16 Sep

Apple’s Tax Battle: Should Investors Be Concerned?

WRITTEN BY Namrata Sen Chanda

Apple (AAPL) is in the middle of a tax battle with the European Commission due to unpaid taxes in Ireland. In 2016, the European competition commissioner, Margrethe Vestager, slapped the tech giant with tax fine worth $14 billion. The company has been involved in the tax battle for three years.

On Tuesday, the European Union’s Seventh Chamber of the General Court will hear appeals from Apple and Ireland after waiting for three years.

Apple accused of tax evasion in Ireland

The European Commission alleged that Apple enjoyed selective tax benefits in Ireland. Based on the allegations, the company underpaid taxes worth $14 billion in the country. Ireland has been accused of favoring Apple with preferential tax treatment. In 2016, the European Union alleged that Apple’s selective tax treatment helped the company avoid taxes on all of its sales profits across the European Union.

Apple only registered its sales in Ireland instead of the actual territories. As a result, the company escaped corporate taxes. The European Union alleged that Apple created an “artificial” profit arrangement by redirecting profits to a “head office” in Ireland that only exists “on paper.” As a result, the European Commission ordered Ireland to recover $14 billion worth of taxes along with interest for the period between 2013 and 2014.

Apple denies tax evasion 

Apple argued that engineering for most of its products and services happens in the US. As a result, most of the company’s profits are in the US.

As expected, Apple vehemently denied the allegations in 2016. Apple’s CEO, Tim Cook, said, “The European Commission has launched an effort to rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the international tax system in the process.” He dubbed the entire matter as “total political crap!” Cook stated that the European Union is making a mistake in targeting the profit generated in the US.

The Finance Ministry of Ireland also “profoundly disagreed” with the allegations made by the European Commission. Ireland’s finance minister, Paschal Donohoe, stated that the government would put forth a “very robust defense” for the iPhone maker.

Technology companies’ complex organizational structure and the treatment of their profit from intellectual property led to tax scrutiny. Last week, Google (GOOGL) and the French Ministry mutually agreed to a one-time settlement of about $1 billion due to a disagreement about tax evasion in France.

Ireland’s tax laws appeal global corporation

Due to Ireland’s economic and taxation policies, many companies think that it’s a tax haven. The tax structure has encouraged many global companies to incorporate organizations in the country. The corporate tax rate in the US before deductions is 21%, while the corporate tax rate in Ireland is 12.5%. The country also offers a 25% tax credit on research and development. Ireland is home to technology companies’ European headquarters including Google, Accenture, Facebook, Microsoft, PayPal, and LinkedIn.

Apple stock was subdued 

Last week was particularly eventful for Apple. The company launched a slew of products on September 11, which caused widespread enthusiasm among buyers and investors. The company unveiled the iPhone 11, the latest iPad, Apple Watch 5, Apple TV+, and Apple Arcade. Apple’s valuation touched $1.02 trillion amid its strategic pricing. The pricing intends to boost sales across the segments before the holiday season. However, by the end of the week, the ecstasy gave way to caution. Apple stock closed 1.9% lower at $218.75 on September 13. The stock has gained more than 40% YTD (year-to-date).

On September 13, Goldman Sachs lowered its target price on Apple from $187 per share to $165. The firm is skeptical about the company’s aggressive pricing strategy for Apple TV+. Goldman Sachs forecasted a 26% downside for the stock. Rod Hall, a Goldman Sachs analyst, stated that the accounting treatment for Apple TV+ might have “material negative impact” on the company’s earnings. In response to CNBC, Apple completely dismissed the negative outlook.

Should investors worry about Apple’s tax case?

The hearing on Apple’s tax battle is adding to the subdued sentiment. Apple paid more than 14.3 billion euros in taxes and interest to the European Union in September 2018. However, the money is in the company’s escrow account. Apple mentioned that the amount would be restricted for general use until the entire legal proceedings end.

Lawsuits related to tax evasion take around ten years to settle. As a result, I don’t see any material impact from the ruling in the short term. This week marks the official release of many of Apple’s newly launched products into the market. Investors will focus on the new iPhones hitting the shelves.

If Margrethe Vestager doesn’t convince the court with her argument, the money will go back from escrow to the company’s account for productive use. However, if Apple loses its tax fight against the European Union, it will have to pay for the tax evasion. We might see the effects of the payment on future earnings in a retrospective manner. The ruling would impact Apple’s business in Europe and its global reputation. In fiscal 2018, Europe contributed 24% to Apple’s total revenues.

The European Union is grappling with economic uncertainty amid Brexit and trade wars. If recovered fully, the unpaid tax of 14.3 billion euros would ease the EU’s financial pressure.

Update: Due to a copy editing error, an earlier version of this article suggested that the unpaid tax would ease Apple’s financial pressure rather than the European Union’s.

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