EU Takes Action Against Amazon and Ireland Over Taxes (Oct 4, 2017)
It was reported earlier in the week that the EU would soon take action against both Amazon and Ireland (with regard to Apple) over the underpayment of taxes in the trading block, and both actions are now official. In the Amazon case, the company is being asked to pay 250 million euros to get the company up to the level of taxes the EU says it should have paid in Luxembourg over the last few years, while in the case of Ireland, the country is being taken to EU court by the European Commission over the fact that it has not yet collected and placed in escrow the 13 billion euros Apple owes it. I’ve covered both cases in the past, so I won’t add much here, but of course this is all part of the ongoing tension between the EU and the US tech industry on a variety of fronts, something that prompted me to create the first new narrative here on the site in a while and retroactively tag a number of past posts against it – you can see it here.
In a case with significant parallels to the European Commission’s tax case against Apple, it appears that it’s preparing to take similar action against Amazon over its past payment of taxes in Luxembourg, where its European operations are headquartered. As with the Apple case and Ireland, the country had offered Amazon reassurances that it was in compliance with local tax laws and the company has therefore been paying taxes in good faith, but the Commission feels that the deal involved special considerations which go against the normal tax rules for businesses in the country and therefore violate EU rules. The decision might be announced on Wednesday, and is likely to leave Amazon with a tax bill to Luxembourg for several hundred million euros, much smaller than Apple’s tax bill of 13 billion euros, but still significant given the level of Amazon’s overall profits in Europe, which have always been fairly low.
via Financial Times
This is just a quick follow-up on yesterday’s item on Google’s second proposed remedy to the finding that its Shopping search feature violates the EU’s competition laws. Google has now begun rolling out the changes that were reported but not officially confirmed by the company, and the EU’s stance is still that it will have to wait and see how the changes pan out before it rules on whether the fix is acceptable. The separation and opening up of bidding to other companies certainly leaves the door open to similar remedies in the other cases pending at the European Commission as well as other areas it may choose to investigate, including Maps, News, and so on, which would create much more far-reaching effects for Google than this change alone. It’s going to be a tough few years for Google in Europe.
After its initial proposal to address the European Commission’s concerns over its Shopping search feature apparently failed to pass muster, it appears Google is now offering to separate its Shopping search business from its core search business in the EU, and force it to bid for ten slots above the regular search results alongside other comparison shopping services. The reporting here from Bloomberg makes it sound like Google might still get more formal approval of its proposal, despite the EU Competition Commissioner’s remarks to Bloomberg last week which suggested that it would have to play things by ear. This solution will certainly seem less fishy than the first proposal, which I said had significant issues, but it’s still not clear whether it will meet the approval of either the EU or Google’s competitors. Certainly, Google is now going to have to bid for slots it previously received for free, which will dramatically change the economics of the Shopping search in the EU. But as long as Google has exclusive rights to its past data about the results from those links in the past, it will continue to have something of an unfair advantage over competitors in knowing what to bid for them in future.
This seems like a totally bizarre stance from the EU’s Competition Commissioner in response to Google’s proposed remedy to its alleged abuse of its dominant market position. Google is reported to have offered an auction to fill the Shopping slot it previously occupied exclusively, and Margrethe Vestager says her office won’t approve the remedy as such, but will wait to see whether it works in the market. That’s enormously unfair as an approach because it means Google could act in good faith, believing it’s proposed an adequate remedy, only to find out much later than it hasn’t and is subject to back-dated fines. Given that the European Commission found that Google violated its rules, it should surely also be the arbiter of whether the proposed remedy fixed things or not. And allowing the comparison shopping services that prompted the investigation in the first place to be the judges instead seems particularly unreasonable given that they have a vested interest in continuing to extract concessions from Google. I said when the proposed remedy was reported last week that I thought it unlikely to be sufficient, but to leave Google in legal limbo on this point just isn’t reasonable. It gives the impression that the EU has an axe to grind with Google and wants it to suffer rather than simply providing the legal clarity it should be entitled to.
