EU Demand Adds to Challenges for CEO -- WSJ

Disputed tax bill comes as company is readying new products after sales slowdown

By Robert McMillan

A $14.5 billion European tax bill is the latest headache for Apple Inc. Chief Executive Tim Cook, who is facing his toughest set of challenges since taking the company's helm five years ago.

On Tuesday, the European Union's antitrust regulator ordered Ireland to recoup about EUR13 billion in taxes from Apple, ruling that tax arrangements Ireland offered to Apple in 1991 and in 2007 amounted to illegal benefits. Between 2003 and 2014, Apple paid less than 1% tax on its European profits, the Commission said.

Apple and Ireland both said they plan to appeal the decision, which comes as sales of Apple's flagship product, the iPhone, are declining for the first time in its history. Concerns about sales of the iPhone, which accounts for roughly two-thirds of Apple's revenue, have pushed Apple shares down 6% in the past year.

Shares fell 1% in recent trading Tuesday following the European Commission ruling, which Apple sharply criticized.

In an open letter posted on Apple's website, Mr. Cook said the company pays "all the taxes we owe." He blasted the Commission as a challenge to the sovereignty to EU members. "At its root, the Commission's case is not about how much Apple pays in taxes," he wrote. "It is about which government collects the money."

Apple said Tuesday that it expects to set aside an undetermined amount of cash in an escrow account. This cash will be recorded as restricted cash, pending the company's appeal. The company said it has paid more taxes than the Commission represented, noting that its 2014 Irish tax bill was $400 million.

Even if Apple is forced to pay the full penalty, it would make only a small dent in the company's $231 billion cash hoard as of June 25. Apple said the ruling wouldn't affect its future tax rate. The European Commission noted that Apple's Irish tax deals no longer were in effect after Apple made structural changes to its Irish operations in 2015.

Despite the big bill, analysts generally played down the potential impact. UBS Group AG analyst Steven Milunovich said the $14.5 billion total was "toward the high end of expectations," and could translate to as much as a $5 hit to Apple's share price. But, he said it is "too soon to make any adjustments" to his Apple forecasts.

The ruling comes at an awkward time for Apple, which is preparing to introduce its latest iPhones next week. Revenue from the iPhone fell 23% in the quarter ended June 25, compared with a year earlier. Meanwhile, sales of established products such as the Macintosh and iPad have slowed recently, and new products such as the Apple Watch haven't yet had an appreciable impact on Apple's finances.

"Right now, Apple goes as the iPhone goes, and it's a much more mature market than it was two years ago," said Crawford del Prete, chief research officer with the International Data Corp. technology-research firm.

At next week's event, Mr. del Prete said in addition to refreshing its iPhone line, Apple may seek to break into new product areas building virtual-reality headsets or personal-assistant devices such as Amazon.com Inc.'s Alexa. Apple also has the automobile in its sights. It recently named veteran executive Bob Mansfield to oversee its secret autonomous-vehicle initiative, code-named Project Titan. Earlier this year, the company invested $1 billion in Chinese ride-sharing company Didi Chuxing Technology Co.

In a conference call with analysts last month, Mr. Cook said that he was optimistic about the company's prospects in China and India, two countries that have experienced rapid iPhone growth.

--Natalia Drozdiak contributed to this article.

Write to Robert McMillan at Robert.Mcmillan@wsj.com

(END) Dow Jones Newswires

August 31, 2016 02:48 ET (06:48 GMT)

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