved May 24, 2021.

[5]

Apple Computer Inc acquires Coral Software Corp.” Thomson Financial. Archived from the original on May 11, 2009. Retrieved May 24, 2021.

[6]

Apple Computer Inc acquires NeXT Computer Inc.Thomson Financial. Archived from the original on May 11, 2009. Retrieved May 24, 2021.

[7]

Apple Computer Inc acquires Power Computing-Clone-Making from Power Computing Corp.Thomson Financial. Archived from the original on May 11, 2009. Retrieved May 24, 2021.

[8]

Apple Computer Inc acquires remaining interest in Xemplar Education Ltd from Morgan Stanley.” Thomson Financial. Archived from the original on May 11, 2009. Retrieved May 24, 2021.

[9]

Apple Computer Inc acquires Raycer Graphics.” Thomson Financial. Archived from the original on May 11, 2009. Retrieved May 24, 2021.

[10]

Apple Computer Inc acquires NetSelector.” Thomson Financial. Archived from the original on May 11, 2009. Retrieved May 24, 2021.

[11]

Apple Computer Inc acquires Astarte-DVD Authoring Software from Astarte GmbH.” Thomson Financial. Archived from the original on May 11, 2009. Retrieved May 24, 2021.

[12]

Jade, Casper. “Apple Acquires SoundJam, Programmer for iMusic.” AppleInsider. January 8, 2001. Archived from the original on January 19, 2012. Retrieved May 24, 2021.

[13]

“We’ve been acquired!.” Bluefish Labs. Archived from the original on November 29, 2001. Retrieved May 24, 2021.

[14]

“Network Innovations Corp acquires bluebuzz.com Inc.Thomson Financial. Archived from the original on May 11, 2009. Retrieved May 24, 2021.

[15]

Apple Computer Inc acquires Spruce Technologies Inc from JBIS Holdings Inc.Thomson Financial. Archived from the original on May 11, 2009. Retrieved May 24, 2021.

[16]

Apple Computer Inc acquires PowerSchool Inc.Thomson Financial. Archived from the original on May 11, 2009. Retrieved May 24, 2021.

[17]

Apple Computer Inc acquires Nothing Real LLC.” Thomson Financial. Archived from the original on May 11, 2009. Retrieved May 24, 2021.

[18]

Apple Computer Inc acquires Zayante Inc.Thomson Financial. Archived from the original on May 11, 2009. Retrieved May 24, 2021.

[19]

Apple Computer Inc acquires Silicon Grail Corp-Chalice from Silicon Grail Corp.Thomson Financial. Archived from the original on May 11, 2009. Retrieved May 24, 2021.

[20]

Apple Computer Inc acquires Propel Software Corp.” Thomson Financial. Archived from the original on December 20, 2008. Retrieved May 24, 2021.

[21]

Loli, Eugenia. “Apple Purchases Prismo Graphics.” OSNews. Jun 21, 2002. Retreived May 24, 2021.

[22]

Apple Computer Inc acquires Emagic Soft-und Hardware GmbH.” Thomson Financial. Archived from the original on May 11, 2009. Retrieved May 24, 2021.

[23]

Freid, Ina. “Apple swallows SchemaSoft.” CNET. March 23, 2005. Retrieved May 24, 2021.

[24]

Khaney, Leander. “Birth of the iPhone: How Apple turned clunky prototypes into a truly magical device.” June 26, 2017. Retreived May 24, 2021.

[25]

Cohen, Peter. “Apple acquires Silicon Color.” MacWorld. October 15, 2006. Retrieved May 24, 2021.

[26]

Apple Acquires Proximity.” Mac Observer. December 5, 2006. Retrieved May 24, 2021.

[27]

Krazit, Tom. “Apple acquires low-power chip designer PA Semi.” CNet. Sept. 18, 2009. Retrieved May 24, 2021.

[28]

Weintraub, Seth. “Apple purchased Placebase in July to replace Google Maps?.” ComputerWorld. Archived from the original on October 2, 2009. Retrieved May 8, 2021.

[29]

Kincaid, Jason. “Apple has acquired LaLa.com.” TechCrunch. December 4, 2009. Retrieved May 8, 2021.

[30]

McCarthy, Caroline. “Apple acquires Quattro Wireless.” Cnet. January 5, 2010. Retrieved May 8, 2021.

[31]

Vance, Ashlee and Brad Stone. “Apple Buys Intrinsity.” New York Times. April 27, 2010. Retrieved May 8, 2021.

[32]

Hay, Timothy. “Apple Moves Deeper Into Voice-Activated Search With Siri Buy.” Wall Street Journal. April 28, 2010. Retrieved May 8, 2021.

[33]

“Gipsy Moth Studios acquired by Apple.” AcquiredBy.co. Retrieved Retrieved May 8, 2021.

[34]

Marsal, Katie. “Apple acquires online mapping company Poly9 — report.” AppleInsider. July 14, 2010. Retrieved May 8, 2021.

[35]

Apple Buys Imsense Ltd.” Silicon Tap. September 14, 2010. Retrieved May 8, 2021.

[36]

Takahashi, Dean. “Apple acquires face-recognition firm Polar Rose.” VentureBeat. September 20, 2010. Retrieved May 8, 2021.

[37]

Gurman, Mark. “Apple acquired mind-blowing 3D mapping company C3 Technologies, looking to take iOS Maps to the next level.” 9to5Mac. October 29, 2011. Retrieved May 8, 2021.

[38]

Burns, Chris. “Apple picks up Anobit for Flash Memory.” SlashGear. December 20, 2011. Retrieved May 8, 2021.

[39]

Satariano, Adam and Douglas MacMillan. “Apple Is Said to Pay About $50 Million for Search Startup Chomp.” Bloomberg Businessweek. Archived from the original on February 25, 2012. Retrieved May 8, 2021.

[40]

Wauters, Robin. “Apple-acquired music editing software firm Redmatica closes; product support will end on June 12.” The Next Web. Retrieved May 8, 2021.

[41]

Souppouris, Aaron . “Apple buys patent-rich security firm Authentec for $356 million.” The Verge. Retrieved May 8, 2021.

