BRUSSELS — The European Commission on Tuesday warned that tax advantages Ireland has granted to Apple for more than two decades might amount to illegal state aid that could require the company to pay huge amounts in back taxes.  Tax experts said the financial impact — if any — on the company and Ireland was difficult to predict, as the case could take years to play out.  But the warning, along with a similar preliminary finding that Luxembourg may have granted too favorable a tax arrangement to a unit of the Italian automaker Fiat, could put multinational corporations on notice that it may become harder to go tax shopping among European Union countries.  If the European Commission, the union’s administrative arm, eventually finds that Apple’s tax arrangements in Ireland are illegal and must end, Ireland could be required to recover money from the company.  “It’s really hard to get an actual number for how much Apple may have to repay,” said Heather Self, an accountant at Pinsent Masons, a British law firm. “My gut feeling is that it’s going to be a big number, but not a disastrous one, and could range between nothing to hundreds of millions of euros.”  Because of a statute of limitations, a liability for past taxes could go back no further than 2003. But for Apple, which had a profit of $37 billion last year on revenue of $171 billion, any back taxes would probably not be as significant as the company’s need to revamp its international tax strategy — in which Ireland has come to play a prominent role.  The company and Ireland have said there is nothing untoward about their tax dealings. “Apple has received no selective treatment from Irish officials over the years,” the company said in a statement on Tuesday. “We’re subject to the same tax laws as the countless other companies who do business in Ireland.”  Neal Todd, a partner based in London at the law firm Berwin Leighton Paisner, predicted a protracted dispute as Apple and Ireland contest the findings. “You can expect that this will almost certainly end up in court,” he said.  The report was sent to Ireland in mid-June, when an investigation was announced, but it was only published, in redacted form, on Tuesday.  The 21-page report by the European Commission lays out its preliminary case claiming that Ireland granted Apple special deals that may have helped the company avoid significant amounts of tax and that created unfair advantages over other European Union member countries.  The commission, the executive arm of the European Union as well as the bloc’s competition regulator, said it was focusing on rulings by the Irish tax authorities in 1991 and 2007 concerning two wholly owned Apple subsidiaries, Apple Operations Europe and Apple Sales International, which have branches in Ireland.  The report found that Ireland’s tax authorities in the 1991 agreement with Apple discussed profit projections from the company as a basis for calculating its taxes, even though Apple’s own tax adviser acknowledged there was “no scientific basis” for the number being cited.  And yet, the report said, Ireland allowed that tax arrangement to stay in effect until the 2007 reassessment — a period at least three times longer than most other European Union countries would allow without revisiting the agreement, according to investigators. That long duration, even as Apple was growing and the market for digital technology was rapidly evolving, “calls into question the appropriateness of the method agreed” to, the report said.  As a result of its investigation, “the commission is of the opinion that through those rulings the Irish authorities confer an advantage on Apple,” the report said. “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.”  European Union law “provides that all unlawful aid may be recovered from the recipient,” Joaquín Almunia, the bloc’s departing commissioner for competition, said in the report.  Ireland has long asserted that it has granted Apple no special tax favors.  In a separate report on Tuesday, the commission also published preliminary findings in a tax investigation of Luxembourg, saying there was evidence that favorable treatment had been given to Fiat Finance and Trade, a unit of the automaker. That case also formally began in June.  The focus of the case against Apple and Ireland is on so-called transfer pricing — a practice that commonly involves companies’ moving profits and losses between subsidiaries by labeling them internal corporate payments for goods or for copyright or patent royalties.  The report includes an organizational chart of Apple’s international operations and some of the findings of a United States Senate subcommittee that has been investigating corporate tax issues, including details of a more than 400 percent increase in sales revenue from 2009 to 2012.  “The main question in the present case is whether the rulings confer a selective advantage upon Apple insofar as it results in a lowering of its tax liability in Ireland,” said the report, which was written in the form of a long legal letter in June from Mr. Almunia, the competition commissioner, to Eamon Gilmore, who was Ireland’s foreign minister until July.  The commission said it had found “several inconsistencies in the application of the transfer pricing method chosen when determining profit allocation” between the two Apple subsidiaries, as well as costs that had been “reverse engineered so as to arrive at a taxable income.”  James Stewart, a financial tax expert at Trinity College Dublin, said that whatever the outcome of the investigation, the commission’s report would nonetheless have an impact.  “There’s no doubt that this is damaging to Ireland,” Mr. Stewart said. “There’s a deeply held belief that our low corporate tax regime is central to Ireland’s industrial policy. The commission letter gives notice that these types of tax rates are under scrutiny. It will be much more difficult for Ireland to give similar deals to other multinational companies.”  The report cited the unusually long duration of the tax agreement struck in 1991 as an indication that Apple was granted special treatment. And even when Apple and Ireland renegotiated their 1991 tax arrangement in 2007, the report said, officials did not try to calculate the transfer of payments between the parts of Apple’s business as if they were separate companies — as standard accounting principles would require.  Nor, according to the report, did the tax agreement use calculations that would adequately allow for an increase in taxes to reflect the company’s rapidly growing revenue.  Investigators said that Apple Sales International recorded a revenue increase of 415 percent during the three years from 2009 to 2011, to $63.9 billion. But during that period, the operating costs used to calculate taxable income in Ireland reportedly grew only 10 percent to 20 percent, the report said.  “As a large part of the operating capacity of A.S.I. as a whole seems to be located in Ireland, the discrepancy between the sales growth and the growth of the Irish operating capacity cannot be explained,” the report found.  The Irish government said it had sent a letter to the European Commission in September replying to questions about Ireland’s tax policy. The Irish document, which was not publicly available on Tuesday, outlined why Ireland believed it had not broken European law, according to Brian Meenan, a spokesman for the country’s Department of Finance.  Ireland has set its corporate tax rate at just 12.5 percent. That is roughly one-third the tax rate of other European countries, including France, whose policy makers have criticized Ireland for offering incentives to attract global companies to its shores. One country having lower tax rates than its neighbors is not against European Union rules. But it could be a violation if a country granted special deals to certain companies that were not available to others.  “This is not a case of letting bygones be bygones, which tended to be the approach in the past, because the commission has named specific taxpayers like Apple rather than simply go after the tax regime in Ireland,” said Mr. Todd, the tax lawyer. “That suggests that the commission will want to get a cash settlement, rather than simply a change in practice.”  James Kanter reported from Brussels, and Mark Scott from London.
The commission laid out its preliminary case over Apple’s taxes in Ireland, and it told the country it may order it to collect huge amounts of back taxes.