Bruised Apple

 

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The first day back following a bank holiday is never the easiest, especially the August one as it signifies the typical end of ‘summer’ and the final true bank holiday until Easter.  Back to the point, as you’re sat there checking the damage done to the bank account after a busy weekend, forgetting about those Jägerbombs at 3am on Sunday, it could be worse; imagine receiving an unexpected bill for £13.5 billion, because that’s exactly what happened to the technology giant Apple.

Following a 3 year investigation into their Irish tax operations a European commission court ruling deemed Ireland eligible to claim back 13 years worth of back taxes and interest. For Apple it seems their luck of the Irish has well and truly ran out of juice.

First of all, multinational tax avoidance isn’t anything new. It’s been around longer than Francesco Totti’s been a forward for Roma (since records began basically) and the cliché of they’re not the first and certainly won’t be the last is very apt. It doesn’t help that the US Tax Code is longer than War and Peace (that’s actually true)! This is just the latest headline tax avoidance case bringing the wider issue back into the public eye, reigniting the long standing issues within the very grey areas of multinational taxation (or lack of it). This is why we wanted to take a brief look at Apple’s case and what it might mean going forward for large firms dealing with similar issues.

Specifically relating to Apple’s case, there are numerous arguments and dilemmas thrown up by the ruling. Firstly due to the current taxation system in the US, it may end up being the US taxpayer who foots the bill from the tax credits Apple would receive in light of the larger overseas tax bill. Yet for this to happen Apple would have to repatriate their overseas cash, and well, that’s not happening as it would cost them around $60bn and that would certainly be enough to move the share price. Treasury Secretary Jacob Law has highlighted however the complicated and perhaps inefficient current US tax system, in which US companies can claim tax credits for overseas tax bills, needs to be changed. After all it is believed that US firms hold close to $2 trillion overseas because of this.

Interestingly though is the reaction from the Irish to the ruling. At first one might find their decision to appeal against the ruling somewhat perplexing; we’re pretty sure it is the first time in history someone has complained about receiving $13bn plus interest. Ireland is split; one side considers the obvious boost to the country’s finances, the equivalent of the annual budget of the Irish health Service we might add, whilst the other side looks to preserve the low tax reputation and integrity of the system. Outside of Ireland the attraction to multinational corporations will certainly decrease if they fear retrospective action but some countries will argue then for fair competition. Yet the other side of that coin is countries with comparably lower tax rates or those seen as tax havens will likely fear they’re next and it’s an expensive bus to be dragged under.bruised-appeal-3

Apple has been in Ireland for over 30 years as Tim Cook rightly mentioned however despite never asking for special deals it’s not as though Apple will have been unaware of their lowered tax payments. And for other large multinationals, unlike Apple, the highest valued company in the world, brushing off a $13bn unexpected payment may not be as easy. The share price hardly faltered following the news and rightly so, for a firm that sits on over $200bn cash overseas and that has just seen their latest iPhone model sell out worldwide, they’ll hardly struggle. Here are some more humbling facts to put things into perspective;

  • Apple earns over $300,000 of revenue p/min, so it can raise the fine in approximately a month.
  • If the co-founder of Apple sold his shares today rather than way back when for $800, he would be able to pay the fine almost 3 times over. And you thought you were having a bad day?
  • In Q1 of 2014, Apple earned more than Facebook, Google and Amazon combined and the value of Apple is worth more than the entire Russian stock market, they also have more operating cash than the US Treasury.
  • An iPhone contains around 0.0012 ounces of gold and in 2015 Apple made back $40 million from recovered gold in broken iPhones (now Apple care makes sense).

 

This does merit saying there’s quite clearly a large difference between illegal tax evasion and tax avoidance. Most companies now could be accused of tax avoidance as they justifiably seek to pay the least amount of tax they can get away with, as it then becomes more of a business ethics argument. Frankly one we won’t enter. But either way the overall situation throws up an interesting argument that we certainly won’t hear the last of. Let’s have a look at some of the prior culprits to have been rumbled;

Starbucks have unwillingly been associated as the biggest culprits of tax avoidance. The coffeehouse scrapped their complex UK tax structures in 2015 which meant their tax bill was almost as much as the prior 14 years. In 2012 Starbucks paid no corporation tax despite UK sales of £400m, you don’t need to be an accountant to figure that’s incorrect. Google also appears to be as good at hiding as it is at searching, well in terms of taxes, having paid just £6m to the treasury in 2011 despite a UK turnover of almost £400m. They obviously need Starbucks’ accountants. Amazon’s another high profile name, their achievement being a £1.8m tax expense with £3.35bn in sales. In 2010 General Electric made over $14bn in profit and paid $0 in taxes.

Yet this is all legal and the biggest detriment is to their corporate image, not to be undervalued of course but these brands have such power it deems these acts almost redundant in terms of how sales are affected.

Despite the power these brands have, the public is becoming increasingly aware and unhappy of the lengths multinationals and individuals are going to in order to reduce their tax bills as much as possible. The Panama Papers leak earlier this year should be a reminder of the times we live in. Apple’s case is interesting due to the fact it highlights how tax receipts to a country can be forgone to larger benefits, and personifies tax as a separate form of competition all together between constituencies.

Overall tax from the get-go is as complicated and opaque as anything else out there. After all many overlook Delaware in the US, one of the best tax shelters in the world. 1209 North Orange, Delaware is the legal address to nearly 300,000 businesses including the likes of JPMorgan, Ford, Coca-Cola, Apple and more, despite places like the Cayman Islands and Switzerland being thought of as the most secretive havens. The argument will go on indefinitely, and the corporations are always likely one step ahead. Even if Apple wins their case, many corporations and countries will be on guard for who’ll be next. It seems the favoured grey area of taxation is fading day by day.

 

 

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