The European Commission has accused Ireland of conferring a selective tax advantage to computer company Apple by embarking on a transfer pricing arrangement that was in breach of EU state aid rules.

In a letter setting out the terms of the investigation, published yesterday morning but sent to the Government in June, the commission said its preliminary view was that two tax agreements reached by the Irish authorities with Apple in 1991 and 2007 “constitute State aid” .

While a final decision is expected to be still some 18 months away, the 21-page letter outlines in detail the reasons for the commission’s decision to embark on a formal investigation. The letter will be published in the EU’s official journal next month, after which time interested parties, including Apple, will be given an opportunity to comment.

In essence, the commission has concerns that insufficient taxable income from two Apple subsidiary companies was attributed to Ireland.

Reverse engineering

In particular, it accuses the Irish authorities of “reverse engineering” a 65 per cent mark-up of costs to reach a figure of $28 million to $38 million as requested by Apple, citing from minutes of a meeting between Irish revenue authorities and an Apple representative in 1990.

The commission argues that the Irish authorities failed to give an adequate explanation of why the specific transfer pricing arrangement was agreed. It also notes that the two tax rulings failed to comply with the arm’s-length principle, a key principle of transfer pricing agreements, as set out by the OECD. Among the concerns outlined by the commission is that the 1991 ruling was negotiated by the Irish authorities rather than substantiated by reference to comparable transactions. It also found “several inconsistencies” in the application of the transfer pricing method chosen by the Irish authorities when determining profit.

Open-ended agreement

It also notes that the ruling was applied by Apple for 15 years without revision. “Even if the initial agreement was considered to correspond to an arm’s- length profit allocation, quod non, the open-ended duration of the 1991 ruling’s validity calls into question the appropriateness of the method agreed between [the two Apple subsidiaries].”

Based on its preliminary findings, the commission states that it is of the opinion that “through those rulings the Irish authorities confer an advantage on Apple”.

While countries are permitted to offer companies a myriad of tax breaks and specific tax arrangements to encourage economic activity, the commission is arguing that the specific tax ruling offered by the Republic to Apple was in breach of state aid rules by giving a selective advantage to Apple.

In its preliminary findings, the commission says the aid given by the Republic to Apple “cannot be considered compatible with the internal market in that it does not facilitate the development of certain activities or of certain economic areas, nor are the incentives in question limited in time, digressive or proportionate to what is necessary to remedy to a specific economic handicap of the areas concerned”.

Should the commission find against the Government, the exchequer would be in a position to recoup any lost tax revenue from the beneficiary, but only that which applied during the years from 2003 to 2013.

The Government has previously said it will fight any allegations of breaches of state aid in the European Court of Justice, potentially opening up years of legal wrangling with Brussels.

Apple has also rejected accusations that it profited from selective tax treatment from Ireland.