European Commission details grounds for Apple tax probe

The tax probe focuses on use of transfer pricing arrangements by two Apple subsidiaries

The European Commission believes Apple could have received significant tax reductions from Irish authorities, and is focusing its investigation on tax rulings that favored two Apple subsidiaries, according to a newly revealed Commission document.

The 21-page document explained the Commission's June decision to open a probe into Apple's tax affairs after a year-long preliminary investigation. The Irish Minister for Foreign Affairs received the original document in June, and the Commission published a redacted version Tuesday.

The Commission's research into Apple's tax dealings focuses in particular on tax rulings by the Irish government granted to Apple in 1991 and 2007, the document showed. Both those rulings concern profit allocation to two Apple subsidiaries with branches in Ireland: Apple Operations Europe (AOE) and Apple Sales International (ASI).

The tax rulings constitute state aid that may not be in line with European Union laws, European Commissioner Joaquín Almunia said in the document, noting, "All unlawful aid may be recovered from the recipient."

Media reports have said the alleged unlawful aid could be worth billions of euros.

The probe mainly concerns the prices set for goods sold or services provided by one subsidiary of a corporate group to another subsidiary of that same group, called transfer pricing.

Multinational companies such as Apple pay taxes in countries that have different tax rates. This gives them a financial incentive when allocating profit to the different companies of the corporate group to allocate as much profit as possible to low tax jurisdictions and as little as possible to high tax jurisdictions, the Commission said.

"The Commission notes several inconsistencies in the application of the transfer pricing method chosen when determining profit allocation to AOE and ASI," it said in the document.

Apple said it had received no selective treatment from Irish officials over the years. "We're subject to the same tax laws as the countless other companies who do business in Ireland," it said in a statement issued Tuesday

"Ireland is confident that there is no breach of state aid rules in this case and has already issued a formal response to the Commission earlier this month, addressing in detail the concerns and some misunderstandings contained in the opening decision," the Irish government said in a statement issued Monday. Apple "did not receive selective treatment and was taxed fully in accordance with the law," it added.

The Commission will publish its decision in the Official Journal of the EU, after which interested third parties have a month to comment on the investigation.

Loek is Amsterdam Correspondent and covers online privacy, intellectual property, open-source and online payment issues for the IDG News Service. Follow him on Twitter at @loekessers or email tips and comments to loek_essers@idg.com

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