(CN) - In a scathing letter to the Irish government made public this week, the European Commission said it believes sweet tax deals between Ireland and Apple going back to 1991 constitute illegal state aid.
The EU's chief regulatory body said that in 1991, Irish tax authorities agreed to calculate profit for Apple Operations Europe at 65 percent of operating expenses up to $70 million and at 20 percent above that mark.
Meanwhile, Ireland agreed to tax Apple Sales International based on scheme that figured the subsidiary's net profit as 12.5 percent of all branch operating costs. Formulas for both Apple subsidiaries were revised in 2007 so that only output by the Irish branches was considered for tax purposes.
But the commission expressed doubts as to whether Irish authorities had bothered to look at Apple's proposed tax formulas through the eyes of an independent third party to see if they made sense.
"The fact that the methods used to determine profit allocation to Apple Sales International and Apple Operations Europe result from a negotiation rather than a pricing methodology, reinforces the idea that the outcome of the agreed method is not arm's length and that a prudent independent market operator would not have accepted the remuneration allocated to the branches of ASI and AOE in the same situation, which serve as a basis for calculating the tax liability," the commission stated.
Furthermore, the regulators said that the costs attributable to AOE "appear to be reverse-engineered so as to arrive at a taxable income of around $28 to 38 million, although that figure does not have any economic basis."
The commission criticized the Irish government for keeping the 1991 agreement in place for 15 years without a revision. Most EU states require that corporate tax agreements expire within five years or less.
"That advantage is also granted in a selective manner," the commission wrote. "While rulings that merely contain an interpretation of the relevant tax provisions without deviating from administrative practice do not give rise to a presumption of a selective advantage, rulings that deviate from that practice have the effect of lowering the tax burden of the undertakings concerned as compared to undertakings in a similar legal and factual situation. To the extent the Irish authorities have deviated from the arm's length principle as regards Apple, the contested rulings should also be considered selective."
The regulators said a formal investigation has been launched, and gave Ireland 30 days to turn over the financial records for Ireland-based Apple subsidiaries - as well as cost-sharing agreements between Apple and those subsidiaries.
While the commission does not fine EU states in illegal state aid cases, it can order Apple to pay back hundreds of millions in back taxes.
Apple employs over 4,000 people in Cork, where all its Irish subsidiaries are based.
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