The background for the European Union (EU) assessing a $14.5 billion tax on Apple for its sales in Ireland is a rather complex maze of laws, treaties, and politics. It is not my purpose here to delve into those complexities. I am attempting a simple explanation of the issues involved and why the EU levied the tax, even though Apple and Ireland were both very content with thing the way there were.

At first blush, the recent demand from the EU that Apple pay Ireland $14.5 billion in taxes seems somewhat strange. Apple was happy, Ireland was happy. Why was the EU not happy? And why does the EU have the authority to interfere in a sovereign nation’s tax matters?

The EU claims that the deal between Apple and Ireland amounts to illegal state aid. The EU has an agreement—“The Treaty on the Functioning of the European Union”—which prohibits government subsidies to private industry. These subsidies are known as state aid. Since Ireland is a part of the EU, they are bound by this treaty, and the EU can step in and declare the agreement null and void, ordering Apple to return the illegal state aid received. It should be pointed out that this has nothing to do with Ireland’s low tax rate, the EU cannot do anything about that.

So what was the deal that got the attention of the EU? Basically, Apple paid far less tax on its Irish income than the statutory rate called for. In addition, Apple structured itself so that its affiliates pay royalties to the Apple Irish affiliate, creating a large amount of Irish income and reducing reported income to other nations, both within and outside the EU.

I would not feel too sorry for Apple even if they lose the case. Yes, $14.5 billion is a lot of money, but that is only a small portion of the cash held by Apple. As of June of this year, Apple reported cash of $231.5 billion. Of this amount $214.9 billion is held outside the United States. This has everything to do with the US tax laws. The United States has one of the highest corporate tax rates in the world. Under our laws, a corporation must pay tax on it worldwide profits only when the funds are repatriated. So Apple has not paid US tax on these funds. If they bring them to the US, a huge tax liability would be created. Of course, Apple could take a credit for taxes paid to foreign countries, but it would still result in a large payment of taxes to the US above the credit amount.

The United States’ government position on this is that our worldwide system of taxation means that Apple should be paying taxes on all its income regardless of source. The value of what Apple sells was created in the US and therefore, should not pay tax anywhere but the US. Some are of the opinion that this issue may result in a reform of US corporate tax laws.

So, mix some politics with some tax law and throw in an international treaty and you get the current situation with Apple, Ireland, the European Union, and the United States all weighing in with competing interests. What will be the ultimate result? Your guess is as good as mine. Stay tuned.