[42]

Lowensohn, Josh. “Apple snaps up celebrity-backed Web app firm Particle.” cNet. Retrieved May 8, 2021.

[43]

Perez, Sarah. “Speech Recognition Pioneer Novauris Bought By Apple, Team Now Works On Siri.” TechCrunch. April 3, 2014. Retrieved May 8, 2021.

[44]

Clover, Juli (April 3, 2014). “Apple Acquired Speech Recognition Firm Novauris Last Year for Siri Team.” MacRumors. Retrieved May 8, 2021.

[45]

Lunden, Ingrid (April 6, 2015). “Apple Acquired Search Startup Ottocat To Power The ‘Explore’ Tab In The App Store.” TechCrunch. Retrieved May 8, 2021.

[46]

Lessin, Jessica. “Apple Acquires Indoor Location Company WifiSLAM.” Wall Street Journal. Retrieved May 8, 2021.

[47]

Paczkowski, John. “Apple Acquires Local Data Outfit Locationary.” All Things Digital. Retrieved May 8, 2021.

[48]

Burrows, Peter and Sarah Frier. “Apple Said to Buy HopStop, Pushing Deeper Into Maps.” Bloomberg. Retrieved May 8, 2021.

[49]

Lee, Nicole. “Apple acquires wireless chip maker Passif Semiconductor.” Engadget. Retrieved May 8, 2021.

[50]

Cheredar, Tom. “Apple acquires Matcha.tv.” VentureBeat. August 13, 2013. Retrieved May 8, 2021.

[51]

Lessin, Jessica (August 22, 2013). “Exclusive: Apple Buys (Another) Map App, Embark.” Retrieved May 8, 2021.

[52]

AlgoTrim.” Crunchbase. Retrieved May 8, 2021.

[53]

Etherington, Darrell (August 28, 2013). “Apple Reportedly Acquires Swedish Firm AlgoTrim, A Company That Does Mobile Media And Data Compression.” TechCrunch. Retrieved Retrieved May 8, 2021.

[54]

AppleInsider Staff. “Apple acquires personal assistant app Cue for at least $35M [u].” AppleInsider. October 3, 2013. Retrieved May 8, 2021.

[55]

Isaac, Mike and John Paczkowski. “Apple Confirms Acquisition of 3-D Sensor Startup PrimeSense.” AllThingsD. November 24, 2013. Retrieved May 8, 2021.

[56]

Clover, Julie. “Apple Acquires Social Analytics Firm Topsy for $200 Million.” MacRumors. December 2, 2013. Retrieved May 8, 2021.

[57]

Fried, Ina. “Apple Did Indeed Acquire BroadMap and Catch Earlier This Year.” All Things Digital. December 23, 2013. Retrieved May 8, 2021.

[58]

Fried, Ina. “Apple Did Indeed Acquire BroadMap and Catch Earlier This Year.” All Things Digital. December 23, 2013. Retrieved May 8, 2021.

[59]

Clark, Jack and Tim Higgins. “Apple’s FoundationDB Acquisition Builds on Earlier Database Buy.” Bloomberg. March 25, 2015. Retrieved May 8, 2021.

[60]

Constine, Josh. “Apple Acquires Rapid-Fire Camera App Developer SnappyLabs.” TechCrunch. January 4, 2014. Retrieved May 8, 2021.

[61]

Yeung, Ken. “Apple confirms that it has acquired TestFlight creator Burstly.” The Next Web. February 21, 2014. Retrieved May 8, 2021.

[62]

Rao, Leena. “Apple Acquires Power Efficient LED Tech Company LuxVue.” TechCrunch. May 2, 2014. Retrieved May 8, 2021.

[63]

erez, Sarah. “Apple Acquires Spotsetter, A Social Search Engine For Places.” Engadget. June 6, 2014. Retrieved May 8, 2021.

[64]

Gayles, Contessa. “Apple buffs up radio service with string of acquisitions.” CNN Money. June 29, 2014. Retrieved May 8, 2021.

[65]

Kline, Daniel. “Is Apple Preparing to Challenge Amazon’s Book Business?.” The Motley Fool. June 29, 2014. Retrieved May 8, 2021.

[66]

Constine, Josh. “Apple Secretly Acquired “Pandora For Books” Startup BookLamp To Battle Amazon.” TechCrunch. Retrieved May 8, 2021.

[67]

Steele, B. “Apple aCcquires Beats Electronics for $3 billion.” Engadget. August 1, 2014. Retrieved May 8, 2021.

[68]

Baldwin, Roberto. “Apple acquires digital magazine startup Prss.” The Next Web. September 23, 2014. Retrieved May 8, 2021.

[69]

Purcher, Jack. “Apple Acquired Prss in 2014 and today their Invention that became ‘Apple News’ was Published by USPTO.” Patently Apple. Retrieved May 8, 2021.

[70]

Lynley, Matthew. “Apple Quietly Bought Dryft, A Keyboard App.” Retrieved May 8, 2021.

[71]

Price, Rob. “Apple has acquired London music production software company Camel Audio.” Business Insider. February 24, 2015. Retrieved May 8, 2021.

[72]

Fleisher, Lisa. “Apple Buys Semetric, Gearing Up to Take On Spotify.” The Wall Street Journal. January 21, 2015. Retrieved May 8, 2021.

[73]

Williams, Rhiannon. “Apple buys UK music start-up Semetric.” The Telegraph. January 21, 2015. Retrieved May 8, 2021.

[74]

Panzarino, Matthew. “Apple Acquires Durable Database Company FoundationDB.” TechCrunch. March 24, 2015. Retrieved May 8, 2021.

[75]

Hirschauge, Orr and Daisuke Wakabayashi. “Apple Buys Israeli Camera-Technology Company LinX.” The Wall Street Journal. April 14, 2015. Retrieved May 8, 2021.

[76]

Fingas, Jon. Apple bought a company focused on super-accurate GPS.” Engadget. May 17, 2015. Retrieved May 8, 2021.

[77]

Miller, Ron and Josh Constine. “Apple Acquires Augmented Reality Company Metaio.” TechCrunch. May 28, 2015. Retrieved May 8, 2021.