A few weeks back, when Google filed its proposed response to the European Commission’s investigation into its Shopping feature, I suggested that there were only a few ways in which it might comply with the Commission’s requirements: “kill its Shopping product entirely in the EU; relegate it to either the organic or paid slots on a page rather than giving it the current prominent placement it enjoys; or create a broader “comparison shopping” section above the regular search results featuring both its own and competing services.” In the end, it sounds like what Google has proposed is a combination of those things – allowing other comparison shopping sites to bid to appear in the Shopping section where its own results currently appear exclusively, while placing an artificial cap on its own maximum bids to avoid dominating the results after the change.
The latter highlights the unlikelihood that the solution will be palatable to Google’s competitors or the EU – either it forces itself to sit out entirely from the bidding process, or it will regularly beat out competitors. Google knows better than anyone else what placement in that slot is currently worth, because it’s the only company that’s ever occupied it, and it therefore enjoys an unfair advantage. It could therefore set arbitrary caps in line with what it thinks those slots are worth, allowing competing companies to take the slots it doesn’t want to and reserving the best for itself. Either this has to be an open marketplace, in which case Google’s massive scale will likely allow it to beat out competitors for every slot it actually wants (as the WSJ points out it already does in many cases), or Google has to be excluded. This is where I go back to the solutions I proposed – either open up the Shopping slot in a similar fashion to Microsoft’s Windows browser choice options, or do away with the feature entirely. This proposed solution seems unlikely to pass muster with the EC.
★ Google Formally Appeals EU Ruling on Shopping Search (Sep 11, 2017)
The EU has three open antitrust cases against Google, and has just announced its final decision in one of those cases, which concerns Google Shopping. Very briefly, EU law doesn’t punish dominance in a market per se, but does place limits on certain behavior by dominant companies, specifically those which give their other products and services an unfair advantage. The EU has concluded firstly that Google search is dominant in the EU, and secondly that Google abused that dominance by favoring its Google Shopping feature over other “comparison shopping services”. It has therefore set a €2.4 billion ($2.7bn) fine based on revenue from Google Shopping in 13 countries where it’s available since as long ago as 2008, with a threat to levy an additional 5% of Alphabet’s total revenue going forward if Google doesn’t comply with its directives within 90 days. Other than the fine, the directive says Google has to stop favoring Google Shopping over other comparison shopping services, presumably either by eliminating the Shopping box that appears at the top and merely allowing Google Shopping results to appear with the other blue links below, or by featuring every available comparison shopping service in that box at the top and letting users choose. Predictably, Google has said it feels the decision is wrong and may appeal.
On, then, to what this all means. Firstly, this is just the first in three separate cases, and I’ve previously written in depth about the one that concerns Android here and here. In its decision, the EU explicitly says that this case sets a precedent, which certainly suggests it’s likely to find and act similarly in the other two cases. Secondly, the fine is substantial, but ultimately not the biggest punishment for Google here. Rather, the most significant outcome is restrictions on promoting other Google services in search, which applies for today onto to Shopping but by implication would also affect other linked products that get prominent promotion in search results, whether Maps, News, or potentially other categories too. Put that together with the precedent point, and we’re very likely to see similar restrictions on bundling and promoting other services in Android and possibly other areas too. Thirdly, the decision is notable for a very European approach to defining markets, which I mentioned in one of those earlier pieces on Android: the EU tends to define markets in ways normal people probably wouldn’t, because that allows it to make findings that otherwise couldn’t be made. In this case, it’s defining Google Shopping as a comparison shopping service rather than just a more useful way to present shopping-related search results and/or ads, which is how Google sees them. Once you define Google Shopping in that way, then of course Google is unfairly promoting Google Shopping over other comparison shopping services – can you even name any others? Google’s own algorithm, which benefits only from being as good as possible, rarely ranks any others above the fourth page of organic search results, suggesting their limited relevance. But as long as the EU is determined to take that approach, I see very little Google can do to fight against this decision, because it’s based on a market definition the EU gets to decide on, and which Google is essentially powerless to change. Overall, this feels like something of a watershed moment in Google’s relationship with the EU – I think any appeal is very unlikely to succeed, and at most will push back the implementation of the decision and the forced unbending of Shopping from search. But there’s lots more to come here, and Google is going to end up operating very differently in the EU from the rest of the world as a result. See a recent case in Russia for a small sense of some of the possible implications of the Android case.
