The European Commission's decision ordering Ireland to recover €13 billion in state aid granted to Apple is based on a misapplication of OECD profit attribution principles that Ireland never even adopted, according to the Irish Department of Finance.

In August, the commission announced its decision that advance pricing agreements granted by Ireland to Apple Sales International (ASI) and Apple Operations Europe (AOE) in 1991 and 2007 provided selective state aid in violation of article 107 of the Treaty on the Functioning of the European Union. On December 19, a redacted version of the commission's formal decision was released.

Apple's double Irish setup established a position that much of its European sales income was taxable nowhere, because its U.S.-managed, Irish-organized companies -- ASI and AOE -- were resident nowhere and acted through branches in Ireland. Ireland has since changed its corporate residence rules.

Ireland gave Apple a unilateral advance pricing agreement capping the taxable income of its Irish branches at a percentage of operating expenses. The commission argued that the transfer pricing method used in the APA attributed too much income to Apple's Irish branches' head offices, which had no substance. The commission wanted to reattribute most of Apple's European sales income to the Irish branches so that it would be taxable in the EU.

Irish tax law did not have transfer pricing rules until 2010, and Ireland did not regard the branches as legal persons. Ireland argued that the transfer pricing guidelines did not apply to the 1991 and 2007 APAs given to Apple, but the commission countered that transfer pricing was implicit, and that the APA treats branches as hypothetical separate entities.

The department's December 19 release explaining its appeal of the decision says that Ireland has the exclusive right to set rules for attributing a nonresident entity's profit to a local branch, and the rules it set were not based on the arm's-length principle.

"The Commission attempts to rewrite the Irish corporation tax rules so that, in respect of [the rulings], the Revenue Commissioners should have applied the Commission's version of the arm's length principle," the department said in its release. "This principle is not part of EU law or the relevant Irish law in relation to branch profit attribution, and the Commission's claim is inconsistent with Member State sovereignty in the area of direct taxation."

European Commission's Apple Decision Rewrites Irish Tax Law, Appeal Application Says