Apple Inc. stock was crashing on Monday morning as news broke that European regulators would extend an investigation into the firm’s tax practices. The European Commission is investigating whether tax arrangements between Tim Cook’s firm and the Irish government constituted illegal state aid. Today’s reveal means that the process will likely drag on well through next year.
On Monday the European Commission requested additional information from the government of Ireland. The situation is made more complicated by an upcoming election in the island nation. It’s possible that the current government won’t be representing the country in the investigation in a few short months, a change that may drag out the process even longer.
Apple falls on tax worries
Today’s announcement doesn’t really shed much light into the Commission inquiry into Apple and Ireland’s tax deal. It may be speculated that the Commission is looking for more information because it’s not able to make a case, but it might be equally said that the investigators are following a promising line of questioning.
What is clear is that the body has not finished looking into the country’s complex dealing with Apple, and it’s not likely to do so any time soon.
The request for information, coming late in the year as it has, isn’t likely to be fulfilled until the opening months of 2016 and elections, which must be held in the first week of April at latest, will intrude. The Irish media says that the ruling could have had ramifications on the case had the result emerged before polling began. Today’s delay in the inquiry makes that unlikely.
Rod Hall of JPMorgan says that Apple might end up getting a bill for as much as $19B if the Commission finds the actions of the government of Ireland were improper. It’s important to point out that, at least at this point, Apple is not being accused of any wrong doing. If it’s found that the state of Ireland did infringe on its legal responsibility to not interfere in the functioning of the internal market, however, any deals that are illegal have unenforceable terms.
That means that any illegal tax deal did not, in effect, exist, and Apple Inc. will be on the hook for all of the tax it should have paid going back ten years. The $19B bill would likely come down on appeal, but even at that huge level it’s still just about 10 percent of the firm’s cash pile and just about 3 percent of the firm’s market capitalization.
That means that a fine of that size would be in no way disastrous for Apple, but changing the firm’s tax rate going forward could indeed hurt its future growth. Carl Icahn, a Wall Street maven with a taste for Tim Cook’s tax policies, reckon that the firm’s tax plans add huge levels of value to the stock.
Apple keeps building in Ireland
Apple has had a base in the Republic of Ireland for the last three decades, and the island is a powerful part of the firm’s international accounting and administrative web. An outsized portion of Apple worldwide sales move through the firm’s Co. Cork HQ, Earlier this year it became clear that the firm was upping the amount of money coming through the country.
According to filings made with US authorities, Apple was increasing the amount of tax it paid in Ireland by a wide margin during the 2015 fiscal year. The shift to paying more tax in Ireland made Apple’s headline tax rate higher than previous years.
Carl Icahn, among others, has highlighted the less-than-useful nature of the headline overall tax rate. Apple doesn’t actually pay every cent of tax it reports as being part of its obligation, something Mr. Icahn thinks is among the firm’s greatest attributes.
On top of paying more tax, Apple has ramped up its investment in the country in recent years. On top of a massive expansion of its work force in Co. Cork, Tim Cook has announced a data center project in the west of the country.
It’s clear that Apple values Ireland highly, but that may not be enough to keep the firm’s tax deal with Ireland intact. It remains to be seen what the Commission’s opinion on the deal is in earnest,
Apple Inc. stock is a major loser
At time of writing shares in Apple were selling for $110.52, down 2.35 percent for the day so far. Today’s fall has erased all the gains that the firm’s shares have made in the course of 2015, despite the year being filled with successful, and record-breaking, products.
The iPhone, according to IDC, will sell a total of 226 million units this year, and nothing has slowed down at Apple in 2015, at least not yet. Most of the worries that traders are baking in to Apple Inc. stock appear to be related to next year, rather than the months past.
On Monday morning Morgan Stanley’s Katy Huberty said that sales of the iPhone were likely to fall by more than 5 percent for the full year 2016. That forecast is based on estimates of a 10 percent drop in component orders seen earlier on in the fourth quarter. It seems, if some on Wall Street are believed, that Apple will not be able to match sales of the iPhone 6 in the year ahead. Anxieties abound about whether that means the end of the firm’s real cash cow.
Despite talk about the iPad, the App Store and the iPad, it’s the iPhone that earns Apple more than 60 percent of its revenue, and the smart phone has been responsible for almost all of the firm’s growth in recent years. The iPad segment has fallen apart and the Mac has continued its solid gains, but nothing has growth like the iPhone in terms of dollars.
Huberty cut her price target on Apple shares from $162 to $143, though that wasn’t enough to shift the firm from the Morgan Stanley “Best Ideas” list. On a conference call this morning Huberty’s colleague Jasmine Lu said that Apple ,may have cut orders by as much as 10 percent for the December quarter, and 20 percent for the march quarter.
Huberty was quick to suggest that those numbers were wort-case scenarios for the Cupertino firm, and there may be other reasons for shifting those orders around. Huberty still believes Apple is in an extremely strong position but, for the time being at least, it just isn’t going to get the support from the iPhone world that Wall Street seems to demand.