Following its announcement of record Q2 earnings, Apple published its quarterly 10-Q report, providing more in-depth details about finances. Notably, the company warns of the possibility of “material” back taxes due to the company’s well-documented favorable tax arrangements with Ireland.
On June 11, 2014, the European Commission issued an opening decision initiating a formal investigation against Ireland for alleged state aid to the Company. The opening decision concerns the allocation of profits for taxation purposes of the Irish branches of two subsidiaries of the Company. The Company believes the European Commission’s assertions are without merit. If the European Commission were to conclude against Ireland, the European Commission could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid. While such amount could be material, as of March 28, 2015 the Company is unable to estimate the impact.
Apple will need to pay the fines if the European Commission, which is akin to the U.S.’s SEC, rules that Ireland granted Apple special privileges for reduced taxes. As the European Commission has not made any formal rulings on the fine, Apple says it could not estimate the impact. However, the Financial Times pegs the potential payments at $2.5 billion based on Apple’s current rate of profits.
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The Wall Street Journal provides some math behind the aforementioned calculation, noting that “material” payments typically amount to approximately 5% of a company’s annual profits, before tax, for the past three years. The European Commission officially opened up its inquiry into Ireland and Apple’s tax practices last fall. A decision from Europe is expected in June. Apple has not commented further on the matter, but Apple CFO Luca Maestri told the FT last year that Apple “simply followed the laws in the country over the 35 years that [Apple has] been in Ireland.”