Fresh on the heels of the U.K. vote to leave the E.U., its antitrust regulator has ordered Apple to pay the Irish government $14.5 billion in retroactive taxes due other nations. However, this action by the E.U. plays right into Apple's long-term desire to repatriate much of its more than $200 billion cash stockpile. This being my view as an Apple shareholder and shareholder of other U.S. companies.
Clearly Apple's defense is that it has conformed to all tax laws of the United States and E.U. as well as the conventions of the Organization for Economic Cooperation and Development (OECD). We see no reason to believe otherwise and this scuffle with the E.U. antitrust regulator will likely have consequences that disadvantage Europe's competitiveness, level of foreign direct investment, job creation, and at the same time damaging its relationship with its U.S. ally.
If the E.U. holds its current course, it will likely see various unintended consequences as this overreach (and grab for U.S. corporate cash) fully plays out.
Ireland Disagrees with the E.U.'s Antitrust Regulator
As an E.U. member and sovereign entity, Ireland does not itself feel legally entitled to receive the award. Ireland disagrees with the E.U. antitrust regulator's conclusion who stated, "No government can give a selective advantage to a specific company because that would make competition unfair." For it's part, Ireland says it didn't craft a special deal.
This poses a dilemma for Ireland, which as a sovereign nation has the right to set its own tax rates. The E.U. framework makes this clear. Regardless, the country is being required by the E.U. to collect and keep taxes which the E.U. antitrust regulator says are due to other sovereign nations within the E.U. The antitrust complaint itself does not name specifically where these additional taxes are due, and has stated that any member states that feel they are due sums should file those claims with Ireland.
The E.U. action is akin to the U.S. Justice Department ordering a low-tax jurisdiction such as Texas, which has had good economic growth due to their pro-business environment, to collect, if not keep, additional taxes presumably due to high-tax jurisdictions such as New York, all based on the broad brush of "anticompetitive" violations. The E.U. antitrust regulator is retroactively rewriting tax convention in Europe's favor at the expense of the U.S. treasury. In an interview with CNBC, the E.U. antitrust regulator acknowledged, "To some degree, they are right."
The Tax Impact to Apple May Ultimately Come From U.S. Taxpayers
Financially, if Apple has to ultimately pay the $14.5 billion tax, it will likely be treated as any non-US tax payment, as a dollar-for-dollar tax credit against any U.S. taxes owed to the U.S. treasury. Accordingly, Apple's finances would essentially be unharmed after receiving those U.S. tax credits. In turn, the U.S. treasury and taxpayer will be out those funds, effectively forced to pay the demand from Europe's antitrust regulator. Naturally, the E.U. is probably not finished with its demands for additional taxes from other U.S. companies by taking similar antitrust actions against them.
The socialists want to unjustly claim the capitalist profits of U.S. companies at the expense of the U.S. taxpayer. In seeking to do so, the E.U. action completely steps on the toes and finances of the U.S. government and treasury -- essentially robbing the U.S. government of the taxes that its companies are obligated to ultimately pay to the U.S. treasury. The EU is retroactively attempting to rewrite international tax conventions, under the guise of an antitrust action.
Lawmakers from both sides of the U.S. political isle will be united in defense of U.S. tax revenues, and will accelerate changes to the U.S. tax code.
Members of Congress Offer Support
Apple's prior scuffle with the FBI and Justice Department over encryption left both sides with crossed swords. But in this tax matter, Apple now has the support of many additional members of congress, the White House, and U.S. Treasury. With additional E.U. tax cases against U.S. companies likely ongoing as we speak, including against Google and McDonalds, U.S. lawmakers are under increased time pressure to overhaul the U.S. tax code.
U.S. lawmakers will probably seek to reduce the financial incentives of corporate inversions and to encourage repatriation of the massive amounts of U.S. corporate cash held overseas, at far more desirable tax rates. Apple and other U.S. multinationals would like to bring much of their overseas earnings home where they can invest locally, use it for dividends, acquisitions, and other domestic activities.
Certainly, the U.S. government will not easily let its rights to tax the overseas earnings of U.S. companies, and its overall tax base, be transferred to the E.U. at the dollar-for-dollar expense of the U.S. treasury, without considering a range of actions. What they decide to do remains to be seen. The E.U. action also overlooks its need for the strongest possible relationship between Europe and its closest non-European military ally. The E.U. should not risk fracturing the relationship with the U.S., as doing so is nothing less than foolish in the grand scheme of things, especially given the challenges facing the continent.
Repatriating Corporate Cash
The E.U. has reminded U.S. companies that the Europe and its socialist tendencies may be an increasingly hostile place to do business. Companies like Apple will surely rethink their approach to doing business in the E.U., and they may well view its regulatory environment with a different lens and invest more outside of the E.U. when alternatives are available. For its part, Apple has said that it will begin repatriating some corporate cash back to the United States beginning in 2017.
The Business Roundtable, representing 185 CEOs in the United States called foul over the ruling and called for the European Commission to overturn the ruling. It would be hard to see how the business climate and their investment in Europe would not be impacted by the additional regulatory uncertainty.
Rather than seeking billions for Europe's tax coffers and spending, the E.U. could have encouraged Apple and other U.S. companies to invest their billions in overseas cash in Europe -- creating more jobs there. Instead, it chose to go after the cash on antitrust grounds rather than encourage private sector job creation, a tendency which has long-plagued and held down economic growth in Europe.
While the E.U. is in the process of losing its second largest economic engine as the result of the U.K'.'s decision to leave the E.U., it may well be on the path to ultimately lose Ireland and other member states.
The stresses on Europe are notable, from its economic malaise, refugee crisis, low birth rates, and the impact of terrorism and terror plots have been notably stressing the cohesiveness of the union. The introduction of an economic rift between member states and its greatest ally seem to be a needless fracture. In summary, the E.U. action was foolish, steps on the toes of it's staunch U.S. ally, and may be setting the stage for Irish Exit, just moments after the U.K. vote for Brexit.
The author is long shares of Apple (AAPL) as well as shares of other U.S. companies.