Saturday, January 20, 2018

EU Commission refuses to face reality about Apple's record repatriation tax payment

As I wrote more than two weeks ago, one of the key conflicts to watch in 2018 is The (failed) EU vs. Silicon Valley. Long gone--really long--are the days when European technology companies were among the leading ones in the world. The more digital the world becomes, the more Europe gets marginalized in the most important fields of technology--fields in which Mediterranean statism never succeeded in the first place.

On Wednesday, Apple announced what is a huge victory President Trump and Republicans in Congress: a $350 billion contribution to the U.S. economy over the next five years (that's at a level with the entire public debt of the failed state of Greece) including a $38 billion repatriation tax payment to the Dept. of the Treasury.

That payment is due to the fact that Apple essentially parked money in Ireland at times when U.S. corporate tax rates were much higher. While other politicians thought they could name and shame Apple and other U.S. companies for totally lawful behavior, the dealmaker-in-chief, a businessman himself, simply recognized that the United States faced only two realistic choices: make those companies an offer they can't refuse and get them to bring a lot of money back to the U.S.--or otherwise they'd have to do what's best for their shareholders, which led to the absurd situation of Apple borrowing money so it could pay its dividends while it actually had plenty in Ireland.

When Apple announced that it "expects to invest over $30 billion in capital expenditures in the US over the next five years and create over 20,000 new jobs through hiring at existing campuses and opening a new one," it confirmed that the President's "Buy American, hire American" strategy is working out nicely so far, unlike the EU's failed economic, fiscal and monetary policies. The Trump tax reform is indeed increasing America's competitiveness, and the primary loser is that old, complacent, bleeding-hearted continent run by politicians who have everything in mind (even Africa) but the competitiveness of their economies in the digital age and opportunities for their citizens.

The EU "state aid" "case" against Apple--formally, against Ireland, which the EU even sued last year for alleged non-compliance with a ruling to recover "up to" 13 billion euros--is still on appeal. Last February I criticized the EU decision (after reading it a couple of times in full detail), among other reasons for misrepresenting an important thing:

In its decision, the Commission does recognize that under Irish tax law a company can be registered in Ireland without being subject to Irish taxes. The Commission describes those companies as "stateless," which again sounds like "never paying taxes anywhere, anytime" and is not the way it is: if a company is registered in Ireland but practically operates outside of Ireland and is managed in the U.S., its profits will be subject to U.S. taxes, just that the point in time when this occurs depends on repatriation.

The EU Commission doesn't say that such companies cannot legally exist. It's all about allocation: it's about how much is taxed in Ireland (and, in that case, taxed immediately) versus how much can be kept in Ireland for a while but will ultimately be subject to U.S. repatriation tax.

Now "the point in time when this occurs" is near. Apple is going to make that payment. A reporter then asked a spokesman for EU competition commissioner Margrethe Vestager at a daily Brussels press briefing what bearing Apple's U.S. tax payment would have on the EU "case." Reuters reports that Mrs. Vestager's spokesman said "nothing has changed" with a view to that matter. He obviously had to say so. The only alternative would have been for the EU to recognize its fundamental legal error and drop the "case."

At this stage of proceeding, the Commission is just a party to the case. Since both the Commission and the judges on the EU courts are appointed by the same national governments, it's not a given that Apple will be treated fairly, but at least there is the possibility of the judges finding the "rationale" underlying the Commission decision so irrational that they'll overturn Mrs. Vestager's decision.

I actually agree with her spokesman in the sense that "nothing has changed" about the decision having failed to distinguish between tax avoidance and deferred taxes (see this explanation by Apple and another one by Fortune). What has changed is the tax rate for Apple in the U.S., and that made it a better choice for Apple to repatriate mountains of cash. But the overall cross-jurisdictional framework, with the deferred tax system in the U.S. that applied to the years at issue in this "case," hasn't changed retroactively. The idea of any of Apple's money ever having been "stateless" (not taxed by anybody) was a complete misconception.

What has changed, however, is that it's now just a matter of legal structures but (additionally) a matter of fact. Apple can point to its U.S. repatriation tax payment and, on that basis, focus the whole debate on allocation (how much of its taxes it owes in the U.S. and how much in Ireland) as opposed to tax avoidance.

