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Abstract
Last year the most successful I.T. Company Apple has caught a national wide focus. This time is not because they held a conference for new iphone or any i-products, but because their tax planning. As a model company, Apple always create amazing products, we can see their products all around the world, so many newspapers and magazines praise their design teams and marketing teams. These time their Tax team was enjoying the annoyance, after the news related Apple’s tax strategy open to the public there were a lot of argument around them. Some people thought they break the Tax laws, some people believe the Apple was clean, and some people thought Apple’s approach is immorality. In this paper, I will explain the approach which Apple use to avoid tax, show some supporting codifications and regulations about this approach, and analysis whether this approach is lawful. At last, I will show my view point about this issue.

1. Explain the approach which Apple use to avoid tax.
1) Basic knowledge
Apple is one of the largest international company in the U.S., they create billions of profit a year and become the most successful I.T. Company in the world. Apple sell their products all over the world, at same time, they also have some subsidiary companies overseas to help them avoiding tax. The approach for Apple Inc. to avoiding the huge tax is very complex, and need several special requirements.
The main profits Apple earned are from two parts: tangible assets sells such as Iphone, Ipad, and Imac, and intangible property rights which are more and more valuable in today economy. For the tangible assets, it is difficult to avoiding the taxes, but for the intangible property rights is possible to create a tax-shield.
Apple’s tax avoid strategy has two parts: First, the company shift the intellectual property profit to an offshore tax haven. Second, the company use some tactics to ensure that the offshore income is in the shield of the U.S. taxes system, they do not need to pay the taxes to the U.S. government based on the IRS code, and can get the profits from subsidiary companies. In order to get this goal, Apple created many offshore corporations the most important are Apple Operations International (AOI), Apple Sales International (ASI), and Apple Operations Europe (AOE). These three offshore companies incorporate with Ireland, but not the tax residence in Ireland, each of these three companies have their own purpose and played a critical role in Apple’s tax avoiding plan. AOI owned by Apply only is the main corporation for tax avoiding plan and is the top of the offshore company structure. AOI, ASI, and AOE are Ghost Company, the company had no physical parts in Ireland, employees and carried out its operations through the action of a U.S.-based board of directors, most of whom were Apple Inc. in the U.S., these companies are incorporated in the Ireland but control by U.S.
Even though Apple already create these three company at tax heaven in Ireland, Apple also need find some laws and exceptions to ensure these sub-companies can make their tax avoiding plan work. “Cost-sharing agreement” and “check-the-box” are useful tools for Apple’s tax avoiding plan worked. Cost-sharing agreement: “An agreement between two parties to share the cost of developing an intangible asset. Such an arrangement is used to reduce or avoiding taxes on the transfer of assets. For example, if a parent company wanted a foreign subsidiary to use one of its patents, tax authorities might consider the transfer a taxable transaction. By establishing a cost sharing agreement, the parent company and the subsidiary share in the cost of developing the patent, so that both are entitled to use it, and it is not transferred from one to the other”[1]. Apple setup the cost-sharing agreement with its Irish company, it is not an arm’s-length transaction. As a result the company can share the cost, and shift profits generated by its intellectual property.
Check-the-box: this regulation can help company avoiding the Subpart F rules which tax passive income. The check-the-box rule allows a taxpayer to elect to treat a foreign corporation as though it does not exist for U.S. law (reg. section 301.7701-3). So Ireland would treat a checked Apple subsidiary as a corporation and recognize payments made to and from it. Other countries would also treat it as a corporation. But the United States would not recognize the corporation, and would not acknowledge the payments. [2]
2) Simple map for Apple tax avoiding plan.
After the introduction we know that Apple create some ghost company at the tax heaven country, and use the differences of the tax law between Ireland and United States to let the company in the nowhere income tax area. As a supplement, Apple also fined the loophole in the U.S. tax law which is combine the Cost-sharing agreement and the Check-the-box to ensure their cleaver tax avoiding plan.
To simply explain how the tax avoiding plan works, there is a very basic equation:
Sales revenues – Cost = Income before tax
Income before tax is the bases for company to pay tax. In order to decrease the income before tax, Apple has two smart way. First, Apple Ireland company receive billions intelligence property sales revenue, when the principle company receive these revenues, it pay the dividend income to Ireland sub-company. Under normal circumstance, company need to pay the tax (Subpart F), but based on the AOI’s special characters and the Check-the-box regulation, this income do not need to pay any tax to any national government. Also, Apple use the ASI to receive the intellectual property rights income, because the ASI was located in the Ireland, so Apple do not need to pay the tax in U.S.. The other way is more cleaver and complex, in short words, Apple use the Cost-sharing agreement to share some of the sales expense from the Ireland sub-company. As the result, Apple transfer a large part of the revenues to tax-free place and absorb the cost from non-America place, the income before tax is decreased a lot. This is just a simple explanation, in the real world the transactions are more complex, but they use the same theory.

