Ireland appears to be granting Apple illegal rebates that may have to be recouped, the European Union's competition watchdog said as it pressed forward with an inquiry into Apple's overseas tax practices.
If the EU's preliminary finding is confirmed over the coming months, Apple Inc could face a repayment bill worth billions of dollars because it funnels the bulk of its international sales through subsidiaries in Ireland, where it benefits from low, negotiated tax deals.
In a letter to the Irish government published Tuesday, the 28-nation bloc's executive Commission said the tax treatment granted to Apple "constitutes state aid" and therefore raises "doubts about the compatibility" with EU law.
EU rules forbid governments from helping companies to avoid undermining free market competition. The EU first announced the probe in June, also targeting coffee store chain Starbucks and others as part of a crackdown on multinationals exploiting tax loopholes.
The EU Commission is now requesting further documents from Ireland before making a legally binding decision on whether the rebate granted to Apple is illegal and must be recouped, wholly or partially.
The EU probe focuses on exaggerated transfer pricing, where one part of a company charges another part an inflated price for goods or services to shift profits to low-tax locations.
If Apple had to repay some taxes, the money would come as a windfall to Irish state coffers. However, fearful of losing its reputation as a business-friendly country with low corporate taxes, the Irish government is adamant that no EU rules have been breached.
The Commission, however, said in the letter the tax deals struck with Apple in 1991 and in 2007 show "several inconsistencies" and may not comply with international taxation standards. The Brussels-based executive body also was critical of the fact that Apple's applicable tax rate appears to have been the result of "a negotiation rather than a pricing methodology" which a "prudent, independent" tax authority should not have accepted.
Apple's tax practices have also attracted scrutiny in the United States, where a Senate Committee last year published a scathing report on the Cupertino-based firm's tax schemes. The report held up Apple as an example of legal tax avoidance made possible by the complicated US tax code, estimating the firm avoided at least $3.5 billion in US federal taxes in 2011 and $9 billion in 2012 by using its tax strategy.
Apple one the world's most valuable and profitable firms — sat on some $164 billion in cash and cash equivalents, with $138 billion stashed away in foreign subsidiaries, according to its latest quarterly report in June. The company estimated its effective US tax rate is 26.1%, as opposed to the statutory US rate of 35%, primarily because of undistributed foreign earnings.
"A substantial portion" of those foreign earnings was generated by subsidiaries organized in Ireland, Apple said in the regulatory filing, adding that "such earnings are intended to be indefinitely reinvested outside the US."