Apple’s $14.5 Billion Tax Troubles Could Cost Other U.S. Companies

- August 30, 2016
Photo: LA Times

Photo: LA Times

By now you have heard that Apple (NASDAQ:AAPL) is on the hook for $14.5 billion to the Irish government. EU antitrust regulators found that Apple illegally routed profits through Ireland in a scheme that lowered its corporate tax rate on European profits all the way down to 0.005% in 2014. Keep in mind that the highest U.S. corporate tax rate is 39%, and Ireland, which has the lowest corporate tax rate among developed countries, is 12.5%. Therefore, Apple was cheating the system in a big way.

With that said, Apple will obviously appeal the decision, but still, the EU is trying to make an example of the world’s most valuable company. The European Commission talks about Apple ignoring the tax system and uppending the entire international tax system with its scheme. Albeit, Apple may be the big fish in this case, but now that it has lost in court, and the book has been opened on these types of crimes, investors must consider if other large U.S. companies with heavy European exposure will face similar problems.

Apple aside, are their others?

Regardless if Apple appeals and wins or not, $14.5 billion is not going to cause too many problems for the company. Apple has so much money sitting in international markets that it doesn’t even know how to spend. If we start thinking about long-term implications, it is certain that this case will put Apple under a bigger microscope, and that investors might notice lower profit margins as Apple is forced to pay a higher tax rate.

Apple creates the overwhelming majority of its profit from North America and China. I doubt a higher tax rate in Europe will have negative effects on AAPL stock long-term. What really interests me though is not whether Apple is forced to pay a higher tax rate in Europe.

Instead, I’m curious to see if there is any fallout for U.S. companies that are heavily exposed to Europe, specifically the U.K. and Ireland. I’m referring to companies like Priceline Group (NASDAQ:PCLN) that creates 65% of its revenue from Europe. Priceline is the one that really interests me because of its exposure, high margins, and because its business allows for the constant flow of cash from one or more places as hotels, flights, or rental cars are being booked. I do wonder just how creative its financial teams may have become with such loose oversight and a clear path to drive profits higher for the last decade or longer.

Other companies like that are (NYSE:CRM), TripAdvisor (NASDAQ:TRIP), and eBay (NASDAQ:EBAY). I’m not saying that any of these companies are involved in tax schemes like Apple, but do realize the importance of tax management in producing large profits. These companies with large businesses and heavy exposure in Europe have had opportunities like Apple to manipulate the loose tax structure and hoard profits outside of the U.S. Now that Apple’s record breaking suit is public, it will be very interesting to see how many companies like Apple are out there, and if companies with greater European exposure could face large suits of their own.

Remember, $14.5 billion is nothing to Apple. Hell, it is nothing more than last quarter’s spending on stock buybacks. But that number is based on Apple’s profits in Europe over time, and Apple does not create an overwhelming majority of its profits in Europe. For a company like Priceline or that do create a large percentage of their profits from Europe, finding illegal tax schemes could be catastrophic to their stock prices.

Of course, there is no way to know right now, and these things will take time to play out. Therefore, be sure to keep your eyes and ears open. It is certainly something to monitor.

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