One quick note: I’ve used the term “EU” throughout for simplicity’s sake, but it’s worth noting that technically it’s a specific part of the EU organization, the European Commission, which is taking this action.
Back in December, four big US Internet companies signed a voluntary code of conduct with the EU under which they agreed to improve and accelerate the removal of hate speech from their platforms. Now, the EU is reporting good progress on those goals, with twice as high a percent of offending content removed, and Facebook and Twitter removing substantially more content within the first 24 hours, while YouTube slipped a little in this regard for reasons that aren’t clear. As Facebook has discovered, policing content is an expensive and labor-intensive task at the best of times, but having external standards set like this raises the stakes even further. The big risk in the EU and specific European countries is that this moves from voluntary codes of conduct to actual laws with significant consequences for non-compliance, so the big US companies are wise to do what they can to play nicely to try to ward off such outcomes.
★ European Firms Including Spotify Sign Letter to EU Asking for Action Against “Gatekeepers” (May 5, 2017)
Google Settles With Italy for $320m Over Unpaid Taxes (May 4, 2017)
Apple files 14-point appeal against European Commission’s $14 billion tax edict – AppleInsider (Feb 21, 2017)
Long story short: Apple has filed its formal appeal of the EU’s action against Ireland regarding Apple’s tax treatment in the country, and it argues for the dismissal of all charges on the basis of a number of different points. That’s not surprising – Apple immediately after the ruling said it would appeal, so this is just that process rolling along. I’ve never been a huge fan of the ruling – it felt like judicial overreach and part of the ongoing spat between the EU and US on taxes and on competition between US and European tech companies rather than something based on actual legal merit. Nevertheless, as I admitted at the time, neither I nor the vast majority of other tech industry commentators are actually experts in EU tax law, and even admitted experts like the Irish authorities, Apple’s accountants and lawyers, and the European Commission’s investigators can actually agree on what the right answer is. We can state opinions all we want, but they don’t actually matter – this case will go to court and at some point a conclusion will be reached which all the parties will have to live with. A move to enable lower-tax repatriation in the US would certainly go some way to bolstering Apple’s case that it already pays adequate taxes in its home market on what it earns in Europe, but Apple has no direct control over that outcome either.
Interesting to see this move go ahead in the wake of the recent EU Ireland tax action. Ireland is obviously a big base for Apple in Europe, and this is mostly about moving the legal home of the iTunes business in Europe, rather than a big physical move. But it’s intriguing to see Apple double down on its presence – legal and physical – in Ireland with all the uncertainty over its tax status there. Apple is, of course, fighting the EU’s ruling with the help of the Irish government, but there’s obviously still a decent chance that things don’t go Apple’s way here.
An investigation which began in 2014 concluded in August 2016 with the EU finding that Apple’s tax arrangement with the Irish government contravened EU tax policy, and requiring that Ireland recoup $14.5 billion in back taxes. The EU had also made similar moves with regard to Starbucks and Fiat as a result of similar investigations, but the numbers involved in the Apple case are far larger. Apple argues that it creates essentially all the value in its products in the US – iPhones and other products are famously “Designed by Apple in California” – and that therefore it repatriates all its profits to the US to be taxed there. The Irish arrangement recognized this argument and the Irish government has been happy to have Apple build a big base in Ireland on this basis, but the EU feels that Ireland’s treatment of Apple is an example of unequal treatment. Part of the reason for all this is that Apple has been keeping huge amounts of cash overseas for years in anticipation of an eventual tax holiday in the US, and so this isn’t just about Apple and the EU but also about a larger battle between US and European tax authorities.
via New York Times