Apple says it may have to pay Ireland back tax; Foreign tax rate at 4.4%
By Michael Hennigan, Finfacts founder and editor
Oct 31, 2014 - 8:26 AM

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Enda Kenny, taoiseach, meets Tim Cook, Apple's CEO, at the Cork campus, Jan 31, 2014

Apple Inc. reported in a regulatory filing on Thursday that it may have to pay Ireland back tax in respect of the European Commission's ongoing investigation of state aid via a special tax arrangement made between the US electronics giant and the Irish authorities. The filing also disclosed that Apple had a foreign corporate tax rate in the fiscal year ending September 27, 2014.

Apple said in its 10-K filing with the US Securities and Exchange Commission: June 2014, the European Commission opened a formal investigation to examine whether decisions by the tax authorities in Ireland with regard to the corporate income tax to be paid by two of the company’s Irish subsidiaries comply with European Union rules on state aid. If the European Commission were to take a final decision against Ireland, it could require changes to existing tax rulings that, in turn, could increase the company’s taxes in the future. The European Commission could also require Ireland to recover from the company past taxes reflective of the disallowed state aid."

Between 2006 and late 2013, Apple was able to use Irish companies to book transactions without incurring any tax liability anywhere.

The "stateless" facility where Apple said the Irish companies were not obliged to pay any tax to any jurisdiction, was closed down via a Finance Act last year for new companies after 24 October 2013 and for existing companies such as Apple from 1 January 2015.

Apple generated 62% of its revenues of $183bn ex-United States in 2014. $41bn of sales were in Europe.

The company said that the foreign provision for income taxes is based on foreign pre-tax earnings of $33.6bn, $30.5bn and $36.8bn in 2014, 2013 and 2012, respectively.

It added that "substantially all of the company’s undistributed international earnings intended to be indefinitely reinvested in operations outside the US were generated by subsidiaries organized in Ireland, which has a statutory tax rate of 12.5%. As of September 27, 2014, US income taxes have not been provided on a cumulative total of $69.7bn of such earnings. The amount of unrecognized deferred tax liability related to these temporary differences is estimated to be approximately $23.3bn.

As of September 27, 2014 and September 28, 2013, $137.1bn and $111.3bn, respectively, of the company’s cash, cash equivalents and marketable securities were held by foreign subsidiaries and are generally based in US dollar-denominated holdings. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the US."

The total cash balances in 2014 amounted to $155.2bn and  $146.8bn in the previous year.

The foreign tax rate in 2014 was 4.4%, which compared with 3.7% in 2013 and 1.9% in 2012 -  the foreign tax rate was 11.8% in 2012 and 7.8% in 2004.

Most of the cash in foreign subsidiaries is held in the US.

In its accounts Apple provided for tax of $14bn in 2014 and $13bn in 2013 while its effective tax rates were 26.1% and 26.2% respectively.

However, Apple's true effective rate is about 15% as it uses a rarely used form of reserve accounting to boost its reported rate - apparently before it was subject to a US Senate panel investigation in 2013, it didn't wish to draw attention to its low real effective rate.

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