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Irish Apple tax rebates 'illegal'

The European Union's competition watchdog says tax rebates that Ireland granted iPhone maker Apple appear to amount to illegal state aid and may have to be recouped.

Apple 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, the 28-nation bloc's executive Commission said the tax treatment granted to Apple raises "doubts about compatibility" with EU law.

The Commission says tax deals struck with Apple in 1991 and then 2007 show "several inconsistencies" and might not comply with international taxation standards.

The EU announced the probe in June. It is now requesting further documents from Ireland before making a decision which is likely to take several months.

If the EU's preliminary finding is confirmed over the coming months, Apple could face a repayment bill worth billions.

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 investigation 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 Dublin government is adamant that no EU rules have been breached.

The Commission 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 US, where a Senate committee last year published a scathing report on the California-based firm's tax schemes.

The report held up Apple as an example of legal tax avoidance made possible by complicated US tax rules, estimating the firm avoided at least 3.5 billion dollars (£2.1 billion) in federal taxes in 2011 and 9 billion dollars (£5.5 billion) in 2012 by using its tax strategy.

Apple - one the world's most valuable and profitable firms - sat on 164 billion dollars (£101 billion) in cash and cash equivalents, with 138 billion dollars (£85 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 organised in Ireland, Apple said in the regulatory filing, adding that "such earnings are intended to be indefinitely reinvested outside the US".

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