Apple's tax battle: Should investors be concerned?

Apple (AAPL) is in the middle of a tax battle with the European Commission because of unpaid taxes in Ireland. In 2016, the European Commissioner for Competition, Margrethe Vestager, imposed a $ 14 billion tax fine on the technology giant. The company has been involved in the tax battle for three years.

On Tuesday, the seventh chamber of the European Union Court will hear appeals from Apple and Ireland after three years of waiting.

Apple accused of tax evasion in Ireland

The European Commission said that Apple had enjoyed selective tax benefits in Ireland. Based on these allegations, the company underpaid $ 14 billion in taxes in the country. Ireland has been accused of favoring Apple with preferential tax treatment. In 2016, the European Union claimed that Apple's selective tax treatment had helped the company avoid taxing all its profits from sales in the European Union.

Apple has only recorded sales in Ireland instead of the current territories. As a result, the company escaped the corporate tax. The European Union alleged that Apple had created an "artificial" profit system by redirecting its profits to a "head office" in Ireland, which existed only "on paper". The European Commission has therefore ordered Ireland to recover $ 14 billion in taxes and interest for the period from 2013 to 2014.

Apple denies tax evasion

Apple argued that the engineering of most of its products and services is conducted in the United States. As a result, most of the company's profits are in the United States.

As expected, Apple vehemently denied these accusations in 2016. Apple CEO Tim Cook said: "The European Commission has launched an effort to rewrite the story of Apple in Europe, ignore Irish tax laws and upset the international tax system. " The whole affair has been described as "total political shit!"

The Irish Ministry of Finance has also "deeply disapproved" the allegations of the European Commission. Irish Finance Minister Paschal Donohoe said the government would put forward a "strong defense" for the iPhone maker.

The complex organizational structure of technology companies and the treatment of their intellectual property benefits have led to a thorough examination of the tax system. Last week, Google (GOOGL) and the French Ministry agreed on a single settlement of around $ 1 billion due to a disagreement over tax evasion in France.

Irish tax law appeals to multinational

Due to Ireland's economic and fiscal policies, many businesses think it's a tax haven. The tax structure has encouraged many global companies to incorporate organizations in the country. The corporate tax rate in the United States before deductions is 21%, while the corporate tax rate in Ireland is 12.5%. The country also offers a 25% tax credit on research and development. Ireland is home to the European headquarters of technology companies including Google, Accenture, Facebook, Microsoft, PayPal and LinkedIn.

The Apple action has been mastered

Last week was particularly hectic for Apple. The company launched a series of products on September 11, which generated widespread enthusiasm among buyers and investors. The company has unveiled the iPhone 11, the latest iPad, Apple Watch 5, Apple TV + and Apple Arcade. Apple's valuation reached $ 1.02 trillion among its strategic awards. Pricing aims to boost sales in all segments before the holiday season. However, by the end of the week, ecstasy has given way to caution. Apple's shares closed down 1.9% to $ 218.75 on September 13th. Shares have increased more than 40% since the beginning of the year.

On September 13, Goldman Sachs lowered its target price on Apple from $ 187 per share to $ 165. The company is skeptical of the company's aggressive pricing strategy for Apple TV +. Goldman Sachs forecast a 26% decline in the stock. Rod Hall, an analyst at Goldman Sachs, said the accounting treatment applied to Apple TV + could have a "significant negative impact" on the company's results. In response to CNBC, Apple completely rejected the negative outlook.

Should investors be worried about Apple's tax record?

The hearing on the tax battle of Apple adds to the feeling of weakness. Apple paid more than 14.3 billion euros in taxes and interest to the European Union in September 2018. However, the money is in the escrow account of the company. Apple said the amount would be limited for general use until the end of the legal proceedings.

The lawsuits related to tax evasion take about ten years to settle. As a result, I do not see any significant impact of the short-term decision. This week marks the official release of many products recently launched by Apple on the market. Investors will focus on the new iPhones hitting the shelves.

If Margrethe Vestager does not convince the court of his argument, the money will be transferred from the escrow account to the company's account for productive use. However, if Apple loses its tax battle against the European Union, it will have to pay for tax evasion. We could see the effects of the payment on future earnings retrospectively. This decision would have an impact on Apple's business in Europe and its global reputation. In fiscal year 2018, Europe accounted for 24% of Apple's total revenues.

The European Union is grappling with economic uncertainties related to Brexit and trade wars. If it were fully recovered, the unpaid tax of 14.3 billion euros would relieve the financial pressure of Apple.