[78]

Tung, Liam. “Apple acquires mapping visualisation startup Mapsense.” ZDNet. Retrieved September 27, 2015. Retrieved May 8, 2021.

[79]

Hughes, Neil. “Apple enhances Siri team with purchase of VocalIQ, a car-focused British speech tech firm.” AppleInsider. October 2, 2015. Retrieved May 8, 2021.

[80]

Campbell, Mikey. “Apple buys machine learning firm Perceptio, suggests development of imaging AI.” AppleInsider. Retrieved May 8, 2021.

[81]

Lunden, Ingrid; Lomas, Natasha. “Apple Has Acquired Faceshift, Maker Of Motion Capture Tech Used In Star Wars.” TechCrunch. Retrieved May 8, 2021.

[82]

Winkler, Rolfe; Wakabayashi, Daisuke; Dwoskin, Elizabeth. “Apple Buys Artificial-Intelligence Startup Emotient.” Wall Street Journal. Retrieved May 8, 2021.

[83]

Loizos, Connie. “Apple Acquires Education Startup LearnSprout.” TechCrunch. Retrieved May 8, 2021.

[84]

Novet, Jordan. “Apple acquires spatial perception startup Flyby Media, reportedly has a secret VR team.” VentureBeat. Retrieved May 8, 2021.

[85]

Singh, Manish. “Apple Buys Security Firm LegbaCore That Exposed Vulnerabilities in OS X.” Gadgets360. NDTV. Retrieved May 8, 2021.

[86]

Kumparak, Greg (August 5, 2016). “Apple acquires Turi, a machine learning company.” TechCrunch. Retrieved May 8, 2021.

[87]

Crook, Jordan. “Apple acquired Gliimpse, a personal health data startup.” August 22, 2016. Retrieved May 8, 2021.

[88]

Clover, Juli. “Apple Acquires Machine Learning Startup Tuplejump.” MacRumors. Retrieved May 8, 2021.

[89]

Kumparak, Greg. “Apple acquires another machine learning company: Tuplejump.” TechCrunch. Retrieved May 8, 2021.

[90]

Shead, Sam. “Apple secretly acquired a Finnish company to help it map indoor spaces.” BusinessInsider. December 1, 2016. Retrieved May 8, 2021.

[91]

Panzarino, Matthew (March 23, 2017). “Apple has acquired Workflow, a powerful automation tool for iPad and iPhone.” TechCrunch. Retrieved May 8, 2021.

[92]

Koetsier, John (March 23, 2017). “Siri, Book My Vacation: Apple’s ‘Workflow’ Acquisition Hints At Coming AI Feats.” Forbes. Retrieved May 8, 2021.

[93]

Farr, Christina. “Apple has acquired a sleep-tracking app called Beddit.” CNBC. May 9, 2017. Retrieved May 8, 2021.

[94]

“Beddit Privacy Policy.” Beddit. May 8, 2017. Archived from the original on May 10, 2017. Retrieved May 8, 2021.

[95]

Fingas, Jon (May 13, 2017). “Apple’s AI acquisition could help Siri make sense of your data.” Engadget. Retrieved May 8, 2021.

[96]

Rossignol, Joe. “Apple Acquires German Eye Tracking Firm SensoMotoric Instruments.” MacRumors. June 26, 2017. Retrieved May 8, 2021.

[97]

Matney, Lucas. “Apple acquired augmented reality headset startup Vrvana for $30M.” TechCrunch. Retrieved May 8, 2021.

[98]

Dillet, Romain (September 29, 2017). “Apple quietly acquired computer vision startup Regaind.” TechCrunch. Retrieved May 8, 2021.

[99]

Lunden, Ingrid (January 19, 2018). “Apple has hired tech team from data science startup SVDS.” TechCrunch. Retrieved May 8, 2021.

[100]

Lieu, Johnny. “Apple just bought out a little-known wireless charging company.” Mashable. Retrieved May 8, 2021.

[101]

Read, Ellen and Tom Pullar-Strecker. “Apple snaps up NZ’s PowerbyProxi.” Stuff.co.nz. Retrieved May 8, 2021.

[102]

Lunden, Ingrid. “Apple has acquired imaging sensor startup InVisage Technologies.” TechCrunch. Retrieved May 8, 2021.

[103]

Heater, Brian. “Apple buys podcast search startup Pop Up Archive.” TechCrunch. Retrieved May 8, 2021.

[104]

Laursen, Lucas. “Apple Secretly Bought Danish Visual Effects Startup Spektral Last Year.” Fortune. October 10, 2018. Retrieved May 8, 2021.

[105]

Lunden, Ingrid. “Apple has hired tech team from data science startup SVDS.” TechCrunch. Retrieved May 8, 2021.

[106]

Gurman, Mark. “Apple Brings on Team From Consultant Silicon Valley Data Science.” Bloomberg. Retrieved May 8, 2021.

[107]

Heater, Brian. “Apple buys app development service Buddybuild.” TechCrunch. Retrieved May 8, 2021.

[108]

Balakrishnan, Anita (March 12, 2018). “Apple buys Texture, a digital magazine subscription service.” CNBC. Retrieved May 8, 2021.

[109]

Musil, Steven. “Apple acquires startup focused on lenses for AR glasses.” CNET. August 29, 2018. Retrieved May 8, 2021.

[110]

Nellis, Stephen. “Apple buys startup focused on lenses for AR glasses.” Reuters. Retrieved May 8, 2021.

[111]

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Table A1.3. Estimated ASI/AOE Acquisition-Related PCT Values
Between September 30, 1996, and September 30, 2020

Year

Est. Value of Acquisitions ($ mil)

Apple Ireland Est. RAB Share of Acquisition Price

Apple Ireland Est. PCT Payments ($ mil)

1997

$514

40%

$207.5

1998

$-

36%

$-

1999

$5

36%

$1.8

2000

$157

38%

$60.2

2001

$227

36%

$82.3

2002

$235

34%

$80.8

2003

$-

33%

$-

2004

$-

33%

$-

2005

$142

33%

$46.7

2006

$-

32%

$45.9

2007

$142

33%

$46.6

2008

$278

35%

$95.9

2009

$168

51%

$85

2010

$957

43%

$407

2011

$267

49%

$132

2012

$1,241

49%

$609

2013

$168

49%

$83

2014

$5,316

51%

$2,694

2015

$1,106

54%

$600

2016

$1,373

54%

$743

2017

$1,068

52%

$554

2018

$1,771

52%

$915

2019

$2,779

49%

$1,350

2020

$1,741

48%

$835

Sum

$17,953

 

$9,673

VIII. Appendix 2: Periodic Adjustment

A. Assumptions Made

In preparing this analysis, the following assumptions underlie the calculations.

