"Member states can not give tax benefits to selected companies - this is illegal under European Union state aid rules", she said a statement on Tuesday.

It paid $2.67 billion in taxes during its latest quarter at an effective tax rate of 25.5 percent, leaving it with net income of $7.8 billion according to company filings. This effectively amounted to state aid, the commission said.

"[EU] member states can not give tax benefits to selected companies - this is illegal under European Union state aid rules", said Commissioner Margrethe Vestager, Europe's top antitrust official.

"In Ireland and in every country where we operate, Apple follows the law and we pay all the taxes we owe".

Amazon and McDonalds are next under the gun for unpaid tax in Europe, after the European Commission stunned Apple with a €13 billion ($A19.15 billion) bill for back taxes.

In short, the Irish Revenue made two tax rulings that enabled Apple to pay an effective corporate tax rate that declined from 1% in 2003 to 0.005% in 2014, on the profits of Apple Sales International, which is an Irish incorporated company of the Apple group.

Apple warned the decision would "have a profound and harmful effect on investment and job creation in Europe". Today's decision should mark a watershed moment in the fight against tax avoidance: the race to the bottom on tax must stop, and we must make sure all companies - whatever their size - are able to compete in a fair environment. The Commission said it treated all companies equally.

Apple's tax arrangements in Ireland are based on an agreement drawn up in 1991, when Apple was struggling against the PC boom, and another in 2007, which allowed the company to pay a significantly reduced rate of tax on profits over more than 10 years.

"If you look at the small print on an Apple iPhone, it says designed in California and manufactured in China and that means any profits that accrued didn't accrue in Ireland and so I can't see why the tax liability is in Ireland", he said. "Ireland does not do deals with taxpayers".

Apple employs 5,500 workers, or about a quarter of its European-based staff in the Irish city of Cork, where it is the largest private-sector employer.

Apple is not the only American company that has recently found itself under scrutiny over its European tax affairs.

"When coupled with ongoing competition investigations against several US manufacturers, technology companies, and services providers, this ruling raises significant new questions about Europe's attractiveness as an investment destination for USA business", the Chamber said in a statement.

The Irish government is afraid companies would be less likely to invest in Ireland if its tax regime changes, which could cost the country thousands of jobs.

"I disagree profoundly with the Commission's decision", Irish Finance Minister Michael Noonan said in a statement. "Our tax system is founded on the strict application of the law". Any money handed over by the company will be placed in a hands-off escrow account pending what could be years of litigation before the European Court of Justice in Luxembourg, he said.