Apple Inc has been skating on thin ice for some time when it comes to paying taxes in the European Union. Even supporters of the iPhone maker will admit that the firm has pursued an aggressive strategy to try and mitigate its EU tax burden, but the company has staunchly defended its policies as in full compliance with all applicable tax regulations.
However, based on a January 15th analysis by Bloomberg, Apple could owe as much as $8 billion in back taxes relating to a European Commission investigation into its accounting and tax practices. The tech titan has already said it will appeal any adverse ruling relating to setting up subsidiaries in Ireland to minimize the taxes it pays on revenues derived outside the U.S.
More on EC investigation of Apple’s tax practices
Of note, the ongoing EC investigation stretches back to early 2014 and a decision is expected within a few months.
In the investigation, the EC is arguing that Apple’s corporate tax arrangement in Ireland means it is calculating profits with more favorable, and inappropriate, accounting methods. Financial analysts point out that the iPhone maker calculates its tax bill based on very low operating costs, which significantly decreases the total amount of taxes the firm pays in Ireland.
Based on Bloomberg’s analysis, Apple today produces close to 55% of its revenues ex-U.S., and its overall foreign tax rate is only around 1.8%. Given the real possibility that the EC will call for accounting standard where Apple pays a more fair 12.5%, when you do the math on $64.1 billion in profit produced from 2004 to 2012, the company will owe north of $1 billion in back taxes.
Although Apple is the highest profile U.S. firm with tax problems in Europe, Starbucks, Amazon.com and McDonalds have all seen investigations into their tax practices.
Apple has begun listing scrutiny of its taxes as a risk factor in regulatory filings to investors. Related to this, the U.S. Internal Revenue Service is reportedly taking another close look at the company’s tax returns. As reported by ValueWalk, in a recent interview on 60 Minutes, CEO Tim Cook recently lambasted talk of a further U.S. probe into Apple’s tax polices as “political crap”.
RBC capital notes in a email to clients:
Tough to pinpoint the exact companies that will be impacted given disclosure, but we provide a couple of quick steps investors can use to find companies that HOLT identifies with the most risk. Companies with the lowest tax rates on foreign earnings as shown in exhibit 11 is a great starting point – Ron Graziano, holt