2. Is the Apple break the tax law?
Whether Apple break the U.S. tax law is depend on the three parts: lawful Ghost Company, the use of Check-the-box, and the use of Cost-sharing agreement.
1). Lawful Ghost Company
U.S. Company can hold the subsidiary overseas at this point, Apple follow the rules.
2) The use of Check-the-box.
For United States income tax purposes, a business entity may elect to be treated either as a corporation or as other than a corporation.[3] under the regulation, Apple can use the check-the-box and there is no unlawful act. (For detail, please check the Reg 301.7701) Also, the Subpart F which made certain types of offshore income subject to U.S. income tax, even when that income was not brought back to the United States, including, for example, funds transferred between offshore affiliates in the form of dividends, royalties, or interest. Combined with the check-the-box rules will creating a tax loopholes.[4]
This two rule combined together will create a loopholes and Apple just use this loophole transfer the profit between offshore companies and principle company without pay tax.
3) The use of Cost-sharing agreement.
Based on the Code §1.482-7: [5]
(a) In general. The arm's length amount charged in a controlled transaction reasonably anticipated to contribute to developing intangibles pursuant to a cost sharing arrangement (CSA), as described in paragraph (b) of this section, must be determined under a method described in this section. Each method must be applied in accordance with the provisions of §1.482-1, except as those provisions are modified in this section.
(b) Cost sharing arrangement. A cost sharing arrangement is an arrangement by which controlled participants share the costs and risks of developing cost shared intangibles in proportion to their RAB shares. An arrangement is a CSA if and only if the (1) Substantive requirements. (2) Administrative requirements. (3) Date of a PCT. (4) Divisional interests.
(c) Intangible development costs. Costs included in IDCs are determined by reference to the scope of the intangible development activity (IDA). The IDA means the activity under the CSA of developing or attempting to develop reasonably anticipated cost shared intangibles. The scope of the IDA includes all of the controlled participants' activities that could reasonably be anticipated to contribute to developing the reasonably anticipated cost shared intangibles. The IDA cannot be described merely by a list of particular resources, capabilities, or rights that will be used in the CSA, because such a list would not identify reasonably anticipated cost shared intangibles. Also, the scope of the IDA may change as the nature or identity of the reasonably anticipated cost shared intangibles changes or the nature of the activities necessary for their development become clearer. For example, the relevance of certain ongoing work to developing reasonably anticipated cost shared intangibles or the need for additional work may only become clear over time. If a particular cost is directly identified with, or reasonably allocable to, a function the results of which will benefit both the IDA and other business activities, the cost must be allocated on a reasonable basis between the IDA and such other business activities in proportion to the relative economic value that the IDA and such other business activities are anticipated to derive from such results.
Apple follow the rules of CSA based on the codification above.