1. Apple Inc. made all U.S. and foreign acquisitions that constitute platform contributions.

Apple disclosed to the Senate PSI a detailed accounting of the PCTs paid by its Irish affiliates in 2012, which showed that they made payments to Apple U.S. for their share of PCTs for acquisitions of both foreign and U.S. companies in that year that were deemed to contribute to the IP development activity, as well as for “other” IP consisting of IP that was covered by reg. section 1.482-4. The information did not disclose any PCT obligations of Apple U.S. to the Irish participants. Therefore, we have extended these facts to all the years since January 5, 2009. If 2012 was not reflective of the facts in other years, those results may be inaccurate.

2. There are undisclosed and underpriced PCTs and other uncompensated transactions.

This periodic adjustment analysis assumes that AOI paid an arm’s-length price under applicable regulations (in fact, the maximum value for acquisitions of intangible assets and personnel that would contribute to the development of cost-shared intangibles) for all identified PCTs. Therefore, to the extent that a periodic adjustment is calculated, it would be the result of unidentified PCTs, identified PCTs for which no payment was made, non-CSA-related controlled transactions, or other factors that inflate the divisional profits of AOI. For instance, our analysis has shown, and Apple has represented to the GCEU, that AOI did not pay for any U.S. commercialization activities that in fact generated the Irish participants’ CSA-related income (a violation that could technically invalidate Apple’s CSA under reg. section 1.482-7(m)(1) in combination with reg. section 1.482-7(a)(3)(iii)). Apple further testified that all its stateless income was attributable to these Apple U.S. exploitation services and activities. Whether this is an Apple U.S. operating contribution or an activity that contributes to the IP development activity in a way that requires a PCT payment, it is one example of an undocumented transaction that would help explain the significant periodic adjustment result.

One reason the commensurate-with-income standard is necessary is that it is often impossible for the IRS to sufficiently identify all current and future PCTs, operating contributions, and non-CSA-related intercompany transactions to adequately explain all future CSA outcomes in a way that can reliably value platform contributions made at the outset of the CSA or throughout the CSA’s existence. Only through a periodic adjustment analysis in future years can the IRS be confident that the CSA has properly accounted for the value of all PCTs and other intercompany transactions. The periodic adjustment calculations do not try to identify these missing transactions but merely confirm that they exist. Taxpayers can, of course, avoid a periodic adjustment by performing the periodic trigger calculations themselves and revising their transfer pricing to ensure that the periodic trigger limitations are not breached for the applicable period.

B. Alternative Assumptions

If any of the alternative assumptions below occurred, the results of this analysis could change significantly.

1. AOI made material technology acquisitions using its own funds.

If Apple’s 2012 year was not representative of other years and, for instance, AOI made acquisitions with its own funds in other years, this could change the amount of the periodic adjustment, which assumes that AOI made no acquisitions with its own funds from 2009 but paid Apple U.S. AOI’s share of PCTs for all acquisitions that contributed to the cost-sharing activity. If AOI made its own acquisitions, there could be some amount of PCT payments due by Apple Inc. to AOI, and AOI would have to be given credit for any acquired intangibles in the RPSM analysis.

2. Exceptions apply under reg. section 1.482-7(i)(6)(vi).

If any of the exceptions to a periodic adjustment listed in reg. section 1.482-7(i)(6)(vi) apply, that could alter or reverse these results. These exceptions are explained in Section V.E of our report. These exceptions would include if AOI provided intangible development activities that have not been otherwise accounted for. That would reduce the value of any periodic adjustments once these contributions were accounted for.

3. Apple did not have a qualified CSA under the 1996 regulations.

The January 1996 regulation, reg. section 1.482-7A(a)(1), required for a valid CSA that there be “individual exploitation of the interests in the intangibles assigned to them under the arrangement.” Based on testimony by Apple Inc. to the GCEU, and the results of the state aid investigation by the European Commission, AOI (or ASI and AOE) neither conducted its business in any truly independent manner nor exploited the CSA-covered IP. Rather, Apple Inc. performed these activities on behalf of AOI, apparently without compensation. As such, if AOI were considered to not be conducting individual exploitation, there would be no valid CSA in place from 1996 through January 5, 2009. This means that all internally created intangibles (putatively created within the preexisting CSAs from the January 1, 1996, effective date of the applicable regulations until January 5, 2009) should be treated as solely owned by Apple Inc. for purposes of the relative platform and operating contributions as of January 5, 2009, that each of Apple Inc. and AOI contributed to the new CSA. For conservatism, this alternative assumption was not made in the periodic adjustment calculations, but it appears to be realistic. If the IRS pursues the periodic adjustments suggested in this report, it should consider whether to adopt this lack of any effective CSA from 1996 through the January 5, 2009, commencement date of the new CSA.

C. Periodic Adjustment Step 1

Table A2.1 below calculates the residual profit for each year, based on the difference between the foreign affiliate revenues and the non-CSA-related expenses as marked up by the routine return. This difference is the nonroutine return. The nonroutine return is additive by year, and the sum of each year and prior years is determined and converted to a net present value as of the CSA start date (January 5, 2009). Importantly, the calculations in this appendix are based on the following assumptions, as mentioned earlier:

  1. AOI, through its disregarded entity subsidiaries, performs only routine activities.

  2. The arm’s-length return for AOI’s routine activities is an 8 percent markup on its associated expenses. Based on our experience, we deemed this to likely be a generous arm’s-length profit for what are clearly routine back-office functions, marketing and sales activities, manufacturing, customer service, and other disaggregated and essentially subcontracted services performed mostly for the local Irish markets.30

  3. Future years are included in accordance with reg. section 1.482-7(i)(6)(v)(B)(2). They are reflected in a “terminal value” that was modeled as a finite life of 10 years, in which each year replicated the fiscal 2020 result with no growth or decline, with the nominal amount representing the discounted result in 2020, using the 2017 applicable discount rate (these assumptions of zero growth and finite life of the CSA are anticipated to be very conservative estimates of Apple’s projected results).

