Unpacking the European Union’s recent tech policy rulings

To the EU’s detractors on the far left, the European project is imbued with “neoliberalism” and in bed with large corporations; to those on the right, it is a bureaucratic monstrosity stifling competition and burdening the European economy with pointless regulation.

Two tech-related decisions by the European Court of Justice (ECJ)
this week illustrate that the reality is more complicated. US policymakers
should take note and engage with the EU as it currently exists — and not with
its ideological caricatures.

In the first case, concerning Ireland’s tax breaks extended to Apple, the Court annulled the European Commission’s (EC) decision from 2016, according to which Ireland ought to seek €13bn in lost tax revenue from Apple since 1991. The Commission’s move, spearheaded at the time by its competition tzar, Margrethe Vestager, while applauded by those who would like to see the past 30 years of tax competition in Europe reversed, was highly problematic.

A statue of Justice is pictured during a protest outside the EU Commission headquarters as the European Court of Justice is set to rule a day later whether the EU-Canada free trade deal is in line with EU law in Brussels, Belgium, April 29, 2019. REUTERS/Francois Lenoir

Most importantly, it sought to undo the distinction between the
legitimate corporate taxation policy of individual member states and illegal
state aid. The revenue that was supposedly “lost” did not come from explicit
tax breaks extended to Apple through the Irish government’s discretion. The
estimated “loss” resulted from a specific accounting method through which
Apple, with the acquiescence of Irish authorities, determined its taxable
profit in Ireland. That is a highly abstract question since Apple’s income is
largely driven by its intellectual property, which is hardly straightforward to
valuate.

According to the Court (and just like I argued four years ago), the EC failed to demonstrate that the tax regime under which Apple operated was distortionary. If it appeared ‘special,’ it was not because the Irish government went out of its way to shower the company with favors — it simply applied its own rules to a complex and unique global company.

So kudos to the ECJ for curbing the EU’s overreach —
especially given that it came from one of the most popular figures in the
Commission. After all, Ireland’s competitive tax regime was key to lifting it
to the echelons of the world’s most prosperous economies, and undoing that
regime retroactively would have created considerable uncertainty, given
that essentially all member states have incentives to structure their corporate
tax systems in order to be friendly to businesses and investors.

In the second tech-related ruling, released the following day, the Court also pushed back against the EC. This time around, however, there are some significant wrinkles around the decision to scrap the so-called ‘EU-US Privacy Shield’ which enabled transfers of personal data between the EU and the United States, while in compliance with the EU’s restrictive General Data Protection Regulation. According to the Court, US protections of personal data are not equivalent to the European ones and do not grant Europeans actionable recourse in court against the decisions of US authorities.

In practical terms, WSJ reports, the ruling may force companies “to decide between a costly shift toward data centers into Europe or cutting off business with the region.” Such a decision may be straightforward for the tech giants of today, which have plenty of resources to accommodate additional costs of compliance.

The question, however, is how it ends up shaping the incentives of the Facebooks and Amazons of the future, which will have to take it into consideration as they grow their businesses. For small but promising players which may have otherwise unseated the present incumbents, a balkanized internet might become a serious barrier to growth. Furthermore, the ruling should not be viewed in isolation — some voices in the European debate suggest that the EU build a Chinese-style firewall to buttress its own regulation of the internet.

In short, in tech as in other sectors, the EU is a mixed bag and product of oft-conflicting interests and ideas. What US policymakers need to keep in mind, however, is that European countries are firmly committed to the project. Therefore, the path forward to a liberalization of digital markets and data flows across the Atlantic does not go through bilateral deals with member states but through Brussels — perhaps via a deal like the Transatlantic Trade and Investment Partnership, which was unfortunately shelved in the early days of the Trump administration.