3. Apple issue analysis We can see that based on the code Apple do not obey any taxation code, and also do not break any laws about run business in foreign country. The key point for Apple’s tax plan are the tax lax differences between Ireland and United States and the U.S. tax laws loopholes. These two requirements must satisfied at the same time, if one of them is not attained U.S. tax law will retain the tax from Apple’s foreign sales. Tax heaven can help Apple avoid high income tax, but based on the U.S. tax law if the profit transferred to U.S., Apple need to pay the tax for profit.
The interesting thing is that U.S. tax objects is the citizen, residents and domestic corporations, The America government levy tax on any income earned by their residents, citizens, and domestic corporations. Government do not care where they live or do business. This will lead to a double taxation issues, which the company or individual need to pay both U.S. tax and the foreign local tax. However, apple open their subsidiary company at Ireland, at this point AOI is not a residential company, so U.S. tax law is not fit for them. At the other hand, Ireland Tax Law’s objectives is whether the manager of the company is lived in there, Apple has no employee in the Ireland, so the company also do not need to pay the Ireland tax. This loophole can ensure Apple deposited their profit in the tax heaven, but if they want to get profits back to U.S. they also need to pay tax under the Subpart F.
In order to bypass this rule, Apple find a loophole in the U.S. tax law that is combine the cost sharing arrangement and the check-the-box rules. This combination allow Apple get back the profit without tax and as a by-product Apple can reallocate some expenses. This loophole can work well also depend on the characteristics of the Apple’s profit resources – intellectual property right, the same method can also be used by other I.T. company which main revenue is from intellectual property right. After Apple’s issue explored, we also find Google, Amazon and Microsoft use the same approach.

4. Personal View
When the tax first levied, they tax objects begin to find ways avoid tax. Tax’s purpose is to help the government work well and provide the best service for their citizens, for this aim any one live and work in this country need to pay tax for government because government ensure them a stabilized environment and convenient life. However, tax also from the revenues, in order to get more revenue, people just want pay what they should pay. In their mind, Tax Law is the bottom line, no one can pay less than the Law required. Tax avoidance is not equal to tax evasion, evasion is an illegal behavior. For tax avoidance, it is lawful, but may not ethical. For Apple’s issue, it is entirely legal.
From the government view, Apple’s tax plan is unethical and I also think any company use the loophole of the Tax Law is unethical. Firstly, Apple is an U.S. company, most of their profits are from the principle company such as product design, application design, and R&D for intellectual property right. This profit should pay tax to U.S. government. Secondly, the transfer of intellectual property right profits is mainly used by the principle company not the ghost company because they do not have any employee there. Their employees enjoy the benefit from U.S. government, as a pay back, they need to pay tax supporting their government. Finally, part of Apple’s expense they allocated from Ireland is not for the principle company, this behavior will hurt the government.
The U.S. government should modified their Tax Law through Apple’s issue, and avoid this kind thing happened. Even though the government cannot write a no loophole Law, they should modified their Law immediately to prevent other companies copy the “bad” approach, if all the company do like apple, U.S. government may loss a huge part of Tax revenue.
From the company’s view, Apple did a good job to balance their profit and cost. As an international company, Apple need to find the best operation choice. U.S. government use a double taxation, any international company need to pay two taxes, one for the local country, the other is for U.S. government, Just as the CEO of Apple Tim Cook said “this kind of tax is more like a punish for transnational corporation”, more tax may increase the burden for companies. In addition to this, maximizing the shareholder’s interests let the company very care about their income and expense, the company should not pay more money than the law required. Under this pressure, the company may prefer to choose some loopholes to avoid tax or some other expenses.
The high tax rate in America is another reason for the company use “special” approaches to avoid it. Picture 1 and 2 show the America corporate tax rate compared with other country.
Picture 1 [6]

Picture 2 [7]

From this two picture we can see that the United States has the highest corporate tax compared with other countries. All for all, both the government and Apple should introspection their own problem. The standards for good tax is that 1) Tax should be sufficient, 2) Tax should be efficient 3) Tax should be fair 4) Tax should be convenient. From these four aspects, the U.S. government should decrease the corporate tax rate and optimizing tax levying process. Apple as a tax objective and U.S. Corporation, they need to improve their social responsibility and awareness of tax payment.

Reference
1. http://www.businessdictionary.com/definition/cost-sharing-agreement.html.
2. http://www.forbes.com/sites/leesheppard/2013/05/28/how-does-apple-avoiding-taxes/
3. sec 301.7701-2 and 301.7701-3
4. OFFSHORE PROFIT SHIFTING AND THE U.S TAX CODE—PART 2 (APPLE INC.)
5. Reg §1.482-7 Methods to determine taxable income in connection with a cost sharing arrangement. Final, Temporary & Proposed Treasury Regulations (RIA)
6. http://blog.heritage.org/2012/08/30/no-surprise-u-s-corporate-taxes-driving-businesses-abroad/
7. www.oecd.org/ctp/tax-policy/Table%20II.1_May%202013.xlsx