  4. The residual profit split shown in column (g) provides 66.7 percent of the residual profits to Apple U.S. and 33.3 percent to AOI, based on the analyses shown in Table A2.1. These calculations are further described below.

D. Residual Profit-Split

The first step of the periodic adjustment calculation is to determine the present value of the PCT payments using the adjusted RPSM, as described in paragraph (i)(6)(v)(B) of the CSA regulations. Reg. section 1.482-7(g)(7)(iii)(C)(1) provides that profits must be split “based upon the relative values, determined as of the date of the PCTs, of the PCT Payor’s [AOI] as compared to the PCT Payee’s [Apple U.S.] nonroutine contributions to the PCT Payor’s division.” The regulation continues with further guidance that would clearly not give the correct economic result in Apple’s case. Among other faults, the guidance fails to consider a circumstance in which the PCT payee (Apple Inc.) makes operating contributions to the business of the PCT payer (AOI) (much less an egregious case like Apple’s in which only the PCT payee makes operating contributions) because it refers only to the PCT payer’s operating contributions. Notably, Example 2 in reg. section 1.482-7(g)(7)(v) applies the general rule but does not apply any of the further guidance. We have done likewise in Table A2.1.31 For this purpose, all platform and operating contributions are taken into account, but the initial platform contributions at the outset of the new CSA that are deemed to occur on January 5, 2009, are particularly important. (All later PCTs have already been accounted for in Appendix 1.)

As noted above, the applicable profit-split factor must be calculated for the above calculations. The derivation of the factor is documented in Table A2.1. The factor is equal to the ratio of nonroutine contributions by each party as of January 5, 2009. Nonroutine contributions include both platform contributions and operating contributions. The top portion of the table below calculates worldwide values of each type of nonroutine contribution:

  1. First, the worldwide value of all IP is calculated. This is the market capitalization of Apple Inc. as of January 5, 2009, minus the book value of assets. The worldwide value of all IP equals $41.6 billion.

  2. Second, the worldwide IP value is divided between platform contributions and operating contributions, which are assumed to be equally valuable. Platform contributions are contributions that are related to the development program under the CSA. These are further broken down between the value of product IP (which also includes the value of trademarks) and the value of IP related to workforce in place and research facilities. Considering the world-class nature of Apple’s research program, which is conducted wholly by Apple Inc., we estimate that it constitutes one-third of the total platform contributions. (Note that these IP values, which could also be identified as part of Apple’s going concern value, are in addition to (1) the routine values of the group’s tangible assets, which are captured by using their book value and (2) the routine value of all activities conducted by AOI and its disregarded entity subsidiaries, which is captured by the 8 percent markup on expense.) Nonroutine operating contributions are all IP contributions to the group’s ongoing business that are unrelated to the research program but primarily related to Apple’s world-class supply chain and its marketing strategies, which are directed and conducted by Apple Inc.

The next two portions of the table split these worldwide intangible property values between AOI and Apple Inc.:

  1. AOI contributes only one of the three types of IP identified. That is, AOI is treated as owning all the product-related IP applicable to AOI’s territory (identified as AOI’s 34.5 percent RAB share as of the end of fiscal 2008). This is because even though a new CSA is deemed to begin on January 5, 2009, as a result of the final regulations’ transition rules, the original CSA that commenced in 1980 and later restatements are conservatively assumed to have been valid through January 5, 2009.

  2. It is indisputable that the R&D workforce in place and research facilities are located within Apple Inc. and that no portion of their IP value should be allocated to AOI.

  3. For purposes of the analysis, it is assumed that AOI should not be allocated any portion of the operating contributions, either. While this conclusion is not indisputable, it cannot be denied that Apple Inc. owns the lion’s share of that IP. Attributing some small proportion (say, 3 percent) of this IP to AOI would make only a very minor change to the periodic adjustment calculation.

This report has demonstrated very clearly that almost all activities related to Apple’s unmatched supply chain, and all direction and much of the implementation of marketing strategies, are conducted by Apple Inc. and in fact have been compensated by AOI through service fees only to a very small extent (if at all). Apple has admitted as much in its filings with the European Commission. To the extent there may be Apple group personnel located in China or elsewhere in Asia who are part of the supply chain support and quality control functions who are employed by AOI’s disregarded entity subsidiaries, those personnel take their directions solely from Apple Inc. and not from AOI or any of its disregarded entity subsidiaries. Further, all indications suggest that those AOI disregarded entity subsidiaries would be compensated only with routine returns under Apple’s global transfer pricing policies. It is therefore reasonable and appropriate to assign a nonroutine operating contribution value of zero to AOI.

In light of the above, the worldwide value of the Apple group’s IP of $41.6 billion must be allocated between the Apple Inc. and AOI territories. Under the guidance of reg. section 1.482-7(g)(7)(iii)(C)(1), with only profits attributable to AOI’s territory being subject to the RPSM analysis, the final section in the table below determines the profit split between AOI and Apple Inc. based on AOI’s RAB share of legacy product IP ($4.8 billion) and Apple Inc.’s contribution to AOI’s business from its R&D workforce and facilities ($2.4 billion) and its supply chain, marketing, and other exploitation ($7.2 billion). This results in a profit split for AOI of 33.3 percent and for Apple Inc. of 66.7 percent.

These relative percentages are carried to Table A2.2, which allocates to Apple Inc. a 66.7 percent share of AOI’s residual nonroutine profit.