Considering that Apple's products are designed and engineered in the U.S., and not even manufactured in Europe, it shouldn't be hard to understand that most of Apple's taxes are due in the U.S., too. It doesn't make sense to me that the Commission wants Ireland to collect €13 billion (almost $16 billion), almost half as much as the $38 billion Apple expects to pay as a U.S. repatriation tax. If those EU jurisdictions got even 20% of the amount Apple pays in the U.S., that would already seem very high (almost outrageous, actually) to me.

While nothing has changed about what the law was in the years the EU "case" relates to, it's now easier than ever for the judges to see that Apple never engaged in tax avoidance. The Commission can no longer argue that Apple's "stateless" subsidiaries would never ever pay taxes anywhere.

What Apple announced this week ups the political ante for Mrs. Vestager in three ways:

  1. The kind of propaganda that influenced public and political sentiment in the past won't work anymore.

  2. While the details are not known, there's no question that an unjustified "recovery" of taxes from Apple by Ireland (under pressure from Brussels) affects the United States. At a minimum, any taxes Apple is required to pay in Europe reduce the amount of money it can repatriate. Possibly, there are other implications as well. So there is a potential a major political conflict between the United States and the EU.

  3. Mrs. Vestager wields a big stick but depends on being backed by the governments of the EU member states. I haven't managed to find out what positions various governments have communicated to the EU court. There is, however, a possiblity of some governments now recognizing that Mrs. Vestager's approach is not going to be fruitful. Apple's public statement emphasizes that jobs are going to be created in the U.S., while Apple doesn't do much more in Europe than sales and marketing. The EU Commission's antagonistic attitude does nothing to spur investment in Europe. It just benefits the United States--and President Trump. It could be that some EU member state governments will understand this and be ever less prepared to back Mrs. Vestager's crusade.

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Wednesday, January 3, 2018

Happy New Year -- and a brief overview of key industry issues and conflicts in 2018

First, I wish all of my readers a Happy, Healthy, and Prosperous New Year!

Primarily this first post after the turn of the year is about a quick overview of some key industry issues and conflicts to watch in 2018. In addition, I'd like to mention that my app, Quizcover, is now available on the U.S. App Store (click here to download), and I've just issued a press release on it. But as I promised in a recent post, I'm going to keep those two activities--the trivia game app and the patent/antitrust/policy blog--perfectly separate from now on.

The following industry issues and conflicts were big in 2017 and should be very interesting to watch in 2018:

  • The World v. Qualcomm

    Ever since I can remember, no information and communications technology company has ever faced as many simultaneous and earth-spanning antitrust problems as Qualcomm: unilateral-conduct investigations by competition authoritities in the United States, Europe and Asia; thorough merger reviews of Qualcomm's proposed acquisition of NXP; and antitrust lawsuits brought by Apple in multiple jurisdictions. Then there's at least one other company (analysts believe it's Huawei) that stopped paying license fees. Some early-stage decisions made by federal judges in the Northern and Southern Districts of California didn't work out well for Qualcomm. It's losing the most momumental multi-front war any company in this industry has ever been embroiled in.

    From the outside it's always easy to say: they should settle, especially since they can't realistically win. It's never a bad idea to promote peace, and here it's just impossible to imagine that all those regulators and judges and private parties are wrong and Qualcomm (plus Maureen Ohlhausen, the last woman standing in Qualcomm's corner) are right. But let's be realistic: there is so much at stake here that Qualcomm will most likely still be the first item on my list for next year's first blog post, too.

  • The (failed) EU vs. Silicon Valley

    In the past, the EU was more selective about which IT antitrust issues to pursue, and it got a lot of support from various stakeholders all the time. But by now it looks like DG COMP (the EU Commission's antitrust enforcement unit) and policy makers are trade warriors and completely out of control. The EU's take on U.S. technology giants appears to be: "If you can't beat'em, tax'em." Literally, by creating a new digital tax and/or other measures that have the same effect; slightly less literally, by making up "state aid" cases (such as the one involving Apple) out of thin air and imposing huge fines.

    The two key questions about the continuation of the EU's war on Silicon Valley will be: how far will the EU institutions (including the Court of Justice of the EU) ultimately go? And when will there be some serious backlash?

    The question we don't have to ask--since the answer is the most resounding "no" you can imagine--is whether any of this will make Europe more innovative or more competitive. Europe will fall further behind in the age of the digital economy. It's more concerned with its history than with its future. As an Australian politician once said, Europe is like an endless seminar about itself. I seriously don't believe it has a bright future. It's going down the tubes already, with entire generations being lost in some EU member states that have youth unemployment rates beyond imagination. The EU is part of the problem, not part of the solution, though it does get something right every once in a while, such as its recent guidelines on standard-essential patents.

