EU says Apple's Irish tax breaks are illegal

In a decision published Tuesday, European Union officials said Apple’s tax deals with Ireland violate the law.

The European Commission’s anti-trust authority issued its preliminary findings after months of an investigation that is part of a wider probe into illegal state aid to corporations.

The report says the tax deals struck in 1991 and 2007 between Ireland and Apple give the company an advantage “in a selective manner.”

“Accordingly, the Commission is of the opinion that through those rulings the Irish authorities confer an advantage on Apple,” the report says. “That advantage is obtained every year and ongoing, when the annual tax liability is agreed upon by the tax authorities in view of that ruling.”

The report doesn’t put a specific price tag on the tax breaks or explain how much Apple may have saved or how much tax revenue the Irish government lost. However, the report notes that by 2012 Apple was claiming that its Irish subsidiaries were responsible for $63.9 billion of revenue out of its total annual revenue of $156.5 billion.

Officially, the report is a letter delivered to the Irish government, which now will have an opportunity to formally respond to the charges. Apple will also have a chance to respond.

The focus of the EU’s investigation involves “transfer pricing arrangements.” Though complex, the arrangements involve the way subsidiaries of a company charge each other for goods and services and how a company assigns revenues and costs to various territories.

In the case of the EU investigation, regulators worry that various member countries have struck deals with corporations that allow them to assign revenue to their territories in ways that allow them to pay less in taxes. Such deals would violate the Europe’s common market agreements, in which all countries are supposed to operate on a level playing field.

Specifically, the EU now believes the tax rulings that Ireland made for Apple in 1991 and 2007 allowed the company to assign more of its business to that country than actually occurs there. The report notes that the 415% increase in sales at the branch between 2009 – 2012 did not seem due to similar increases in volume of work happening there.

“At this stage, the increase in sales cannot be related to a comparable increase in operating costs, which could point to an inconsistency in the profit allocation to the Irish activities,” the report says.

While Apple does have a legitimate operation in Ireland, much of the revenue counted there involves operations and work done elsewhere, the EU ruled.

“On the basis of a branch-focused analysis of the operations undertaken in Ireland, it would have been clear that the main profit-generating functions and assets were not located in Ireland,” the report says.

[UPDATED at 6:42 a.m.]

Apple spokesperson Kristin Huguet has issued the following statement:

“Apple is proud of its long history in Ireland and the 4,000 people we employ in Cork. They serve our customers through manufacturing, tech support and other important functions. Our success in Europe and around the world is the result of hard work and innovation by our employees, not any special arrangements with the government. Apple has 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.”