Table A2.1. Residual Profit-Split Calculationa
Inputs to Residual Profit-Split Method Calculation
(Reg. Section 1.482-7(g)(7)(iii)(C)(1) [first sentence])
($ million)

Worldwide Intangible Assets

(a)

$41,600

Market Capitalization of Apple Inc. Consolidated Intangible Assets (Market Cap - BV of Tangible Assets)

(b)

50%

Apple US RAB Share in Jan 2009 (Use FYE 2009)

(c)

50%

AOI RAB Share in Jan 2009 (Use FYE 2009)

(d) = 0.5 * a

$20,800

2009 Market Value of Platform Contribution IP (Product IP, Trademarks, etc.)

(e) = 0.5 * a

$20,800

2009 Market Value of Operating Contribution IP (Supply Chain/Exploitation IP)

(f) = 0.667 * d

$13,874

2009 Market Value of Legacy Product IP (2/3 of platform contribution IP)

(g) = 0.333 * d

$6,926

2009 Market Value of Workforce/R&D Facilities IP (1/3 of platform contribution IP)

AOI Intangible Assets and Operating Contributions (allocable solely to AOI territory)

(h) = c * f

$6,937

AOI Legacy Product IP (RAB share of worldwide product IP)

Apple US Intangible Assets

Worldwide Values

(i) = b * f

$6,937

Apple US Legacy Product IP (allocable solely to Apple US territory)

(j) = (g)

$6,926

Apple US Workforce/R&D Facilities IP (worldwide)

(k) = (e)

$20,800

Apple US Operating Contribution IP (Supply Chain/Exploitation IP) (worldwide)

Allocable to AOI Territory

(l) = 0% * i

$-

Apple US Legacy Product IP (allocable to AOI territory)

(m) = c * j

$3,463

Apple US Workforce/R&D Facilities IP (allocable to AOI territory)

(n) = c * k

$10,400

Apple US Operating Contribution IP (Supply Chain/Exploitation IP) (AOI territory)

Residual Profit-Split Calculation per Reg. Section 1.482-7(g)(7)(iii)(C)(1)

h

AOI Contributions to Nonroutine Profits (AOI territory)

$6,937

33.3%

l + m + n

Apple US Contributions to Nonroutine Profits (AOI territory)

$13,863

66.7%

aNote that we have used some hindsight to apply 2009 year-end RAB shares for entry (b) and (c) in the interest of reliability instead of the year-end 2008 figure.

Table A2.2 below calculates the nonroutine residual profit for each year, 66.7 percent of which is credited to Apple U.S. This residual profit is based on the difference between AOI’s revenues (column (b)) and the sum of (1) AOI’s intangible development costs (that is, cost-sharing payments) (included in column (e)); (2) AOI’s PCT payments to Apple Inc. (also included in column (e)); and (3) AOI’s non-CSA-related expenses (included in column (c)) marked up by an assumed routine return of 8 percent (included in column (f)), which is intended to approximate an arms-length return for these routine functions. This difference is the nonroutine residual return, which is then split between AOI and Apple Inc. based on the profit split calculated in Table A2.1 above. The nonroutine residual return is additive by year, and the sum of each year and prior years is determined and converted to a net present value as of the CSA start date of January 5, 2009 ($132.4 billion in column (g)).

Table A2.2. Step 1 Results
Periodic Adjustment Calculation per Reg. Section 1.482-7(i)(6) for All PCTs
($ million)

 

(a)

(b)

(c)

(d)

(e)

-

(f)

(g) = (d - e - f) * 0.667

Year

Year No.

Apple Ireland Territory CSA-Related Sales

Non-CC/Non-IDC Costs (Est.)

Est. Divisional Profit (Loss)

Reported CC/IDCs (Est.)

Routine Return %

Routine Return (MUTC) = (c) x Routine Return

Residual Profit (66.7% = Share to Apple US)

FY2009

1

$15,748

$12,293

$3,455

$489

8%

$983

$1,321

FY2010

2

$27,759

$14,593

$13,166

$758

8%

$1,167

$7,491

FY2011

3

$53,538

$30,205

$23,333

$1,201

8%

$2,416

$13,141

FY2012

4

$76,756

$38,489

$38,267

$1,658

8%

$3,079

$22,347

FY2013

5

$84,291

$53,502

$30,790

$2,207

8%

$4,280

$16,198

FY2014

6

$92,628

$55,273

$37,355

$3,061

8%

$4,422

$19,910

FY2015

7

$126,769

$76,193

$50,575

$4,376

8%

$6,095

$26,729

FY2016

8

$116,629

$71,353

$45,276

$5,433

8%

$5,708

$22,751

FY2017

9

$118,876

$69,617

$49,260

$6,006

8%

$5,569

$25,117

FY2018

10

$137,282

$83,009

$54,274

$7,358

8%

$6,641

$26,843

FY2019

11

$126,359

$74,833

$51,526

$7,876

8%

$5,987

$25,102

FY2020

12

$131,631

$85,457

$46,174

$8,992

8%

$6,837

$20,225

Terminal Value

12

$736,793

$478,339

$258,454

$50,330

8%

$38,267

$113,210

Yr 0 NPV Thru Yr 12

$678,066

$413,952

$264,114

$32,323

 

$33,116

$132,417

E. Periodic Adjustment Step 2

Table A2.3 is used to calculate the residual return to Apple Inc. for AOI’s exploitation of the cost-shared intangibles as a level royalty rate.

Table A2.3. Step 2 Royalty Rate Determination
Periodic Adjustment Calculation per Reg. Section 1.482-7(i)(6) for All PCTs
($ million)

 

(a)

(b)

(c)

(d)

(e) = (b - c - d) * 0.667

(f) = e/b

Year

Year No.

Est. Divisional Profit (Loss)

Reported CC/IDCs (Est.)

Routine Return (MUTC) = (c) * Routine Return

Residual Profit (66.7% Share to Apple US)

Royalty Calc

FY2009

1

$3,455

$489

$983

$1,321

 

FY2010

2

$13,166

$758

$1,167

$7,491

 

FY2011

3

$23,333

$1,201

$2,416

$13,141

 

FY2012

4

$38,267

$1,658

$3,079

$22,347

 

FY2013

5

$30,790

$2,207

$4,280

$16,198

 

FY2014

6

$37,355

$3,061

$4,422

$19,910

 

FY2015

7

$50,575

$4,376

$6,095

$26,729

 

FY2016

8

$45,276

$5,433

$5,708

$22,751

 

FY2017

9

$49,260

$6,006

$5,569

$25,117

 

FY2018

10

$54,274

$7,358

$6,641

$26,843

 

FY2019

11

$51,526

$7,876

$5,987

$25,102

 

FY2020

12

$46,174

$8,992

$6,837

$20,225

 

Terminal Value

12

$258,454

$50,330

$38,267

$113,210

 

Yr 0 NPV Thru Yr 12

$264,114

$32,323

$33,116

$132,417

50%

F. Periodic Adjustment Step 3

Table A2.4 calculates the nominal value of the royalty payment representing the residual profit as calculated in the prior table, on a rolling basis from the beginning of the CSA to the adjustment date. The table calculates the nominal royalty in the adjustment year, based on the sum of the net present value of the payments in each year and the years before it.

