Tag Archive | "Apple"

The EU Takes Ireland to Court: Understanding the Apple Tax Ruling and the Legal Ramifications of Ireland’s Failure to Act

Photo Credit: Josh Edelson/AFP/Getty Images

Photo Credit: Josh Edelson/AFP/Getty Images

In August 2016, the European Commission ruled that Ireland provided illegal state aid to the Irish subsidiaries of Apple, Inc. between 2003 and 2014, which amounted to approximately €13 billion. The Commission determined that Ireland’s illegal state aid took the form of “undue tax benefits” provided exclusively to Apple’s Irish subsidiaries: Apple Sales International (ASI) and Apple Operations Europe (AOE). Notably, ASI and AOE hold the rights to use Apple’s intellectual property to sell and manufacture Apple products outside North and South America under a cost-sharing agreement with Apple, Inc. The sales from such usage, nearly 60% of Apple’s total profits, are routed through these subsidiaries.

In 1991 and 2007, the Irish government issued two tax rulings that permitted Apple to artificially allocate the taxable profits of ASI and AOE. The method of determining Apple’s corporate tax liability in Ireland did not correspond with economic reality as almost all of the sales profits recorded by ASI and AOE were internally attributed to a “head office” that existed only on paper. The “head office” was not located in any state for tax purpose, it did not have any employees or operations, and it could not have possibly earned the sales profits that Ireland’s tax rulings permitted it to claim. Additionally, ASI and AOE sent yearly payments of approximately $2 billion to their parent corporation, Apple, Inc., for research and development (R&D) purposes. R&D payments are deductible expenses under Irish tax law, and so these amounts were not included in ASI or AOE’s annual taxable profits. As a result, Apple’s effective tax rate (ETR) in Ireland during the identified years amounted to 1% or less, compared with the statutory rate of 12.5%.

Under Article 107 of the Treaty on the Functioning of the European Union (TFEU), “any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings … shall, in so far as it affects trade between Member States, be incompatible with the internal market.” The EU Commission determined that Ireland’s tax rulings permitted Apple to artificially determine its tax liability in a manner that did not reflect economic reality. This gave Apple an undue advantage over competitors in the EU marketplace.

TFEU Article 108(2) provides that the Commission decision may direct the violating Member State to abolish such aid and practices and recover the illegal aid “within a period of time determined by the Commission.” Traditionally, the Commission provides the violating Member States with four months from the date the decision was issued to recover the specified amounts of illegal state aid. The recovery time must be speedy so that the corporation does not continue to receive further illegal state aid for a prolonged period. The deadline for Ireland to implement the Commission’s ruling and recover the €13 billion from ASI and AOE was January 3, 2017. Over a year has passed since the decision was issued and Ireland has not recovered a cent of the €13 billion. Ireland has, however, identified its methods of calculating the precise amount of illegal state aid owed, and it seeks to recover the full amount from Apple amount by March 2018. Despite both Ireland and Apple’s appeal from the Commission’s decision, the €13 billion still must be recovered. The disputed sum plus interest should be held by a third party in an escrow account until all appeals are finalized.

Ireland’s failure to recover the €13 billion in the time provided by the Commission constitutes a violation of Article 108 of the TFEU. As such, the Commission is permitted to bring the matter before the European Court of Justice (ECJ). Per TFEU Article 108(2), “if the State concerned does not comply with this decision within the prescribed time, the Commission … [may] refer the matter to the Court of Justice of the European Union direct.” The Commission did exactly that on October 4, 2017 when it moved to refer Ireland’s violations to the ECJ. EU rules provide that the Commission can first seek a declaratory ruling that Ireland failed to comply with the Commission’s decision. If Ireland still fails to recover the amount in dispute after an ECJ declaration, then the Commission may bring a second case that could result in fines.

The Commission’s recent referral of the Ireland-Apple decision to the ECJ has put pressure on the divided Irish government. Many politicians hope to maintain Ireland’s reputation for having a corporation-friendly tax system, which will continue to incentivize multinational companies to set up subsidiaries, branches, and offices in Ireland. This in turn, is beneficial for Irish citizens as it brings in new jobs and economic growth. Others argue, however, that the corporate taxation scheme favors rich, foreign companies to the disadvantage of Ireland’s poor. Recovering €13 billion in alleged illegal state aid would fully cover Ireland’s health services for one year and permit rampant infrastructure upgrades nationwide. The Apple tax ruling puts Ireland in hot water as it continues to lure in multinational corporations, attempts to comply with EU law, and seeks to appease the demands of its divided population. Until the ECJ issues its decision, however, Ireland certainly ought to continue collecting the alleged illegal state aid from Apple.

