Apple Investigated by European Commission - Analyst Blog

Reportedly, the tax arrangements between Apple Inc. AAPL and Ireland will be investigated by the European Commission, the executive body of European Union EU. The commission will look into allegations that Apple received selective tax treatment from the Irish authorities which helped it to significantly lower the overseas tax burden.

Per Reuters, since 2013, EU's competition authority was already investigating corporate tax arrangements in several member-nations including Ireland. The current focus of the investigation will be on tax laws that are alleged to favor certain companies like Apple and its peers Google (GOOGL) and Microsoft MSFT.

Nations like Ireland, Bermuda and the Cayman Islands are considered tax haven for U.S.-based companies that are required to pay a hefty corporate tax of 35.0% on domestic income. In comparison, Ireland's statutory tax rate is only 12.5%, which makes it an attractive destination for enterprises looking to lower their tax burden.

The difference in tax liability also lies on the way it is calculated in the U.S. and Ireland. In the U.S., enterprises pay tax as per their state of incorporation, while Ireland decides on the location of the people managing the company. Although Apple has three Irish subsidiaries, its business activities are managed by U.S.-based employees. Hence, Apple need not pay taxes in either of the countries.

Tax controversies are not new for Apple. Last year, United States Senate's Permanent Subcommittee on Investigations unveiled a report that alleged Apple of avoiding tax in the U.S. on at least $74.0 billion of profits between 2009 and 2012. The report claimed that Apple used multiple subsidiaries in Ireland to avoid this tax liability.

The report also claimed that Apple used transfer pricing to send profits earned in the U.S. to its Irish subsidiaries. Apple entered into cost-sharing deals with Irish subsidiaries that give them a disproportionate share of the profit from research and development that occurred in the U.S.

However, before the Senate Apple not only defended its tax structure but also vehemently denied any wrongdoing. The company stated that it employs a substantial amount of people in Irish subsidiaries, which play an important part in its overseas activities. Apple noted that it paid $6.0 billion in taxes in the U.S. in fiscal 2012 making it one of the biggest corporate taxpayers of the country.

We believe that EU's investigation will not have a major negative impact on Apple's share price. Investors are eagerly waiting for a new innovative product and the rumor that Apple will launch iWatch in October will be the key growth catalyst for the time being. The upcoming iPhone 6 and iOS 8 will also hog the limelight in the near term.

However, intensifying competition from Samsung and Amazon.com AMZN remains a major concern.

Currently, Apple has a Zacks Rank #3 (Hold).

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