Not only does it place Apple at the top of a growing list of US companies that are charged with massive tax avoidance at a time when discontent about globalisation generally is at a new high, it marks the beginning of a bruising legal fight that could distract its leaders for years to come.
In the near term, the commission’s finding that the world’s most valuable company benefitted from 25 years of illegal state aid from Ireland comes just a week before the launch of its latest iPhone. Every such launch is hailed as crucial for Apple’s future — the iPhone accounts for two-thirds of its revenues — but this will be the first to come when sales of its flagship product are in decline, putting extra pressure on Tim Cook, chief executive, to deliver.
Even though the fine is equal to a quarter of last year’s net profits, Wall Street investors and analysts seem unconcerned by the financial risk to Apple. Instead, the focus is more on potential damage to its reputation, even as Apple vigorously protests its innocence.
The damning verdict and huge headline bill from Brussels could tarnish Mr Cook’s efforts to position the company as a defender of civil rights and bastion of social responsibility, from gay marriage to data privacy.
“I think he genuinely believes in these things and has used Apple’s resources in a way that Steve Jobs never did,” says Jan Dawson, tech analyst at Jackdaw Research. “It makes it harder to paint Apple as a selfish company that only cares about its own profits.”
Apple has been typically forthright in its response to the EU tax ruling. Mr Cook wrote a letter to Apple customers, posted to its website on Tuesday, touting its longstanding investment in Ireland, the creation of 1.5m jobs across Europe from suppliers to app developers and its position as “the largest taxpayer in the world”.
However, Apple is also “the most profitable company in the world,” says Edward Kleinbard, professor at the University of Southern California’s Gould School of Law. “The question is not the size of the cheque it is writing out but the size of the cheque that it is writing out relative to its global profit.”
Other Apple executives have wasted no time in criticising the commission’s “legal mumbo jumbo” and “completely made-up” calculation that it paid an effective corporate tax rate of just 0.005 per cent in 2014. Apple will back Ireland’s appeal to an “unbiased set of decision makers” as soon as possible, its general counsel said on Tuesday. Mr Cook has said previously that Apple will repatriate much of the more than $200bn that it holds offshore once the US offers a more “reasonable” tax rate.
Yet Prof Kleinbard, a former chief of staff to the US Congress joint committee on taxation, says Apple’s arguments “trip itself up”.
If, as Apple claims, its research and development is done at its California headquarters, “that income should be taxed today in the US”, he says. But if its Irish functions were only limited, “why was it able to skim the money off all the other EU member states?”
Nonetheless, Wall Street largely shrugged off the verdict, with Apple stock less than 1 per cent lower on Tuesday morning, as the company reassured investors: “We do not expect any near-term impact on our financial results nor a restatement of previous results from this decision."
Credit Suisse wrote in a note to clients that, based on pre-tax income of $268bn between 2003 and 2014, the years on which the investigation has focused, Apple’s “absolute worst case scenario” would be a 5 per cent higher effective tax rate in the future.
Walt Piecyk, analyst at BTIG Research, predicts little immediate risk to Apple’s brand or iPhone sales. “I don’t think the global battle on which country gets paid what taxes will impact the phone purchase decision of many, if any, consumers,” he said.
Nonetheless, the ruling has fueled the ire of European campaigners who have targeted Silicon Valley companies. Max Schrems, the Austrian student who leads the privacy campaign “Europe v Facebook”, tweeted triumphantly on Tuesday: “The game is on!”
“The challenge for Apple now is to ensure they manage consumer perception and avoid becoming the poster child for all things that are wrong with globalisation today,” says Ben Wood, analyst at CCS Insight. Unlike Google and Amazon, which exist mainly in the virtual world, Apple – like Starbucks – has physical stores that protesters can picket. “This is something Apple need to avoid at all costs,” he says.
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