I previously wrote a short piece on the Apple story. But Brian suggested a follow up and I think it needs further development, based on stories elsewhere.
Rod Hall, a senior analyst with JP Morgan, and a bit of a tech celebrity, thinks that the possible tax hit is not a problem. He is talking about a hit of $19,000M OR €17,000M. Unfortunately, as my millions are not minded by JP Morgan, I don’t get a copy of his musings directly into my inbox, however others do and we will have to rely on them to report his views. In particular, a nice man called Tiernan Ray, included lots of Mr. Hall’s tables in this Blog on the Barrons website.
The nub of the issue is summed up,
“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.”
Limbo, is a place at the edge of Hell, but in this case it is more of tax free vacation in the sun. Unfortunately, the European Commission wishes to save the soul of this wretched company by bringing it back home to the Nirvana that is Cork’s Northside. However to further mix our religious metaphors, in this case the Prodigal Son must provide the fatted calf. Now this company has received lots of profits generated by trading. It seems to have done so without having employees, other than possibly in Cork. Trading profits are taxed at 12.5%. However there is also the issue of the investment income earned on the investing of those accrued profit. Such income is taxable at 25%. It appears Mr. Hall has not taken the higher tax rate into account, but no matter.
ASI seems reluctant to return to the dubious pleasures of Cork’s Northside. I can fully appreciate why one would not want to go back as my late father, collected his Leaving Certificate and immediately took the train out of the place, and he was from the Southside.
Mr. Hall correctly identifies that the historical problem is relatively minor. The “real issue” to him is the “ongoing taxation” or liability. Mr. Ray quotes him as follows,
This scenario assumes that Apple would go from paying no tax on the 59% of EBT that we estimate is generated outside of the Americas to paying the nominal Irish corporate rate of 12.5%. We emphasize that we see this as an unlikely outcome given the fact that Apple has other tax optimization options globally. We also believe that, like most things in life, this will end up a negotiation between the EC, Ireland and Apple with a multitude of possible outcomes […] This increases Apple’s effective tax rate to 33.6% from 26.3% and drives a worst case EPS impact of about 10% when compared to our F2016 forecasts.
However let us look at it more logically. In this example, I have taken the 2014 profit figure and split the Rest of World profits equally between Europe & Asia and assumed that Apple are running the European profits through Ireland and the Asian profits through somewhere like Singapore. I have then assumed they are either using an IP deduction or a more classic Double Irish. Here are the figures,
|Assume North America||21001.2|
|Rest of World||31501.8|
|Assume applicable to Irish structure||12600.72|
|Less Patent relief/royalty payment||10080.58|
|Convert to Euro (€ = $1.35)||1866.77|
|Tax @ 12.5%||€ 233.25|
Suddenly a lot of extra money has started to pour in to the Irish Revenue, in the exact months that Apple pays. The additional yield is shown in the Table below. Now Apple may not be the reason, Ireland may have found another fairy godmother, but it does seem odd that so much extra money should flow in during two normally quiet months. The figures are not light years off my calculation above. Next, I have looked at Irish Corporate tax payments since the announcement of the Commission’s Investigation. Apple has a September year end, which means it remits its Corporation Tax to the Collector General in March & August.
|March 2015 (y/e 9/15)||€199M||€291M||€92M (+ 46.1%)|
|August 2014 (y/e 9/14)||€142M||€259M||€117M (+82.2%)|
|March 2014 (y/e 9/14)||€127M||€166M||€39M (+30.1%)|
The expected yield for August 2015 is just €130M, which if my guess is correct will be beaten massively. So perhaps Apple may already have restructured with the Irish Revenue’s blessing?
The Irish Government doesn’t want any back settlement lest it leads to a flight of multi-nationals. But the extra money, a windfall, one might say, would prove useful. A once off lump of cash could bring the national debt below the emotionally important level of 100% of GDP. What better sign to the Irish electorate of the fruits of Fine Gael prudence than the National Debt falling to manageable levels?
Mr. Hall’s note led to a bounce in the share price, adding $0.75. I think, like him, I wouldn’t be too worried. The loss of a little bit of the bloated bank balance while unfortunate, is not the end of the world. Future cashflows look like they have been protected. Settle for €5,000M and everyone walks away happy.