Apple has disclosed that the IRS is examining its tax years through 2016, and we assume that the IRS has not applied a periodic adjustment to Apple Inc. in the current examination cycle or any previous examination cycle. This table therefore uses a royalty rate applicable to adjustment year 2017.

Table A2.4. Nominal Royalty Calculation
Periodic Adjustment per Reg. Section 1.482-7(i)(6)
($ million)

 

(a)

(b)

(c)

(d) = b * c

Year

Year No.

Divisional Profit and Loss

Royalty Rate in Determination Year

Nominal Royalty Due Under Adjusted RPSM

FY2009

1

$3,455

50%

$1,732

FY2010

2

$13,166

50%

$6,601

FY2011

3

$23,333

50%

$11,699

FY2012

4

$38,267

50%

$19,186

FY2013

5

$30,790

50%

$15,437

FY2014

6

$37,355

50%

$18,728

FY2015

7

$50,575

50%

$25,357

FY2016

8

$45,276

50%

$22,700

FY2017

9

$49,260

50%

$24,697

FY2018

10

$54,274

50%

$27,211

FY2019

11

$51,526

50%

$25,833

FY2020

12

$304,628

50%

$152,729

Yr 0 NPV Thru Yr 9

$152,809

 

$76,613

Note: The divisional profit figure shown in the last row of Table A2.4 above adds the two sums for 2020 (the $258,454 terminal value measured in 2020 and the 2020 divisional profit and loss of $46,174) shown in Table A2.3 together for a single entry in 2020.

G. Periodic Adjustment Steps 4a-c

Table A2.5 combines several steps. Step 4a calculates a series of nominal adjustments by subtracting the nominal PCT payments from the nominal royalty payments calculated in the prior table. Step 4b converts these results to a net present value payment at the beginning of the first year of the CSA (year 0). Step 4c takes the step 4b amount and, through compounding, converts it to a nominal payment in the adjustment year (2017).

Table A2.5. Periodic Adjustment Calculation
Periodic Adjustment per Reg. Section 1.482-7(i)(6)
($ million)

Year

(a)

(b)

(c)

(d) = b * c

(e)

(f) = d - e

(g) = f/(Det Year ADR)

Year No.

Divisional Profit and Loss

Royalty Rate in Determination Year

Nominal Royalty Due Under Adjusted RPSM

Nominal Payments Made (PCTs)

Additional PCT Owed

Present Value of the Owed PCT in Determination Year (2017)

FY2009

1

$3,455

50%

$1,732

$150

$1,582

Convert Year 0 Amounts to PV in 2017 Determination Year

FY2010

2

$13,166

50%

$6,601

$539

$6,062

FY2011

3

$23,333

50%

$11,699

$282

$11,416

FY2012

4

$38,267

50%

$19,186

$864

$18,321

FY2013

5

$30,790

50%

$15,437

$341

$15,096

FY2014

6

$37,355

50%

$18,728

$3,342

$15,386

FY2015

7

$50,575

50%

$25,357

$1,160

$24,196

FY2016

8

$45,276

50%

$22,700

$1,439

$21,261

FY2017

9

$49,260

50%

$24,697

$1,293

$23,404

Yr 0 NPV Thru Yr 9

$152,809

 

$76,613

$4,866

$71,747

$196,452

H. Periodic Adjustment Step 5

Table A2.6 applies the royalty rate established for the adjustment year to the years after the adjustment year for which information is available (fiscal 2018, 2019, and 2020) to calculate the periodic adjustments for each of those years due to Apple Inc., net of the nominal PCT payments made in those years. These figures are not discounted, because these adjustments are for examination cycles after the 2017 examination and pertain only to the nominal results year-by-year.

Table A2.6. Periodic Adjustment Calculation for Years Through the Determination Date
Periodic Adjustment per Reg. Section 1.482-7(i)(6)
($ million)

Year

Year No.

Divisional Profit and Loss

Royalty Rate in Adjustment Year

Nominal Royalty Due Under Adjusted RPSM

Nominal Payments Made (PCTs)

Additional Periodic Adjustment to Be Made

FY2018

10

$54,274

50%

$27,211

$1,848

$25,363

FY2019

11

$51,526

50%

$25,833

$2,389

$23,444

FY2020

12

$46,174

50%

$23,150

$1,942

$21,208

FOOTNOTES

1 Stephen L. Curtis and David G. Chamberlain, “Apple’s Cost-Sharing Arrangement: Frankenstein’s Monster,” Tax Notes Federal, Aug. 16, 2021, p. 1049.

2 The only change to this sentence since 1986 is the cross-reference for the definition of intangible property. The current language is shown for readability.

3 See, e.g., H.R. Rep. No. 99-426 at 423 et seq. (1985) (“The committee does not intend, however, that the inquiry as to the appropriate compensation for the intangible be limited to the question of whether it was appropriate considering only the facts in existence at the time of the transfer. The committee intends that consideration also be given the actual profit experience realized as a consequence of the transfer. Thus, the committee intends to require that the payments made for the intangible be adjusted over time to reflect changes in the income attributable to the intangible. The bill is not intended to require annual adjustments when there are only minor variations in revenues. However, it will not be sufficient to consider only the evidence of value at the time of the transfer. Adjustments will be required when there are major variations in the annual amounts of revenue attributable to the intangible.”).

