Apple Inc. (NASDAQ:AAPL) was offered some reprieve on a European tax investigation in recent days after Margrethe Vestager, the Danish Commission in charge of the inquiry, decided to slow down its progress toward making conclusions. Despite that, Apple could still be very much in trouble in Europe, and a new report outlines some of the dangers that Tim Cook and his team may be facing.
Rod Hall of JPMorgan released a note this morning titled “Irish Tax Luck May Be Running Out” concerning the future of the Apple tax deal in the island nation. According to Mr. Hall if the EU investigation goes very badly for Apple the company could end up losing $19 billion.
Apple tax deal in jeopardy
Apple transfers much of its international income through Ireland. According to Mr. Hall’s report the Cupertino company pays “negligible” taxes on 59% of its global income because of tax arrangements with that country and others around the world. His $19 billion figure is based on the European Commission forcing Apple to pay full taxes on its income over the last decade.
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According to Hall’s calculations Apple has booked $153 billion in relevant profits over the last ten years in Ireland. That means that should the Commission send a bill based on Ireland’s full 12.5% tax rate for corporations, the total cost will be around $19 billion.
The European Commission is pursuing an investigation, lead by Margrethe Vestager, into whether Ireland and other countries made extra-legal tax deals with corporations.
Update 15:29 EST: Here’s a look at Mr. Hall’s money flow chart for Apple in Europe. The complexity of the company’s dealings on the continent are worshiped by some, but Margrethe Vestager probably wishes for something a little easier to follow.
Using that structure Mr. Hall believes that Apple gets away with reporting just about 1% of its total international revenue in its Irish subsidiaries to Irish tax authorities. The company then managed to report just 0.4% of its EBIDTA to the same authorities.
Hall says that the outcome wouldn’t be all that bad if Apple went from paying nothing to full tax on the earnings it reports in Ireland. He may, however, be alone in thinking that. Apple said in its most recent earnings report that a ruling against it by the European Union could result in a “material” payment.
It may be more important to note, however, the cost on Apple business going forward rather than the up front tax charge that the company would pay according to Mr. Hall’s calculations.
Apple is a tax genius
Carl Icahn, the activist hedge fund investor, doesn’t see Apple like everyone else. He tends to see the company as one of the most adept financial wizards of all time rather than a simple phone maker. In a recent report he issued on the company’s prospects he said that it was worth more than anyone else thought simply because of its tax arrangements.
The way that Apple CFO Luca Maestri has organized for the company to book its taxes is so impressive that Mr. Icahn’s report ignored the iPhone almost entirely and still managed to value the company at more than $200 per share.
Rod Hall says that a $19 billion charge on Apple would be largely irrelevant for the company’s share price, citing the massive extent of the firm’s cash pile. If the European Commission rules against Apple it may not be the cash pile that suffers, but Apple’s future earnings as it is forced to pay significantly higher tax rates on earnings in Europe and around the world.
Either Apple changes its tax policy once more in response to the European findings, or the company decides to stick it out and pay the additional tax on its global profits. With more and more countries, from India to Italy, seeking to make Tim Cook account for and pay its fair share, it may be difficult to find a place with the mix of economic stability and low tax rates to suit its business going forward.
The majority of tech giants use Dublin, Ireland as their global base of operations for a reason. Should their benefits in that city get ground out, it may be very difficult to find a suitable replacement.