Why Apple Inc. (AAPL) Should Just Swallow Its Tax Pill

Right or wrong is no longer relevant, but Apple (AAPL) can still make lemonade out of these lemons

cash dividends

Source: 401(K) 2012 via Flickr (Modified)

Remember everything Apple Inc. (NASDAQ:AAPL) CEO Tim Cook said a couple weeks ago about not repatriating any of the $181 billion it currently held overseas until the tax bill for doing so was lowered to a more “fair rate”? Yeah, well … never mind.

Today, Cook shocked owners and non-owners of Apple stock alike by saying the company would indeed start to work on some cash repatriation beginning in 2017, despite the fact that the U.S. tax code has changed in the meantime and likely won’t be changing by next year.

The announcement comes just a few days after the European Union’s tax-collection overseers determined the company owed another $14.5 billion in taxes it had thus far evaded … payable to Ireland, which was and still is just fine without collecting said sum. Indeed, both Ireland and Apple intend to appeal the decision.

Is the timing of Apple cash repatriation decision a coincidence? Doubtful, although it is surprising that Apple would let itself be bullied into this decision. It’s also not clear what the benefit of bringing the cash home now — as opposed to later, or never — would be.

On the flip side, owners of AAPL stock can take some solace. Even though the potential tax bill on all the cash held overseas could be as much as $59 billion, swallowing the bitter pill would at least put the matter behind the company once and for all.

This Isn’t Just About Apple’s Overseas Cash

The matter was a contentious one from the start, and as much as it was about Apple and its deal with Ireland, it was more about something else: who should, and can, dictate how every other multinational company is going to be treated for tax purposes, here and abroad.

After all, companies including Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), Amazon.com, Inc. (NASDAQ:AMZN) and McDonald’s Corporation (NYSE:MCD) face similar questions right now.

Interestingly, though not surprisingly, France and Germany publicly sided with the European Union regulator’s decision that Apple owes Ireland $14.5 billion. Neither country cares that Ireland gets the money. They simply want to establish a precedence (even if just a psychological one) that such inside deals aren’t going to be tolerated if they give one country a competitive advantage of another country.

Washington sided with Apple, but not because it aims to protect the interest of a U.S. business. Our federal government knows the more AAPL pays in taxes to a foreign nation, the less it pays in taxes here at home.

Ditto for companies other than Apple that are also holding cash overseas to avoid paying U.S. taxes.

Raises Important Question

At the same time, the debate has far bigger ramifications than just clarifying a set of fuzzy tax rules.

There’s a reason Ireland has been so gentle, tax-wise, with Apple and other companies that have set up shop there. Ultimately, such tax breaks bring some industry and a lot of jobs to Ireland that may not exist otherwise. Apple employees 6,000 people in that nation, each of whom pays income taxes. Their incomes also support the local business people and service providers around them. It’s very conceivable that even if Ireland did give preferential tax treatment to Apple, it was more than fiscally worth it.

And it’s with that as the backdrop that the much more philosophical indictments can be made, beginning with the EU itself.

Does the EU have the authority to require Ireland to collect that $14.5 billion it says Apple owes them? Technically, yes. Philosophically, no — no other European Union has to live with the consequences of Ireland’s policy decisions. Like it or not, it is (or was, anyway) a self-determining country.

Said another way, the fact that this tiff can materialize at all underscores a big piece of the reason for the Brexit vote back in June. That is, the EU’s members share an economy, but they also don’t. They share a currency, but they also don’t. They share a tax code, but they actually don’t.

Ireland doesn’t want to impose a hefty tax on Apple for a reason. Few other European Union member nations care about that specific reason or its benefit, though. They simply want to establish and enforce a uniform tax standard, whether or not that standard makes sense in the long run.

Bottom Line for AAPL Stock

As for Apple, look for it to do exactly what Cook said it was going to do. That is, it will start bringing some cash home next year and just bite the bullet on the tax bill.

It’ll hurt, to be sure, but it’s not a bad thing in the least. While Apple might have to pay $60 billion on the $181 billion it holds overseas, that $181 billion in foreign-held cash may as well be nothing, if it’s unusable. At least here at home, something can be done with the remainder of it that will start to boost the value of AAPL stock — even if that’s just paying down some of its $68 billion in debt.

Also, don’t be surprised if Apple starts to shrink its way out of countries where it’s also a major employer of that nation’s citizens, making new jobs for those workers the responsibility of their respective country.

Every road is a two-way street when it comes to money.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2016/09/why-apple-inc-aapl-should-just-swallow-its-tax-pill/.

©2019 InvestorPlace Media, LLC