The European Commission has announced a formal investigation into tax arrangements offered by the Irish Government to computer giant, Apple.

The investigation, which follows an informal inquiry by the European Commission, will examine whether the corporate tax paid by Apple complies with EU rules on state aid.

The Netherlands and Luxembourg are also being investigated in relation to specific tax rulings they offered to Starbucks and Fiat respectively.

The commission inquiry relates to the Irish branches of two Apple entities - Apple Sales International and of Apple Operations Europe.

The focus of the EU investigation is on tax rulings - so-called comfort letters given by the tax authorities to individual companies on specific tax matters. While EU law allows countries to grant specific tax arrangements to companies, these are deemed anti-competitive if they grant a selective advantage to a particular group of companies.

Following its initial enquiry into the calculations used to set tax in specific rulings offered to Apple, the commission “has concerns that they could underestimate the taxable profit and thereby grant an advantage to the respective companies by allowing them to pay less tax”.

In particular, the commission is examining the practice of transfer pricing - the practice of shifting profits between entities within a company, which allows companies to reduce their tax bill.

“In the current context of tight public budgets, it is particularly important that large multinationals pay their fair share of taxes,” EU Competition Commissioner Joaquín Almunia said.

“Under the EU’s state aid rules, national authorities cannot take measures allowing certain companies to pay less tax than they should if the tax rules of the member state were applied in a fair and non-discriminatory way.”

Responding to today’s announcement, Apple said it had received “no selective treatment” from Irish officials.

"Apple is subject to the same tax laws as scores of other international companies doing business in Ireland, " the company said. "Apple pays every euro of every tax that we owe. Since the iPhone launched in 2007, our taxes in Ireland have increased 10-fold."

The company said it was “proud to have been doing business in Cork” since 1980.

Responding to the European Commission's announcement of a formal investigation, a spokesman for the Department of Finance said Ireland "is confident that there is no state aid rule breach in this case and we will defend all aspects vigorously".

“Like other tax administrations in other countries, the Revenue Commissioners, in certain limited circumstances, operate a system of non-binding advance opinions where companies can seek advice on the correct application of the law in their self-assessed tax filings. This facility is available to all taxpayers, including companies, both large and small,” the Department of Finance said.

The spokesman noted that, in the event of an unfavourable decision, it will be open to Ireland to launch a legal challenge in the European Courts.

“The company in question did not receive selective treatment and there was no ‘special tax rate deal’. Indeed, the company has publicly clarified that there was no special deal,” the Department of Finance added.

Ireland, Luxembourg and the Netherlands have attracted criticism for allegedly attracting multinational companies to their shores by offering sweetheart deals.

The finding last year by a US Senate committee that Apple had paid corporate tax of 2 per cent or less in Ireland caused consternation in the US and abroad.

The Irish Times reported in March that Apple paid just $36 million in tax on $7.11 billion worth of profits funnelled through an Irish company.

The iPhone maker avoided $850 million of Irish tax between 2004 and 2008 using lower rates according to accounts for Apple Sales International, seen by the Irish Times.

Speaking in Brussels the Competition Commissioner refused to rule out the possibility that Ireland’s tax arrangements with other companies would not be investigated, saying the commission was just beginning its work.

“We are starting our work based on the information we receive and we will continue to request information as regards political cases.”

The commission noted that, while Ireland had tightened its transfer pricing rules over the years, the Ireland’s tax authority had “a significant degree of discretion in the past”.

“The commission has concerns that such discretion has been used in the case of Apple to grant a selective advantage to that company, reducing its tax burden below the level it should pay based on a correct application of the tax rules,” the notice said, adding the number of tax rulings issued relating to transfer pricing arrangements in Ireland was “limited”.

The commission also announced it is launching infringement procedures against Luxembourg, referring the country to the European Court of Justice for not fully complying with the commission’s investigation so far.

While Ireland and the Netherlands had co-operated very well with the inquiry, Luxembourg had not provided all the information required.