Having read the European Commission’s original ruling, some prior rulings, the Treasury’s white paper about the European Commission’s actions and a lot of analysis in the tax community, in my opinion, the EC is over-reaching in their decision on Apple.

The European Commission is basing their argument on Apple receiving illegal state aid, which requires a determination that an advantage received by one or more select companies has not been made available across the board. They specifically take issue with two so-called “advanced pricing agreements” between Ireland’s tax authority and Apple over how Apple sets inter-company transfer prices among its subsidiaries that interact with Irish operations. These inter-company prices determine how much taxable profit gets allocated to Ireland.

However, any company can request one of these agreements, and many have. In fact, as of 2014, there were more than 750 advanced pricing agreements in place among all EU member states, and nearly as many being requested by companies. Therefore, this benefit is not “selective,” and, furthermore, not an issue specific to Ireland or Apple.

More generally, every EU member state has the autonomy to set and administer its own transfer pricing rules and tax policy. Case in point: Ireland did not even have transfer pricing rules in place until 2010. This means that up to 2010, there is no set of rules that the EC can cite as being discriminately applied to Apple versus everyone else to provide the firm with a selective advantage. After 2010, Ireland’s revenue authority, which is charged with making sure that the transfer pricing rules set by Ireland are being appropriately applied, asserts that Apple allocated profits in a manner consistent with the rules that applied to everyone.

Like it or not, these companies are following the letter of the law — and the same laws are being applied to all companies.

Finally, while the nuances of Apple’s structure may be unique to Apple, it is certainly not the only company using these types of transfer pricing arrangements to yield a similar result of reducing the amount of taxable income recorded in the EU.

Like it or not, these companies are following the letter of the law — and the same laws are being applied to all companies. It’s clear the EC doesn’t like the result, but the answer has to be greater coordination among member states to close differences in tax rules across countries that companies like Apple can legally exploit.

Many, including officials in Ireland’s Ministry of Finance, have argued that it is not Ireland’s tax policies that are to blame for the tax practices of U.S. multinationals like Apple, but rather those of the U.S. The U.S. tax policy is to tax all worldwide income of U.S. corporations, regardless of where it is earned. However, a deferral provision allows companies to delay tax payment on foreign income until it is repatriated back to the U.S. There is no question this tax policy creates a strong incentive for companies like Apple to report as much of their global income as possible in low-tax, foreign jurisdictions, such as Ireland and Bermuda, and to keep it there.

In 2004, the U.S. passed the American Jobs Creation Act, which allowed U.S. multinationals to repatriate qualifying cash dividends at an 85 percent tax discount. That is, instead of paying the difference between foreign income taxes paid and the U.S. tax rate of 35 percent, repatriating firms paid only 15 percent of the normal tax bill.

This dramatic, temporary change in U.S. tax policy was enacted to stimulate a recovering U.S. economy. By reducing the cost of repatriation, Congress hoped multinationals would bring home their locked-out foreign cash and invest it domestically. It worked in the sense that more than $300 billion was repatriated under this legislation, but evidence on whether the funds were invested as intended is mixed at best. Further, recent research suggests that this one-time, temporary tax holiday actually may have made matters worse, afterwards incentivizing firms to hoard even more foreign cash in hopes of steering Congress toward a second future repatriation tax holiday.

Moving forward, there are a host of proposals on the table that could change the tax landscape for U.S. multinationals like Apple. Many lawmakers call for making the repatriation tax holiday effectively permanent, either by moving the U.S. to a territorial tax system favored by most of the world or to a system that taxes all foreign income immediately at a lower rate. So far the only thing both sides of the aisle in Washington can agree on is that the current system is “broken.” There is little consensus over how to fix it, and evidently little incentive for lawmakers to even try until after our upcoming presidential election in November. Stay tuned.

Featured Image: Bryce Durbin/TechCrunch

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Apple done nothing wrong