THE European Commission has begun an investigation into allegations that Ireland offered special "sweetheart" tax deals to US multi- nationals.

It is understood the probe will begin looking at any special tax deals offered by Ireland, the Netherlands and Luxembourg.

The Commission said today the investigation is at a very preliminary stage.

The new probe follows massive controversy in the United States, Britain, Germany and France about the low taxes charged on US companies with operations in Ireland.

A finding against Ireland could mean US companies here would have to pay back billions of euro in taxes.

News of the investigation first emerged in a report in the Financial Times.

It came as Finance Minister Michael Noonan told a group of business people that there would have to be changes to the laws that allow foreign companies to avoid paying taxes in other countries.

While insisting the 12.5pc rate of corporate tax here was not up for discussion, Mr Noonan conceded the problem of companies reporting profits in other jurisdictions must be dealt with.

Attracting foreign companies to this country has been the cornerstone of successive governments' economic policy, but it angers other countries that lose billions in unpaid taxes.

A significant controversy erupted earlier this year when Apple told a US Senate committee investigating corporate tax avoidance that it had a special deal with Ireland, sparking outrage in Washington.

While Apple later seemed to retreat from the original claim, it never totally denied the claim of a special tax deal and the Irish Government made little attempt to prove that no deal had been done.

Apple is the largest foreign employer in Ireland but only pays taxes that equal around 2pc of profits.

Other companies, such as search engine giant Google and a host of well-known pharmaceutical firms, also pay almost no taxes on profits that amount to billions of euros.

The European Commission's competition authorities have now asked the governments here and in Luxembourg and the Hague to explain how various tax rulings work.

Europe has strict rules on state aid to encourage competition through out the EU.

The European Commission has no problem with Ireland's low tax rates generally – it just wants to be sure that all companies are taxed in the same way.

The present investigation is an informal exercise, but could mark the beginning of a formal probe, if the Commission identifies wrongdoing.

SPOTLIGHT

Taoiseach Enda Kenny and Trade Minister Richard Bruton insisted earlier this year that former Irish governments did not reach a secret tax deal with Apple.

Ireland's tax regime has been in the international spotlight over recent months. Multi-nationals are particularly fond of a tax arrangement that uses Irish and Dutch tax laws and enables many companies to pay virtually no tax.

Another popular tax-avoidance mechanism is the so-called 'Double Irish', which uses two Irish companies to benefit from our taxation of royalties for intellectual property.

These firms are based here but are not tax resident, and use other companies in Bermuda or the Caymans to pay effective tax rates well below the 12.5pc corporation tax.

The Dutch government has promised a crackdown on some tax laws and is due to begin parliamentary hearings on the issue today.

The G20 meeting in Moscow last weekend also saw leaders once again promise to crackdown on tax avoidance but the news of the probe is the first concrete step to tackle the problem.

Irish Independent