 

Rachel Ronca is a 3L Dual Degree student (JD and LLM in International Business Transactions) at the University of Denver Sturm College of Law. She is the Managing Editor on the Denver Journal of International Law and Policy for the 2017-2018 academic year.

Posted in 1TVFA Posts, 2Featured Articles, DJILP Staff, Rachel RoncaComments (0)

The FBI and Apple, Inc.: National Security v. Privacy

Photo Cred: WCCF Tech

Photo Cred: WCCF Tech

In January of this year, President Obama’s top intelligence advisers met with Apple’s CEO, Tim Cook and other technology leaders to discuss their long-standing disagreement over the encryption safeguards built into their devices. The Federal Bureau of Investigation requested Apple help unlock an iPhone used by Syed Rizwan Farook, one of the San Bernardino murderers who killed 14 people on December 2, 2015. Apple refused. On February 16, 2016, the United States District Court for the District of California issued an order compelling Apple to assist the FBI by enabling the search of the Farook’s iPhone. Tim Cook called the FBI’s request “chilling” and a “dangerous precedent” to set. The FBI requested that Apple create and digitally sign a special version of iOS, which would be modified in three ways, as specified on page 8 of the court order:

  1. iOS can be set to erase its keys after 10 incorrect passcode guesses. The FBI wants software with this feature disabled.
  2. iOS imposes increasingly long delays after consecutive incorrect passcode guesses to slow down guessing (this is commonly called rate limiting). The FBI wants software that accepts an arbitrary number of guesses with no delays.
  3. iOS requires individual passcodes be typed in by hand. The FBI wants a means to electronically enter passcodes, allowing it to automatically try every possible code quickly.

At the time, Apple worried the FBI’s application of the All Writs Act of 1798 would allow the government to force Apple into taking further steps, and used the example of surveillance software that could intercept and capture all data on an iPhone.

The All Writs Act is a 227 year old, general-purpose law allowing a court to require third parties’ assistance to execute a prior order of the court when “necessary or appropriate.” Many feared that should the U.S. government prevail in this case, it could be used to justify law enforcement efforts to get around encryption technologies in other investigations far removed from national security threats. Additionally, some feared the government could ask to use this power proactively, before a suspected terrorist attack. Is this really a possibility? Perhaps, but not certainly.

Ultimately, this case pitted a strong, governmental interest in ensuring its national security against an individual’s fundamental right to privacy. Many continue to wonder whether the U.S. can claim national security concerns justify the hacking into all iPhones. However, two legal roadblocks prevent such an occurrence.

First, in the U.S., the Fourth Amendment grants a measure of privacy for “persons, houses, papers, and effects” from “unreasonable searches and seizures” while requiring that warrants be issued based only on probable cause. Second, the international human right to privacy, arguably a customary norm of international law, as codified in the International Covenant on Civil and Political Rights (ICCPR) and the European Convention on Human Rights (ECHR), place limits on a State’s ability to interfere with the right to privacy.

But the courts weren’t faced with making this determination. On March 28, 2016, the Justice Department withdrew its legal effort to compel Apple to assist the U.S. government claiming it had unlocked the iphone without assistance from the tech company. Despite the U.S. government’s successful iphone hack, on April 8, 2016, the Justice Department said it would continue to try to force the tech company to help in criminal probes based on the All Writs Act justification.

Interference into an individuals’ right to privacy is illegal where it is arbitrary and not prescribed by law. As a threshold matter, the invasion must be prescribed by domestic law and have certain clear and precise safeguards. Second, and probably the limiting factor, is that the interference must not be arbitrary. The European Court of Human Rights’ jurisprudence on the subject has allowed a claim of national security threats to supersede an individuals right to privacy. However, these national security threats must be concrete, and the interference may not be “blanket and indiscriminate.” Thus, a State would not be justified in the surveillance of any and all phones absent a clearly defined threat to such State.

In sum, international law already accounts for the fear’s individuals express over a ruling in favor of the government. Should Apple fail in its “fight the good fight” attempt, individuals need not worry about the government being enabled.

Posted in 1TVFA Posts, 2Featured Articles, Philip Nickerson, Phillip NickersonComments (0)


University of Denver Sturm College of Law

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