Why Apple’s Stock Remained Relatively Flat Despite $14.5 Billion Tax Bill Concerns

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On Tuesday, the European Commission asked Ireland to recover close to €13 billion ($14.5 billion) in back taxes from Apple (NASDAQ:AAPL), stating that the Irish government had granted illegal state aid that allowed the company to essentially avoid paying its corporate taxes across the E.U. for over a decade. Taxes on the profits of Apple’s Irish subsidiaries stood at 1% or less between 2003 and 2014, well below the 12.5% Irish tax rate and the 35% U.S. corporate tax rate. However, Apple’s stock largely shook off the news, declining by just about 0.7% in Tuesday’s trading, indicating that investors don’t foresee a meaningful financial impact on the company. Below we take a look at some of the possible reasons for this.

We have a $120 price estimate for Apple, which is about 15% ahead of the current market price.

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  • Apple and the Irish government have said that they intend to appeal the decision, with Apple indicating that it was confident that the decision would be overturned by the E.U. court.  Moreover, a move to collect back taxes could have significant implications for investments in Europe. For perspective, U.S. companies’ together hold about $2 trillion in un-taxed overseas profits and a large portion is likely to be invested in Europe.
  • In an FAQ section published on its website, Apple said that the decision was unlikely to have an impact on its near-term financial results or tax rate, while indicating that it doesn’t expect to restate its previous financials either. [1] That said, Apple may have to place some cash into an escrow account as a result of the decision, although this would not impact its overall cash balance, as it is likely to be carried as restricted cash on its balance sheet.
  • Moreover, the amount that Apple is being asked to pay to the Irish government could be offset with taxes it owes to the Internal Revenue Service, as American firms that pay taxes on profits generated overseas are only liable to pay the federal government the difference between the international taxes paid and the U.S. tax rate. [2] While this is a complex matter, with repatriation and timing being key factors, it could theoretically mitigate the income statement impact for Apple.
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Notes:
  1. Apple Investor FAQ []
  2. Apple Likely to Benefit in U.S. from Irish Tax Bill, WSJ []