Apple's Irish tax bill: What the analysts are saying-updated

Excerpts from the notes I've seen. More as they come in.

Kulbinder Garcha, Credit Suisse: Ireland ordered to collect ~$14.5bn from Apple. We would note that from 2003-2014, Apple generated pre-tax income of ~$268 billion, implying that the effective tax rate over these years should have been, on average, ~5% higher. This would be the absolute worst case scenario on a go forward basis.

Gene Munster, Piper Jaffray: Investors Unlikely To Punish AAPL For Tax Ruling.  The penalty represents about 10% of Apple's net cash balance or about $2.65 per share... While the outcome is likely several months away given the appeal, the key takeaway is that we believe investors are unconcerned on a relative basis in relation to the stock... Bigger picture, the story for AAPL remains the return to growth via the iPhone 7 (announcement next week) or the iPhone 7S/8 next year.

Steven Milunovich, UBS: European Commission's Tax Ruling Larger than Expected but Battle Likely Not Over.  The Commission asserts in its press release that the allocation method enabled most profits to be shifted to a "head office" that did not have a formal tax jurisdiction, enabling Apple to pay 0.05% tax on profits in the region... Although Apple did not violate any law, the tax position is believed to violate European Union rules preventing members from providing preferential treatment to corporates.

Aaron Rakers, Stifel: Outcome Unknown.  Ireland has 2 months and 10 days to bring an appeal. Notwithstanding the right of appeal, it was noted that Ireland is legally obligated to recover the alleged tax payment from Apple in the interim, which will be held in escrow through the appeal process.

Maynard Um, Wells Fargo: AAPL to appeal.  The ruling is disappointing and, while Apple is confident in an appeal, the process may take several years and may have a near-term sentiment overhang on the stock. We maintain our Outperform on our expectation for improving gross margin on iPhone mix, solid iPhone 7 units in the December quarter based on our units/carrier analysis as well the extra week in the quarter, and potential for upside to September if iPhone 7 launches earlier than usual.

Rod Hall, JP Morgan: Unaffected Ongoing Tax Rate Is a Positive. 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... 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.

Neil Cybart, Above Avalon: The fundamental argument Cook is making is that Apple should be taxed according to where valued is created. For Apple, that is the U.S. According to Cook, the Commission is going against that principle by retroactively changing tax laws. I find it very difficult to disagree with Cook.

Ben Thompson, StratecheryOne could absolutely argue that Apple is morally wrong here: if they think their value is created in the U.S., then they should be repatriating their money and paying their taxes, because it's the right thing to do. That they aren't shows that Cook's moralizing only goes as far as what is good for Apple's bottom line... I do think they're getting the short end of the stick from the European Commission. Moreover, I'm hopeful this episode will finally lead to meaningful reform of the U.S. tax code. I do hope, though, that we can get a lot less moralizing along the way.

See also: Here’s Tim Cook on the EC’s $14.5 billion Irish tax ruling


  1. Fred Stein said:
    From the Steve Milunovich quote, “Apple did not violate any law, the tax position is believed to violate of European Union rules preventing members from providing preferential treatment to corporates.”
    I’m not challenging Steve, but the statement seems bizarre. Is it true? Tax laws, tax credits, tax forgiveness, etc. have been used by governments all over to stimulate corporate investments, or to help parents save for their kids college, or to discourage smoking or consumption of gasoline, etc. Is every tax policy that appears preferential to corporates subject to review and retroactive assessment?

    August 30, 2016
    • David Drinkwater said:
      The statement may seem bizarre, but it is not unreasonable.

      Entry into the EU confers benefits of free trade, freedom of movement, etc. And even some level of financial support. In order to obtain those benefits, there are rules that member nations must follow. Ireland has received benefits, but not followed the member rules. And that is the crux of the matter from an EU perspective.

      September 1, 2016
      • Fred Stein said:
        I follow the argument but the tricky parts are; 1) retroactive? and 2) due process. It’s all way beyond my understanding, but it appears that Vesteger has both prosector and judicial powers. And her assessment seems to be based on her opinion of what is fair, not based on law.
        And there is the question of legal precedent.

        September 1, 2016

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