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Italy investigates Apple for alleged tax fraud: Source

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Apple is under investigation in Italy for allegedly hiding 1 billion euros ($1.34 billion) from the local tax authority, a judicial source with direct knowledge of the matter told Reuters, confirming Italian media reports.

According to Italian magazine "L'Espresso," Milan prosecutors say Apple failed to declare to Italian tax authorities 206 million euros in 2010 and 853 million euros in 2011.

The weekly publication said the Italian subsidiary of Apple booked some of its profits through Irish-based subsidiary Apple Sales International, thus lowering its taxable income in Italy.

"The Apple investigation is under way," the judicial source told Reuters on Wednesday, without giving any further details.

(Read more: Six tips for reducing taxes on investments)

The Italian subsidiary of Apple did not immediately respond to a request for comment.

The maker of the iPhone is the latest prominent corporation to become the target of a tax inquiry in Italy amid a global crackdown aimed at preventing companies such as Google, Amazon and others from avoiding taxes.

In crisis-hit Italy, tax authorities faced with dwindling revenues have become more aggressive with domestic and multinational companies.

In June, fashion designers Domenico Dolce and Stefano Gabbana were handed a 20-month suspended prison sentence and a heavy fine for hiding hundreds of millions of euros in unpaid taxes. Both deny any wrongdoing.

"There is a global process underway, and the Italian tax authority is one of the most active," said an Italian tax source. "In general, the focus is shifting towards multinationals that are able to lower their tax base through their international operations."

(Read more: Calls to raise taxes for the rich are growing)

To try to fix public finances, Italy's largest ruling party, the center-left PD, has proposed legislation to oblige companies that advertise and sell online in Italy to do so only through agencies with a tax presence in Italy.

The proposal, dubbed the Google Tax, is meant to combat a tendency by corporations to shift revenues out of Italy and into low-tax countries such as Luxembourg or Ireland.

A U.S. Senate investigation in May revealed that Apple structured its operations so that the vast majority of its non-U.S. profits are reported in Ireland, by companies which, through an unusual feature of Irish tax law, are not a tax resident in that country.

(Read more: Millions at stake...again...between Apple, Samsung)

Apple Sales International contracts with mainly Chinese companies to manufacture iPads and iPhones. It then sells these products to another Irish company which resells them to retail subsidiaries in Italy and other European countries.

The pricing of the inter-company transactions ensures that the lion's share of the profit ends up with Apple Sales International, the Senate report said. Low profits in countries like Italy mean low tax payments there.

Countries usually consider companies registered on their territory to be tax resident there but Irish law allows Apple Sales International to be tax resident nowhere. This means its profits go untaxed.

—By Reuters

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