On September 30 2014, the European Commission released two non-confidential versions of the opening decision letters sent to the governments of Ireland and Luxembourg on 11 June 2014, which launched formal transfer pricing investigations.

The investigations involve whether or not state aid rules were violated by transfer pricing tax rulings given by Ireland to Apple and by Luxembourg to Fiat Finance and Trade. An investigation is also under way involving the Netherlands and Starbucks, though no opening decision letter was released for that case.

Ireland and Apple

The letter sent to the Irish government in regard to Apple outlines the Commission's objections to the tax rulings granted by the Irish tax authorities in 1991 and 2007 that appear to favor Apple Operations Europe (AOE) and Apple Sales International (ASI).

The main issue with the 1991 ruling is that the method for determining profit allocation to ASI and AOE resulted from negotiations rather than from a pricing method. The Commission's initial assessment is that the failure to use a pricing method resulted in an outcome not in compliance with the arm's length principle. Further, the Commission takes issue with the fact that the ruling has been applied for 15 years without revision.

The main issue with the 2007 ruling is that in determining profit allocation the transactional net margin method is used with operating costs as a net profit indicator with no explanation why operating costs were chosen as a net profit indicator instead of a larger cost basis, such as the cost of goods sold.

Luxembourg and Fiat Finance and Trade

The letter sent to the Luxembourg government in regard to Fiat Finance and Trade outlines the Commission's objections to the tax ruling granted by the Luxembourg tax authorities in 2012.

The main issues with the 2012 tax ruling involve the transfer pricing report submitted for the ruling, including:

• It was unclear to the Commission whether the amount of taxable income in the transfer pricing report was fixed and how that amount was determined
• Although the approach taken in the transfer pricing report doesn't violate OECD principles, the Commission believes a more direct comparable uncontrolled pricing approach should have been applied as well in order to verify that the remuneration was at arm's length
• The Commission's view is that the Luxembourg tax authorities did not adequately research the comparables used in the transfer pricing report before issuing the ruling

The investigative process by the European Commission is ongoing with no estimated completion time given, although a final decision could be given within 18 months.

Both Ireland and Luxembourg have issued statements that they are confident no state aid rules have been broken.