The European Commission has told Apple Inc. (NASDAQ:AAPL) that it needs to pay $14.5 billion, plus interest, for a tax-savings deal it cut with Ireland over a decade ago. The decision could have implications for many big companies with European sales, including the drug giant Pfizer, Inc. (NYSE:PFE).
Apple's super-sized tax bill
The European Commission found that Apple improperly reduced its European tax bill by moving profits to Ireland, where the company's effective tax rate fell from 0.05% to 0.005% between 2003 and 2014.
According to the Commission, Apple ran all of its European profits through an Irish head office that only existed on paper. This head office was treated as a non-resident for tax purposes, allowing Apple to pay virtually no taxes on its European earnings. Ostensibly, Ireland agreed to this sweetheart deal to create jobs. According to Bloomberg, Apple employs about 6,000 people in Ireland.
An appeal of this decision by Ireland and Apple could tie up this matter for years, but even if those appeals fail, this tax bill won't cause much of a hiccup at the consumer electronics giant. Apple's cash stockpile stands at $232 billion in June, including $214 billion that's held abroad.
Big exposure abroad
According to the AFL/CIO, Apple holds more money outside the U.S. than any other U.S. company, but Apple is far from the only company that's avoiding U.S. taxes by stockpiling profit abroad. The Citizens for Tax Justice estimate a record $2.4 trillion in unrepatriated profit is held abroad by Fortune 500 companies.
Pfizer's $194 billion ranks it second on the list behind Apple in terms of unrepatriated profit, and while Pfizer isn't directly in the European Commission's sights, it is one of 35 companies that the European Commission has told Belgium to recover a combined 700 million euros from.
In January, the European Commission ruled that agreements between Belgium and multinationals, including Pfizer, violated European Union rules regarding competition. Belgium had inked agreements that allowed multinationals to compare recorded profits against a hypothetical average profit. Any difference was considered "excess profit" that was used to reduce taxable earnings. In practice, the deal reduced the taxable profit for these multinationals by between 50% and 90%. Unsurprisingly, Belgium is appealing the European Union's decision.
Pfizer could also find itself in hot water in the Netherlands. Last year, the Dutch newspaper Trouw reported that the European Commission was looking at agreements made between Pfizer and the Netherlands. The European Commission didn't confirm to Trouw that it had requested information on Pfizer, but it did say that it's requested roughly 300 tax agreements between companies and EU member states, including 10 agreements made between the Netherlands and various companies.
Last year, the European Commission determined that a tax-deal between the Netherlands and Starbucks wasn't up to snuff. The Netherlands allowed Starbucks to reduce its tax burden by paying an inflated cost for coffee beans to a Swiss group company, and by including a "very substantial" royalty on coffee-roasting royalties paid to a U.K.-based Starbucks entity. If upheld, Starbucks would pay less than 30 million euros in back taxes to the Netherlands.
The European Commission is taking a hard line on tax schemes between member countries and large multinationals, but ultimately, any taxes and penalties owed by multinationals won't break the bank. Apple's got plenty of financial firepower to take the hit, and Pfizer's share of the 700 million euros that is owed to Belgium is rounding error. Pfizer's sales are expected to eclipse $50 billion this year.
Therefore, investors shouldn't worry too much that any unexpected taxes and fines could derail these big companies. Instead, it's the impact of growing scrutiny of these state-aid deals that ought to be considered. After all, tax savings schemes are unlikely to offer the same benefits to the bottom line in the future as they have in the past.
Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. Like this article? Follow him on Twitter where he goes by the handle @ebcapital to see more articles like this. The Motley Fool owns shares of and recommends Apple and Starbucks. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.