  • Silicon Valley vs. The White House

    Since President Trump took office about a year ago, Silicon Valley has engaged in political activism that went beyond what made business sense. Obviously, companies don't like restrictions regarding whom they can hire, so "buy American, hire American" runs counter to their global ambitions. And some major U.S. companies were presuambly afraid of losing business opportunities with governments, corporations and consumers in predominantly Muslim countries, and with Muslims anywhere else, if they didn't distance themselves from decisions and statements by President Trump that might have antagonized parts of the world. Up to a certain point, that's just where their corporate interests and President Trump's focus on improving the lives of many voters are not the same. But Silicon Valley companies opposed Trump in ways that clearly weren't justified to any significant extent by business interests, and in the "travel ban" context they took positions that the Supreme Court largely disagreed with and that amounted to Trump-bashing and cheap shots.

    Some of the things that happened last year should give companies pause. The tax reform that Congress passed and President Trump signed into law before Christmas is great news for tech companies of all sizes. The aforementioned EU trade war on U.S. tech companies may increasingly make it necessary for them to get help from the Trump Administration. Then there are subjects such as net neutrality. I don't mean to imply that the Trump Administration retaliated against tech giants in that context, but it definitely didn't help their cause to be at loggerheads with the President all the time.

    I hope there will be a more constructive and rational relationship in 2018.

  • Whatever little is left of Apple v. Samsung (design patent damages)

    If the Supreme Court had allowed the Federal Circuit's statutory interpretation with respect to a disgorgement of a design patent infringer's unapportioned profits to stand, the consequences would have been really bad. Design patents would overnight have become the most lucrative arrow in any patent troll's quiver. Fortunately, the Supreme Court already made it clear in 2016 that infringer's profits are formally unapportioned but limited to the relevant "article of manufacture" (which may or may not be the entire end product). After that strategic victory for reasonableness, the two most important questions left to be answered were the test for determining the article of manufacture and the related burden of proof. Judge Koh answered those questions in ways that Apple can live with and Samsung and many are happy about. Compared to the questions before the SCOTUS and subsequently before Judge Koh, the remaining proceedings are significantly less strategic, but there still is the risk of an award that will encourage design patent trolling. Imagine this kind of "negotiation" between a troll wielding a (possibly overbroad) design patent against an accused infringer:

    TROLL: You know § 289 (unapportioned disgorgement of infringer's profits). Why don't you just pay us X million dollars to eliminate the risk of a devastating defeat.

    COMPANY: We don't think there really is much of a risk. The Supreme Court held that the relevant article of manufacture must be determined. The Department of Justice proposed a test that the Northern District of California adopted and probably all other courts will view very favorably, too.

    TROLL: So what? Samsung ended up paying Apple half a billion dollars at any rate. Shouldn't we negotiate?

    COMPANY: Well... we really don't think the outcome of Apple v. Samsung has a bearing on what we're discussing with you because our lawyers will present a strong "article of manufacture" argument to the court and the jury from the start, optimized for the DoJ's proposed test. But...we are willing to pay you half of what you're demanding.

    That fictitious conversation explains why I hope the outcome will be a reasonable one this spring.

  • Nobody (?) v. Amazon

    To be clear, I'm a very happy Amazon customer (store and AWS alike). I have nothing against that company, and this final bullet point is actually an expression of my admiration for how Amazon has managed to avoid the kinds of disputes that other major players have to deal with all the time. For example, those "smartphone patent wars" never hit Amazon. Little Barnes & Noble had to defend itself against a Microsoft suit, but no major patent holder ever went after Amazon (just trolls).

    It could be that certain strategic "anti-Android" patent holders--none of whom ever even mentioned Amazon to me in connection with patent infringement lawsuits--didn't want to lose Amazon as a reseller. So nobody sued them, and there weren't any antitrust complaints that I'd have heard of.

    There's a good chance that Amazon, apart from maybe having to pay the U.S. Postal Service a bit more in the future and the EU's "if you can't beat'em, tax'em" kinds of challenges, will continue to be able to steer clear of major disputes and conflicts. Admirable, but in no small part attributable to its unique (and enviable) position. While some thought that Jeff Bezos' private acquisition of The Washington Post would add to his clout, it probably isn't an asset under President Trump, but it may still help Amazon in Washington circles.

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