Worst-case scenario from Irish tax changes could reduce Apple's annual earnings by 10%
If the European Commission were to levy a 12.5 percent tax on all of Apple's earnings that run through Ireland, it would reduce the company's annual earnings by just under 10 percent, a new "worst-case scenario" analysis has found.
Apple's headquarters in Cork, Ireland, via Flickr user Sigalakos.
In a research note issued to investors on Thursday, J.P. Morgan analyst Rod Hall did the math on the impact revisions to Ireland's tax code might have on Apple. A copy of the note was provided to AppleInsider.
In it, Hall noted that he remains bullish on AAPL stock, with an "overweight" rating and a price target of $145. Still, he admitted that an ongoing probe of Irish tax laws could have a noteworthy affect on the company's bottom line.
In his potential "worst-case scenario," Hall sees Apple assuming a full Irish tax rate of 12.5 percent against what he calculates as $153 billion of relevant profits over 10 years. That would total some $19 billion against the iPhone maker.
"We see even this as largely irrelevant for Apple's share price given the company's large cash pile," he said.
Looking forward, however, the impact could be greater: Hall estimates that some 59 percent, or $42 billion, of Apple's earnings before taxes run through the Irish tax structure with almost no taxes imposed on them.
If the European Commission were to levy a worst-case 12.5 percent rate on those dollars, Hall estimates that it would reduce Apple's annual earnings by just under 10 percent.
Apple itself issued a warning to investors last month, noting that the European Commission's scrutiny of Ireland's tax laws could have a "material" impact on Apple's bottom line.
Ireland, along with Luxembourg and the Netherlands, have offered sweetheart tax arrangements to large companies in exchange for setting up operations there.
A preliminary report issued by the commission last year found that Ireland's 1991 and 2007 tax records with Apple represented illegal state aid, designed to skirt market forces. Apple is thought to have saved as much as $9 billion per year from these agreements, which could be retroactively charged to the company in back taxes.
Ireland has vowed to fight any EU ruling against its tax policies, and Apple has repeatedly defended its arrangement.
Apple's headquarters in Cork, Ireland, via Flickr user Sigalakos.In a research note issued to investors on Thursday, J.P. Morgan analyst Rod Hall did the math on the impact revisions to Ireland's tax code might have on Apple. A copy of the note was provided to AppleInsider.
In it, Hall noted that he remains bullish on AAPL stock, with an "overweight" rating and a price target of $145. Still, he admitted that an ongoing probe of Irish tax laws could have a noteworthy affect on the company's bottom line.
In his potential "worst-case scenario," Hall sees Apple assuming a full Irish tax rate of 12.5 percent against what he calculates as $153 billion of relevant profits over 10 years. That would total some $19 billion against the iPhone maker.
"We see even this as largely irrelevant for Apple's share price given the company's large cash pile," he said.
Looking forward, however, the impact could be greater: Hall estimates that some 59 percent, or $42 billion, of Apple's earnings before taxes run through the Irish tax structure with almost no taxes imposed on them.
If the European Commission were to levy a worst-case 12.5 percent rate on those dollars, Hall estimates that it would reduce Apple's annual earnings by just under 10 percent.
Apple itself issued a warning to investors last month, noting that the European Commission's scrutiny of Ireland's tax laws could have a "material" impact on Apple's bottom line.
Ireland, along with Luxembourg and the Netherlands, have offered sweetheart tax arrangements to large companies in exchange for setting up operations there.
A preliminary report issued by the commission last year found that Ireland's 1991 and 2007 tax records with Apple represented illegal state aid, designed to skirt market forces. Apple is thought to have saved as much as $9 billion per year from these agreements, which could be retroactively charged to the company in back taxes.
Ireland has vowed to fight any EU ruling against its tax policies, and Apple has repeatedly defended its arrangement.
Comments
If Apple wasn't paying taxes without an agreement, then yes, Apple should pay back the full amount but that's not what happened here. If anything, rule the agreement null from hereon and charge Apple the full tax on new profit. Going back 10 years is just not something I agree with.
If the European Commission were to levy a 12.5 percent tax on all of Apple's earnings that run through Ireland, it would reduce the company's annual earnings by just under 10 percent, a new "worst-case scenario" analysis has found.
Do these numbers mean that something like 80% of their profit runs through Ireland? Also, I thought a company got taxed on their profits not earnings.
Do these numbers mean that something like 80% of their profit runs through Ireland? Also, I thought a company got taxed on their profits not earnings.
