Apple Inc. (NASDAQ:AAPL) is getting hit hard by a ruling from the European Union in what may be retaliation for America being better in innovation and everything else (I kid, I kid). But some note and I quote from Dave Lutz of Jones Trading below.
Apple Inc. (AAPL)
The European Union’s antitrust regulator demanded that Ireland recoup roughly €13 billion ($14.5 billion) in unpaid taxes from Apple, a move that could intensify a feud between the EU and the U.S. over the bloc’s tax probes into American companies – The European Commission Tuesday said the tax arrangements Ireland offered Apple in 1991 and 2007 allowed the company to pay less than 1% or almost zero tax on its European profits for more than 10 years, between 2003 and 2014. Apple has already said it will appeal the decision.
Cynic in me thinks AAPL tax bill is a EU reaction to the USA breaking the VW scandal – The Apple case cuts to the heart of the power struggle between Brussels and Washington over who sets the standards – whether on tax, privacy, or finance – for global business – The US government has lobbied intensely against the move – both in private and then very much in public, accusing Brussels of everything from overstepping its jurisdiction to simply being jealous of the success of US tech groups. Early last year, the president claimed the commission was driven by protectionism. AAPL is the largest component in the QQQs and SPY
The list of big American tech companies being investigated by Margrethe Vestager, the EU’s competition chief, for either antitrust violations or sweetheart tax deals already reads like a “who’s who” of Silicon Valley: Google, Amazon, Apple. Her proclivity for going after US companies, particularly in her tax investigations (American non-tech groups like McDonald’s and Starbucks have also been targeted), has already raised eyebrows in Washington, where Treasury officials and members of Congress have accused her of an anti-American bias
Lutz makes a good point about other companies and that came to my mind but putting that aside for now – at least one analyst thinks this news is GOOD for Apple, if not for other tech giants.
In a JPMorgan report titled “EU Rules Against Apple But Unaffected Ongoing Tax Rate Is a Positive – ALERT” analysts note:
The EU has ruled against Apple in their investigation of the Irish Tax structure which we have written about extensively (here) and (here). The key takeaway for us is that it appears that Apple’s going forward tax rate is not affected, possibly due to the structural changes Apple made in its Irish operations in 2015. In terms of the potential back taxes Apple would need to pay the EU is saying up to €13bn but Apple says this will likely be held in an escrow account until the lengthy appeals process is over. The net of this is positive for Apple in our opinion given the lack of impact on the going forward tax rate. We do believe that this ruling may open the door for specific EU member countries to now attempt to recover taxes from Apple but we would expect that to also be a lengthy process with no short term impact.
Drexel Hamilton sorta agrees stating in a report:
Although the EU decision is a headline grabber and would represent a large tax penalty for most companies, Apple exited 3Q:FY16 with $231.5 billion in cash (93% overseas) and $84.9 billion in debt. In FY:15, Apple generated $81.3 billion in operating cash flow and $70 billion in free cash flow.
We believe today’s news is one of the last pillars in the “gloom and doom” cycle that has engulfed the Apple story since the end of 2015 and into this summer. Similar to the summer of 2013, we believe this summer will prove to be a bottoming process for Apple’s stock with our estimates indicating that the sales and profit cycle bottomed in 3Q:FY16.
So does Stifel, opining:
While we do not claim to be tax experts, nor is it possible to know the outcome of this situation, we would again highlight only a portion of Apple’s undistributed international earnings are classified as indefinitely reinvested in operations outside the U.S. As we have previously reported, Apple’s F2015 (September 2015) 10-K disclosed $91.5 billion in accumulated total foreign earnings held as indefinitely reinvested outside the U.S. exiting F4Q15 (+$21.8B y/y), accounting for 45.8% of foreign pre-tax earnings in F2015; this compares to Microsoft, Intel, Google, and Oracle recording an average of ~81% over the past 4-5 years. Apple recorded a $6.47 billion reduction in its effective tax reconciliation disclosure for F2015 reflective of the indefinitely invested earnings of foreign subsidiaries, which in the past has been noted as solely representing the difference between the U.S. statutory rate of 35% and the local tax rate on those indefinitely reinvested undistributed earnings, substantially all of which were generated by subsidiaries organized in Ireland. Using the $21.8 billion y/y increase in foreign earnings held as indefinitely reinvested outside the U.S., this would equate to a rate of 29.7%, down from 33% and 31% in F2013 and F2014 (vs. an average of ~33% over past three fiscal years).
On the other hand UBS notes:
Certainly $14bn is toward the high end of expectations and could negatively affect the stock. While we expect Apple may record an accrual in the financials relating to this matter, it’s too soon to make any adjustments to our valuation. Taking out $14bn of net cash on a DCF has a $3-5 impact on share price. The decision will likely be appealed, which could take many years. IBM only recently concluded a seven-year dispute with Japanese tax authorities. According to the press release, Ireland is required to collect the amount in question regardless of an appeal. Apple has $231bn in cash and securities with 90% held overseas. Europe has been increasingly aggressive in targeting US corporate tax structures, with investigations of Alphabet, Amazon, and Starbucks. The WSJ has reported that the US Treasury disapproves of the extent of the EU’s investigations.
While Credit Suisse opines:
As Apple and Ireland have both stated that they will appeal the ruling, the implications of this ruling remain unclear and difficult to determine. We would note that from 2003-2014, Apple generated pre-tax income of ~$268bn, implying that the effective tax rate over these years should have been, on average, ~5% higher. We would note that this would be the absolute worst case scenario on a go forward basis.
What do you think comment below.