Earlier this week Apple was effectively given an overdue tax bill from the European Union’s anti-trust commission for around $15 billion. Apple can certainly pay one $15 billion bill. However, this would also eliminate its related tax breaks from Ireland, which protected Apple profits across the EU and that will have a lasting, painful impact on its financial performance.
Why I think Apple is screwed is that this massive tax is very material to every Irish citizen—about $3,000 per person—making it very likely that those that support Apple and are currently fighting the EU will be politically motivated to change sides or lose their elected jobs. For instance, assuming you are in the US, if you were told that finding against Apple would reduce our own personal Tax bill by $3,000, would you support Apple or—like most—figure Apple kind of owes you the money because it made so much off you over the last few years (Apple does have something like $500 billion in reserves).
Ireland has for some time been one of the biggest EU tax havens, and it has paid dividends for the country which has largely emerged from the decades-old bank collapse. In fact, Ireland is healthier than when it entered it—suggesting the smart play would be to leave Apple, and a system that is largely working, alone. However, that would be strategic thinking and something governments are generally not known for. As a result, I think Apple, and a lot of other companies that have been using Ireland as a tax haven, are screwed.
I’ve covered the European Commission on prior cases. They have full authority to fine, but little else and its operations are funded by the fines. It is rarely overturned and—from a political standpoint—pounding on US companies to get funds EU countries desperately need will be very popular.
Let’s talk about other reasons not only Apple is screwed but other companies both in Europe and the US may be as well.
Apple Is Theoretically In The Right
Apple has one of the strongest legal teams on the planet and, as noted, it is hardly alone in this practice of using Ireland as a tax haven. And it worked for Ireland because even at this low tax rate Apple leads other companies in Ireland in terms of the amount of taxes it has already paid. If the favorable tax rate wasn’t in place, Apple likely wouldn’t be in Ireland and rather than getting a very small percentage of something Ireland would get a huge percentage of nothing. Apple exploited what appears to be a solid loophole only to have it slammed shut by the European Commission.
But…
But the issue for Apple is that Ireland likely never should have had the power to bind all of the EU anymore than Michigan can set tax policy for the entire United States. So, while Apple played according to the rules, and from Ireland’s standpoint as well as Apple’s this is a great deal—Ireland isn’t the EU and the deal screws other EU countries. Pretty badly, actually. From a standpoint of competition it gives Apple a significant advantage against theoretical competitors based anywhere that don’t have this massive tax advantage, giving the EU Commission a very strong argument that Apple has an unfair advantage and driving the issue into its jurisdiction.
The EU Commission is known for being tenacious. Also, as I noted, its power is in taxes and when going against Microsoft some years ago it used this power to tax Microsoft billions and this got Microsoft—which had been incredibly resilient to efforts to change its behavior up till then—to change. This showcases that even against some of the most powerful companies in the world (the European Commission is also causing Google some issues now) it seems to prevail.
Wrapping Up
Apple’s ability to fight this lies largely with its support from the Irish government, but Ireland is hardly the most powerful EU country. That would be Germany, and Germany isn’t a fan of things like loopholes—particularly if they give US companies an advantage over German firms. In addition, the amount of money being tossed around is massive and, as I noted above, material to every Irish citizen. If we also add the billions that may be taken from other firms that are using this loophole, the monetary incentive for Irish citizens to vote out the folks that support Apple is massive.
Finally, this appears to have been triggered by a plan for British companies which will be hurt when Britain exits from the EU to go to Ireland and use the Apple benefits to end up ahead. Germany, in particular, would be massively against this and it can take a shot at Apple and keep that from happening without looking like it’s piling on Britain.
As a result, I don’t see a path out of this for Apple. The loophole was unfair to the EU and EU companies. The money makes Apple’s position almost impossible to support by even Irish politicians long term. The need to block British companies from doing the same thing is extreme.
I think Apple is screwed—not only for the initial bill, but for tax treatment going forward. This may be the tip of the iceberg as the US has been unhappy with this tax treatment as well, and there are a ton of other companies that will likely be hit that don’t have Apple’s mammoth reserves.
