JP Morgan errs on side of caution for Apple’s chances in tax inquiry

A sour old joke about Apple deploying its $194 billion (€170 billion) trove of cash to rescue Greece is doing the rounds again. But never mind the outlook for the Greeks.

In question for us is whether a European tax inquiry finds that Apple’s arrangements in Ireland broke state-aid rules.

This is a long-running affair. The European Commission opened an investigation last June.

This was in addition to parallel inquiries into Starbucks’ practices in the Netherlands and tax rulings issued by Luxembourg to Amazon and Fiat.

Last week the European competition commissioner Margrethe Vestager, formerly Denmark’s economy minister, said she would not meet her own deadline for a decision next month on these cases.

Days previously, Apple told the Securities & Exchange Commission in New York that an adverse ruling in Brussels could have a “material” impact on its finances.

What exactly is going on?

At issue in the Apple case is the commission’s preliminary finding that the company, creator of the iPhone, received a “selective” advantage from the Revenue in tax opinions in 1991 and 2007.

This is denied in forceful terms by Apple and by the Government, which might have to recover 10 years of corporate tax payments from the company if Vestager was to uphold the preliminary findings and the inevitable appeals were rejected.

Quite how much money might be in play was set out a few days ago in a detailed assessment for its clients by JP Morgan, which said Apple could be on the hook for $19 billion in a worst-case scenario.

No small change, although Apple’s cash balance would remain healthy. Such a sum – or anything like it – would deliver a huge benefit to Ireland’s public finances.

Yet that is the last thing Dublin would want. A definitive finding against Ireland could call into question Revenue arrangements with other global firms, potentially destabilising the entire multinational sector. The stakes, therefore, are high.

Leaking

What can we make of the latest manoeuvres? Plenty of leaking went on in Brussels at the outset of the inquiry yet nothing has surfaced in recent times to suggest a negative finding is on the way.

That doesn’t really mean anything, however. The delay in Ms Vestager’s office could just as easily be read as a sign investigators are making headway or a sign progress is lacking.

The same goes for Apple’s SEC declaration. A belt-and-braces note of caution for regulatory and risk-management purposes? Or a portent of something else?

For its part, JP Morgan believes an adverse finding is likely.

“Based on our work so far we do believe that a negative European Commission ruling is more likely than not, but we note that the issues are complex and that there is likely a spectrum of potential outcomes with greater and lesser impacts for Apple.”

This seems significant. Take note that JP Morgan has Apple as an investment banking client, makes a market in Apple stock and acts as lead or co-manager in public offerings of equity or debt securities for the company.

Whatever the outcome – and the position of the Government and Apple is unambiguous – JP Morgan’s assessment casts further light on the truly remarkable benefit the company derives from its Irish arrangements.

According to the bank, Apple pays “negligible tax” on some 59 per cent of its global income “because of differences between US and Irish tax laws and successful tax negotiation between Apple and Ireland”.

Given JP Morgan’s ties with Apple and the sensitivity of the ongoing Brussels inquiry, this is unlikely to be inaccurate.

Limbo

An Irish entity called Apple Sales International (ASI) is key. “Based on available documentation, it appears that ASI pays taxes to Ireland based only on income generated in the country and that the bulk of international profits fall into limbo with little tax being assessed.”

The money is dizzying. JP Morgan estimates Apple made $184 billion in operating income outside the Americas between mid-2005 and March 2015.

The “relevant profit” was about $153 billion. “If the European Commission were to drive taxation of Apple’s non-Americas income at Ireland’s nominal 12.5 per cent corporate rate this would imply a back tax bill of [circa] $19 billion.”

This seems simplistic. Still, JP Morgan says the bigger question for Apple would centre on ongoing taxation.

For Ireland, however, the consequences could be grave. If certainty is the bedrock of any corporate tax system, an adverse ruling here would bring with it plenty of uncertainty.