The European Commission is looking into decisions made by the Irish tax authorities that may have unfairly benefited Apple (NASDAQ:AAPL). As noted in a European Commission press release, the investigation will examine the use of “tax rulings” that are issued by Ireland’s national tax authorities. The tax rulings were issued to confirm transfer pricing arrangements between various Apple subsidiaries.
“Transfer pricing refers to the prices charged for commercial transactions between various parts of the same group of companies, in particular prices set for goods sold or services provided by one subsidiary of a corporate group to another subsidiary of the same group,” explained the European Commission. “Transfer pricing influences the allocation of taxable profit between subsidiaries of a group located in different countries.”
Although tax rulings are permitted under European Union laws, the rulings are not supposed to be used to give unfair tax advantages to certain companies. Apple has established favorable transfer pricing arrangements in Ireland that allow it to reduce its overall taxable income. By licensing the intellectual property held by one subsidiary to another subsidiary, Apple is able to shift the bulk of its European profits to Ireland and take advantage of the country’s unique territorial tax system and relatively low corporate tax rate of 12.5 percent. The European Commission plans to look at “the individual rulings issued by the Irish tax authorities on the calculation of the taxable profit allocated to the Irish branches of Apple Sales International and of Apple Operations Europe.”
Both Ireland and Apple have issued statements denying any wrongdoing. “Ireland is confident that there is no state aid rule breach in this case and we will defend all aspects vigorously,” said Ireland’s finance minister in a statement obtained by The Financial Times. “We will now turn to providing our detailed, technical legal rebuttal to the commission’s position and if necessary will defend our position in the European courts.”