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View Comments (16)
This tax (non tax is more like it) problem, on top of their attempting to price fix the digital book business (against Amazon) and their serf labor practices in Asia and very public litigation claiming to own design patients on everything with rounded corners paint Apple as one greedy dude of a company - all the while portraying their products as "loving", and "life changing". "Greedy" might a more appropriate description of this firm. Pay some reasonable taxes and try to innovate again. Your being left in the dust by your competition and the smart phone universe has figured it out.
So does the UK now become a better place to do business than Ireland - assuming they implement a similar tax system?
"there are a ton of other companies that will likely be hit that don’t have Apple’s mammoth reserves."
There used to be a lot of financial commentators who said that Apple had no earthly use for large reserves. I wonder how many of them will be publicly recanting?
No. I don't see why they would / should. $15 billion is a lot to most corporations, but it's only about 5 percent of Apple's cash. If you can pay a $15 billion fine and still have 95 percent of your cash, you probably have too much cash and should consider distributing it to shareholders.
They seem to relish the opportunity to overpay.
Watching Apple jack prices 30% in Europe will be awesome.
I believe Obama said "there is nothing I can do" when New York fined
(grabbed) $8.9 billion from BNP Paribas. Apparently this is a game two
can play.
The EU is not the United States. Ireland is a sovereign country.
Therein lies your confusion.
Nice job Rob Enderle. I have waited to read this here for when I had time. It read well. Thank you.
The reality of what you can do with $ almost always resorts to military might because people rarely accept the truthful things that are necessary to avoid such issues. After enough blood has been shed, people tend to accept the common truth in any situation because they are experiencing such a level of 'shell-shock' that their egos are put aside.
However, at this particular moment, the most pivotal moment in all human history, where the Earth faces mutually assured destruction nine ways to Sunday, as we choose to commit the greatest Holocaust of life ever known in the time of man for the unneeded reasons of fun, sport, fashion, glamor, unneeded nutrition, greed, taste, etc., this most likely all comes down to the fact that Apple doesn't have an army. As a result, if they want to do business in these countries they have to do so by their rules.
Well put !
Thank you.
Tim Cook's arguments are hollow.
Steve Jobs passed away and Apple was left with a guy who doesn't know how to innovate except in finding ways to keep the numbers up by dodging taxes. Tim Cook is garbage.
Sorry Apple, you cheated and now someone is calling you out for it. Our own government sold out long ago and no longer has the courage to stand up to the big multinational corporations.
We re talking about billions of tax dollars here. I'm glad someone has the fortitude to put an end to this obvious injustice. Make em pay!
Apple entered into this deal with Ireland LONG before Tim Cook took over. In fact, it entered into this arrangement with Ireland 6 years before Steve Jobs returned as CEO. It was also before there even WAS an EU.
There is no way to pin this on Tim Cook, and there is probably a valid argument to be made that the EU has no jurisdiction to actually make any demands for an arrangement that Ireland agreed to before it was even part of the EU.
That said, the practice of funneling all European revenue through Ireland or attributing it to a fake "Home Office" entity in Ireland seems like a shady practice that is ongoing and that the EU has every right to object to.
I didn't refer to any particular timeline. I'm suggesting that after Steve Jobs died, dodging taxes is all Apple has left. While it may be true that Apple was cooking up these schemes long before Cook took the helm it is Cook's defiant defense of the tax dodging schemes where I find him lacking and particularly trashy. Everyone in the world knows what cheating looks like and Tim Cook is the CEO of the biggest firm doing such cheating.
You claim that Apple entered these types of agreements with Ireland before there was a EU needs a reality check. I think Ireland joined the EU in 1973. Apple wasn't founded until 1976.
I don't know the details, but I'm fairly sure that Steve Jobs was at the helm during the process of all this ?
You're squarely placing the blame on Tim Cook, and calling him "garbage".
Could you please confirm the facts and then maybe change your view ?
(PS : I dont like either Job or Cook, to be blunt, but becuase I dont actually know them, neither do I go around calling them garbage. )
I didn't refer to any particular timeline. I'm suggesting that after Steve Jobs died, dodging taxes is all Apple has left. While it may be true that Apple was cooking up these schemes long before Cook took the helm it is Cook's defiant defense of the tax dodging schemes where I find him lacking and particularly trashy.