4 Id.

5 This assumption that Apple Inc. and AOI had a valid CSA in effect from 1996 until January 5, 2009, was made to apply conservative assumptions that are the most favorable to the Apple group. See sections III.D, E, and F of Part 1 of this report, and Appendix 2, subsection B, item 3, for a discussion of why we believe there was no valid CSA during that period, which in short explained why AOI did not meet the individual exploitation requirement of reg. section 1.482-7A(a)(1). With AOI’s dependence on Apple Inc. for the performance of so many exploitation functions that AOI is incapable of performing itself or incapable of directing a true independent contractor to perform on its behalf, it is quite reasonable to see the pre-2009 CSA as a sham arrangement.

7 See European Commission, “Commission Decision of 30 August 2016 on State Aid Implemented by Ireland to Apple,” SA.38373 (2014/C) (ex 2014/NN) (ex 2014/CP) implemented by Ireland to Apple, C(2016) 5605 final, at para. 117 (Aug. 30, 2016).

8 See John C. Abell, “Aug. 6, 1997: Apple Rescued — by Microsoft,” Wired, Aug. 6, 2009.

9 Daniel Eran Dilger, “Apple Officially Acquired NeXT 23 Years Ago, Changing Everything,” AppleInsider.com, Feb 7, 2020.

10 Of course, there must have been many acquisitions in addition to the NeXT Software transaction. A full analysis to determine the relative portions of the PCTs as of January 5, 2009, would need to consider all pre-January 5, 2009, acquisitions and whether AOI had made any buy-in payments for acquired intangibles and personnel who would take part in the intangible development activity.

11 Macrotrends, “Apple Market Cap 2006-2021|AAPL.”

12 For a detailed overview of this research, see Curtis, “Forensic Approaches to Transfer Pricing Compliance and Enforcement,” 8 J. Forensic & Investigative Acct. 359 (2016).

13 See reg. section 1.482-7(c)(5), Example 2.

14 As Appendix 1 shows, there are many foreign acquisitions. While it seems likely that all U.S. acquisitions would have been made by Apple Inc., Apple might have arranged for some or all foreign acquisitions to be made by AOI. If so, the analysis here would change to some degree.

15 Lauren Feiner, “Apple Buys a Company Every Few Weeks, Says CEO Tim Cook,” CNBC, May 6, 2019.

16 SRI International, “Siri.”

17 Commission decision, supra note 7, at paras. 181, 313, 316, and 450.

18 See Curtis and Chamberlain, supra note 1, at Section III (discussing the disclosures in the 2016 commission decision regarding false information contained in figures 8 and 9 included in Apple’s restated CSA contract).

19 See GuruFocus’s website. This website provides all calculations and inputs to the weighted average cost of capital determination and is considered a reliable source for this information.

20 Because a periodic adjustment will increase the income of Apple Inc., there will be a corresponding reduction in the accumulated earnings within AOI. See reg. section 1.482-1(g)(2) concerning correlative adjustments.

21 Note that this additional $84 billion in taxes does not include any state taxes that may be due.

22 Recall that AOI has employees within the United States regularly acting for its disregarded entity subsidiaries. This is because ASI and AOE (disregarded entity subsidiaries treated as AOI branches or divisions for federal tax purposes) have U.S.-located directors who, Apple has admitted to the European Commission and the GCEU, are conducting ASI and AOE’s businesses. While those persons may factually be directors of ASI and AOE, the branch-division status of the companies for federal tax purposes under the check-the-box rules means that they are AOI employees who have management responsibility for AOI’s ASI and AOE divisions. The regular conduct of management and other functions by these AOI employees creates a trade or business within the United States for AOI.

23 See Jeffery M. Kadet and David L. Koontz, “Profit-Shifting Structures and Unexpected Partnership Status,” Tax Notes, Apr. 18, 2016, p. 335. As indicated in that article (id. at 340), even just joint production activities will create a separate entity (reg. section 301.7701-1(a)(2)) that will be treated as a partnership for tax purposes under the default rule of reg. section 301.7701-3(b). The production functions (short of the physical manufacturing carried out by third-party contract manufacturers) conducted by Apple Inc. on behalf of both its own and AOI’s product needs are more than sufficient to create the separate entity and thus a partnership for tax purposes. The additional joint management and joint participation in sales to major customers and the management and conduct of the internet-based platforms used by both companies just cement this separate-entity and partnership status.

25 See H. David Rosenbloom, “Kumquat: The U.S. International Tax Issues,” Tax Notes Int’l, June 25, 2018, p. 1521; Lee A. Sheppard, “What About Cupertino?Tax Notes Federal, July 27, 2020, p. 565; Thomas J. Kelley, Koontz, and Kadet, “Profit Shifting: Effectively Connected Income and Financial Statement Risks,” 221 J. Acct. 48 (Feb. 2016); Kadet and Koontz, “Internet Platform Companies and Base Erosion — Issue and Solution,” Tax Notes, Dec. 4, 2017, p. 1435; and Kadet and Koontz, “A Case Study: Effectively Connected Income,” Tax Notes Federal, Apr. 13, 2020, p. 217.

26 Because AOI is not tax resident in any country with which the United States maintains a tax treaty, the 30 percent rate in section 884(a) would apply to the dividend equivalent amount.

28 There is no need to go into details. Suffice it to say that in addition to interest, there could be various penalties, including penalties for nonfiling of partnership returns and non-withholding of tax under section 1446.

29 Rosenbloom, supra note 25, at 1523 et seq.; and Sheppard, supra note 25, at 565 et seq.

30 Note that the 8 percent markup on total costs used in this report is lower than the 10 to 15 percent margins that Apple negotiated with Ireland for the same activities. Apple’s negotiated margin did not involve a transfer pricing study and was deemed by the European Commission to be excessive and to “deviate from the arm’s-length principle.” See commission decision, supra note 7, at paras. 149 and 150.

31 It is appropriate to ignore the regulation’s further guidance rather than to apply it mechanically because it provides a result that is not correct economically. Since independent parties would not use an approach that is economically irrational, following the mechanical rule would violate the overarching requirement in reg. section 1.482-1(b)(1) that the arm’s-length standard be applied “in every case.” (See Xilinx Inc. v. Commissioner, 598 F.3d 1191 (9th Cir. 2010) (holding that reg. section 1.482-1(b)(1) trumps conflicting language elsewhere in the section 482 regulations).)

END FOOTNOTES

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