Apple Handed Huge Tax Bill; We're Not Worried
publication date: Sep 1, 2016
author/source: Kris Rosemann
By Kris Rosemann
The Competition Commission of the European Union has ordered Apple (AAPL) to pay up to ~$14.5 billion in back taxes plus interest to the government of Ireland after concluding that the country unjustly allowed the firm to pay an effective corporate tax rate between 0.005% in 2014 and 1% in 2003 on its European profits. The total amount deemed owed by the EU is 40 times the largest amount previously demanded in such a case.
While $14.5 billion is certainly a meaningful sum of cash, if there is a company equipped to handle such a situation, it is Apple. As of the end of the third quarter of its fiscal 2016, it had ~$231.5 billion in cash, cash equivalents, and marketable securities on its balance sheet, compared to total debt of ~$85 billion. Based on these figures, the back tax total ordered to be paid by the EU amounts to approximately 6% of Apple’s total cash balance and less than 10% of its net cash position of ~$146.5 billion. All things considered, we aren’t expecting the potential penalty to have a meaningful impact on Apple, given the size of its massive cash hoard and tremendous free cash flow generating ability.
Both Ireland and Apple plan to appeal the ruling, but the amount of money to be collected by Ireland could change materially if other countries decide to get involved. A portion of the unfair tax scheme was the recognition of revenue from other European nations in Ireland, which has a low corporate tax rate (12.5%). While the ultimate impact the ruling will have on Apple remains to be seen as the appeal process plays out, the effect it has on investment and job creation in Europe could be profound if other large multinational corporations find the treatment of Apple and others by the EU as unattractive.
The EU’s conclusion comes despite recent urging from the US Treasury Department for the European Commission to stop its tax crackdown on US multinationals. The US Treasury Department even published a white paper August 24 detailing its displeasure with the recent state aid investigations of the EU. The paper focused primarily on the following issues: the Commission’s approach is new and departs from prior EU case law and Commission decisions; the Commission should not seek retroactive recoveries under its new approach; and the Commission’s new approach is inconsistent with international norms and undermined the international tax system.
Other companies that have been impacted by European tax rulings or are currently under investigation by the EU include Starbucks (SBUX), Amazon (AMZN), McDonald’s (MCD), and Google (GOOG, GOOGL). The US Treasury Department is becoming fed up with the European Commission, and the Irish Finance Minister has also expressed his displeasure with the encroachment of EU state aid rules into is country’s tax system. The conclusion of the US Treasury Department’s recent white paper is as follows:
The U.S. Treasury Department continues to consider potential responses should the Commission continue its present course. A strongly preferred and mutually beneficial outcome would be a return to the system and practice of international tax cooperation that has long fostered cross-border investment between the United States and EU Member States. The U.S. Treasury Department remains ready and willing to continue to collaborate with the Commission on the important work of ensuring that the international tax system is fair, efficient, and predictable.
The globalization of the world economy will certainly not slow anytime soon, and geopolitical pressures around the world continue to mount. Our newsletter portfolios will be unaffected by the recent news surrounding Apple, and the appeal process associated with the ruling will likely take a substantial amount of time. We will, however, continue to exercise what we feel to be an appropriate amount of prudence in exposure to such geopolitical uncertainties, while keeping a watchful eye on future developments concerning potentially overreaching government entities.