Sometimes yes and sometimes no: IIRC there are cities in the U.S. that levy a "receipts" tax which taxes all their sales and not just profits. Philadelphia? Then Europe has the VAT which isn't "profits" based...
Oh and on the % I've no idea.
I might be native here but I don't really understand why Apple should be made to pay back these taxes. They didn't "choose" not to pay, they got an agreement with the government and they complied with it.
If Apple wasn't paying taxes without an agreement, then yes, Apple should pay back the full amount but that's not what happened here. ...Going back 10 years is just not something I agree with.
Totally agree. In the states, this would be a (more or less) ex post facto law. If Apple complied with the agreement made with the Irish government, I don't see a reasonable justification for the EU to change the tax rate retroactively. If the EU insists on taking someone to the woodshed, they should take the Irish government, IMHO.
Bottom line: I predict it won't happen (well, maybe a couple of percentage points is possible as a sop....)
Alternatively, maybe Apple could buy Ireland.
Quote:
Sometimes yes and sometimes no: IIRC there are cities in the U.S. that levy a "receipts" tax which taxes all their sales and not just profits. Philadelphia? Then Europe has the VAT which isn't "profits" based...
Oh and on the % I've no idea.
Washington State taxes Corporations on gross sales.
well, as EU countries use VAT, Apple should just bump up the VAT. issue solved.
Those claiming this is "ex post facto law" are forgetting that Apple's agreement was with Ireland. This tax decision is coming from the EU itself and most of the money involved came from European sales not Irish ones.
I wish I only had to pay 12.5% Income Tax
Apple having all this money laying around is just acting as a magnet for the tax barons of the EU to try to come up with some scheme to get ahold of as big a chunk of that as they can.
Totally agree. In the states, this would be a (more or less) ex post facto law. If Apple complied with the agreement made with the Irish government, I don't see a reasonable justification for the EU to change the tax rate retroactively. If the EU insists on taking someone to the woodshed, they should take the Irish government, IMHO.
Sue the EU.
EU become greedy when they see Apple's pile of cash. They hope they can rob some cash from Apple to bail out Greece, another welfare state of EU.
Good. Apple has been avoiding these taxes using a sophisticated and perhaps dubious tax loophole that an ordinary Irish pub can't use. Let's hope that the EU forces Apple to play by the same rules as that little pub.
Those claiming this is "ex post facto law" are forgetting that Apple's agreement was with Ireland. This tax decision is coming from the EU itself and most of the money involved came from European sales not Irish ones.
Except Apple PAID the EU it's taxes.. No one ever adds in the VAT taxes and local taxes to what Apple is paying in tax.. For some reason it gets conveniently left out. What is at question is what taxes Apple owes Ireland itself.. NOT the EU..
The EU is being presumptuous in assuming they can dictate Irish tax law.. The EU wants to 'encourage' Apple and other businesses to leave Ireland. Thats what this is REALLY about. Well, bully them really.
Now, Ireland had almost left the EU completely once.. and this impacts all of Ireland's agreements, not just with Apple.. I could see the question of Ireland leaving being real yet again w/EU throwing it's weight around retroactively..
The 'irony' of this is.. Ireland CLOSED that loophole, so, after 2017, Apple and other businesses cannot take advantage of the tax break ANYWAY.
This is just EU being a bully. Literally.
Good. Apple has been avoiding these taxes using a sophisticated and perhaps dubious tax loophole that an ordinary Irish pub can't use. Let's hope that the EU forces Apple to play by the same rules as that little pub.
Those claiming this is "ex post facto law" are forgetting that Apple's agreement was with Ireland. This tax decision is coming from the EU itself and most of the money involved came from European sales not Irish ones.
Loophole is the word that's used to excuse the failure of the tax law. That's not Apple's issue. They complied with and paid every penny under current tax law.
I think the argument is that the payment is not a punishment, it is just fixing an error that was made based on an erroneous transaction. It is deemed a correction, Apple does not actually lose anything, as they should not have had the benefit in the first place. I doubt Apple cares about the back-taxes, the closing of the loophole in the future has a bigger impact as it affects the value of cash flows into eternity.
Earnings is the term sometimes used to mean operating profit, as in EBITA means Earnings before interest and taxes (but after costs). The top line is called Revenues.
I believe Apple pays Corporate tax in the U.S., why exactly should they not pay taxes in the EU? There are good arguments that corporations should not pay income taxes at all, anywhere. I get that. But why paint the EU as the devil if all they do is enforce a type of tax that exists in most western countries, including the U.S. (where corporate taxes are often higher than in the EU).