Apple Inc. is an international firm but, until its legions of lawyers find some way around the inconvenience, it has to obey the laws of the jurisdiction it’s based in. For much of its global business Apple relies on the relatively lax laws on the island of Ireland in order to help it further its goals. That may not last for very much longer, however.
This week Ireland was buffeted by two major forces that threaten to change the way in which it, and much of the world’s tech sector, does business. On Monday, October 5 the OECD released new rules that suggest changes in the way large firms are taxed. The rules are designed to stop the exact kind of leaks from the global tax system that Apple exploits.
On Tuesday what might be an even more monuments change hit the country. It shows, and not for the first time, that the next big shock for Apple could come from Dublin rather than Beijing.
Facebook changes Apple data rules
On Tuesday a European court said that the transmission of data from Facebook’s centers in Ireland to the firm’s centers in the US under “safe harbor” rules was invalid. The rules, which allow data to move quickly between the jurisdictions, were re-evaluated in the wake of US spying on European citizens.
A case brought by an Austrian, Max Schrems, in Ireland, where Facebook hosts its European data, sparked the European Court of Justice proceedings. The case will now go to the Irish Data Protection Commissioners, who previously said safe harbor rules prevented them from looking into the matter.
Though the ruling won’t change the speed or path of data flows through Ireland overnight, the case that follows may have a massive and direct effect on the way large tech firms in Ireland deal with their data.
Facebook is the firm directly hit by the European court ruling, but most of the biggest web firms in the US are represented in the Republic of Ireland in one way or another. Apple has had a large base in the country for many years, and it’s just started investing more than $1B in making its infrastructure there more concrete.
Apple , on February 25 in the midst of questions about the legitimacy of its work in Ireland, said it will invest €850M in a new data center in Athenry, in the west of the country. That announcement was followed up, on October 6, with a €300M package for its European HQ in Cork, the island’s southernmost city.
The Facebook data rule change will have to be tested by Irish bodies before they begin to impact firms like Apple, Facebook, Google and Microsoft, but there’s no doubt that, should the rules be changed for Facebook, they will force a change on the part of those firms.
We’ll have to wait and see what those changes might be. Looking ahead to a rule change that might alter Apple’s tax rate in Ireland, and as a result around the world, it’s important to see the risks that face a global firm despite the horde of Wall Street sell-side voices shouting that the firm is a buy.
Apple effective tax rate changes
Apple Inc. is undervalued, at least according to activist investor Carl Icahn, because the firm is able to capture a much lower tax rate than Wall Street allows for. That may be about to change. A new list of OECD rules on how member states should deal with taxing global firms has been released.
The rulebook, which is called BEPs, is not likely to be good news for Apple in Ireland. The firm’s tax collectors have already promised to get rid of the most egregious tax scheme, the “Double Irish” within the decade. The new rules may prevent Apple from opening up a similar tunnel to replace it.
In the mean time Apple is being faced with a European investigation over the way in which it paid its taxes in Europe since the release of the iPhone. Rod Hall, an analyst with JPMorgan, reckons that Apple could be forced to pay up to $19B in order to fix the case.
If that massive fine is brought to bear on Tim Cook and Luca Maestri’s accounts, it’s likely that a new higher tax rate in Ireland would come with it. That would likely change the way the firm is valued on Wall Street and it, along with the firm’s need to secure a pipeline for data coming through Ireland, could influence future value to a great extent.
Judging global risks at Apple Inc.
There’s a clear and present danger for Apple in Ireland’s rule changes, though it’s not likely that the firm will be killed by either higher taxes or a need to alter the way its data flows. The changes do highlight something, however, Apple does, despite its size and resilience, face regional risks. As the EU seems to come down harder on large US tech concerns, that may become a bigger and bigger problem.
Wall Street says that Apple is a buy because iPhone sales are set to stay strong and the firm has enough talent to create a new hit product before people stop buying the smart phone. It’s clear, however, that there are more complex worries for the firm, and things that could not have been predicted could crop up and hurt its future.
China’s demand is a worry to the standard story about Apple, and it’s an important one. Investors who think that’s the only risk, and that, in the words of Brian White formerly of Cantor Fitzgerald and now working for Drexel Hamilton, “way overblown,” should take a closer look at the events that are outside of the firm’s control, and outside of the standard model.
As Ireland adapts to the rule changes asked of it by the European Court system and the OECD, Apple will have to adapt to the new requirements of the Irish state. The way it performs those acrobatics may say more about its future value than any iPhone event ever could.