Apple’s $19 billion tax bill could shake up the tech industry

THE EU has gone after Apple for dodgy tax practices and demanded $19 billion. The fight should send ripples through the tech industry.

The EU-Apple tax case represents a new water mark in the bloc’s efforts to rein in alleged excesses of American tech giants. Picture: Reuters

APPLE recently unveiled the new iPhone 7 to mixed reviews, and many analysts are busy debating its impact on the tech giant’s earnings this year.

But investors should note that another major issue hangs over the company — the 13 billion euro ($A19.5 billion or $US14.7 billion) tax bill it faces in Ireland.

In late August, the EU ruled that Ireland gave Apple illegal tax benefits which lowered its effective corporate tax rate on its profits from 1 per cent in 2003 to 0.0005 per cent in 2014.

In other words, Apple allegedly paid just $55 in tax for every $1.12 million in profits it booked in Ireland.

It also ruled that Apple avoided higher taxes in other EU countries by reporting all its European profits in Ireland. Other reports indicate that Apple might have funnelled two-thirds of all its overseas profits through the country to reduce its global tax burden.

Apple claims to have regularly paid Ireland’s 12.5 per cent corporate tax rate on those profits. CEO Tim Cook condemned the ruling as “total political crap” and claimed that the EU commission “just picked a number”.

The company vowed to appeal the ruling, but the Irish Department of Finance recently admitted that it would likely need to collect the payment. If that happens, it could hurt Apple and other US tech companies with Irish ties.

Apple CEO Tim Cook speaks on stage during an Apple event at Bill Graham Civic Auditorium in San Francisco, California on September 7, 2016. / AFP PHOTO / Josh Edelson

HOW BADLY WOULD THIS HURT APPLE?

The EU ruling won’t cripple the company, since $US14.7 billion amounts to just 7 per cent of its overseas cash hoard of $US215 billion.

Even if Apple paid the full amount, it would likely be written off as a one-time charge and wouldn’t be considered a major weight on its long-term growth.

The EU also stated that the final amount could be reduced by an agreement, or if Apple agreed to pay back the taxes to individual countries.

However, accepting the tax bill could trap Apple between a rock and a hard place. Back in the US, members of Congress have called Apple a “corporate tax dodger” for its refusal to repatriate its overseas profits.

Apple gets tax credits for overseas taxes, yet the company isn’t taxed unless it brings the cash back home. Apple argues that the US corporate tax rate of 35 per cent, one of the highest in the world, is unfair and discourages it from doing so. That’s also why it funds its stock buybacks with debt instead of cash.

But there’s a silver lining to this dilemma — if Apple ends up paying the full amount, it can actually earn a one-for-one credit on those overseas payments against its US taxes. This means that if Apple is forced to pay the bill, it could repatriate some cash back to the United States while reducing its US tax bill by $14.7 billion.

(FILES) This file photo taken on September 09, 2015 shows a reporter walking by an Apple logo during a media event in San Francisco, California on September 9, 2015. The EU is expected to announce on August 30, 2016 its decision on possible fines against American tech giant Apple, which is suspected of receiving preferential treatment from Ireland on taxes, sources said. / AFP PHOTO / Josh Edelson

HOW OTHER TECH GIANTS COULD BE AFFECTED

Microsoft, Alphabet, and Facebook also have major presences in Ireland.

Like Apple, all three tech giants have been accused of funnelling overseas profits through the country to reduce their taxes.

This means that they could be next on the chopping block.

All three companies already face plenty of other headaches in the EU. Three years ago, the EU fined Microsoft more than $US700 million for failing to respect a previous antitrust settlement. The EU is also hitting Alphabet with various antitrust charges, and Facebook faces a privacy probe in Germany which might expand into antitrust investigation.

Getting hit by large tax bills could force these companies, as well as many other multinationals, to re-evaluate the future of their European operations. If the EU continues to scrutinise Ireland, these companies could move to other regions that are willing to exchange lower tax rates for jobs and economic growth.

THE BOTTOM LINE

The EU ruling against Apple is a thorny issue. Apple claims that it played by the rules, but the industry practice of funnelling profits through Irish subsidiaries arguably looks like a shell game. This battle will likely drag on for years, but it could dramatically impact Ireland’s relationship with the EU and major tech companies.

This article originally appeared on Fox News.

Originally published as Apple’s $19 billion tax bill could shake up the tech industry