Safe Harbor negotiations are in a critical phase. Here’s an article on potential fallout for Ireland, which is used by many multinationals as an operational and tax base for the EU:
Gavin Kearney has a telescopic view of the threat facing Dublin’s Silicon Docks, the watery frontier of Ireland’s tech sector. He is braced this week for the first of three verdicts that will have sweeping repercussions on both sides of the Atlantic.
Since Kearney founded the encryption business Jumble two years ago, he has watched Ireland come under fire from the European Court of Justice, the European Union and the U.S. Department of Justice.
The cases involve Facebook, Apple and Microsoft and will decide critical issues confronting the tech industry: data protection and privacy, and corporate tax strategies. The results could spoil Ireland’s reputation as a tech hub, spark an exodus of jobs and investment, and force some to pay hundreds of millions in back taxes.
“If somehow Ireland’s data protection was eroded to be more American and less EU, those entities affected may have to relocate some of the operations to restore the balance,” said Kearney, the chief executive of Jumble. “There’s a bit of a perfect storm in terms of the timing of these issues hitting, but it’s a continent-wide problem and not just a standalone country, so we can shore up against it.”
The legal blizzard is expected to hit like this: This week, authorities for the 28 EU countries will decide whether to crack down on certain data transfers from Europe to the U.S. Several weeks later, the European Commission will decide whether the country’s generous tax breaks to Apple were illegal. Finally, the U.S. Court of Appeals for the Second Circuit will rule whether emails stored in Microsoft’s servers in Dublin belong to the company or the client.
“With the new drive to push EU collaboration on taxes and data protection, Ireland has been the odd man out,” said Fredrik Erixon, director of the European Centre for International Political Economy. “In the long term you’re going to see a trend where Ireland is going to have to become like more other countries and foreign investors won’t view them more favorably than other countries. You’ll see a growing skepticism towards the EU in Ireland and an undercurrent of that is already there.”
From toxic wasteland to tech mecca
The stakes could be higher for Ireland than any other country in Europe. Some of the world’s most profitable tech companies have their European headquarters on the Emerald Isle, including Google, Twitter and LinkedIn. The government collected €6.87 billion in corporate taxes last year, up almost 50 percent from the year before. Corporations account for 15 percent of the country’s tax revenue, compared with about 10 percent in the U.K.
The market imploded during the financial crisis, and Ireland went hat-in-hand to seek an €85 billion bailout from the EU.
The speed of technological change is writ large on Ireland’s skyline, workforce and future. The Silicon Docks used to be a toxic wasteland of derelict buildings, warrens for drug users and gangs. Passing naval ships would occasionally anchor there and ardent U2 fans would visit the graffiti-covered studio where the band recorded its debut album Boy.
Around 2004, Dublin’s luck changed when Google became the first large, multinational to put down roots. A tax rate of 12.5 percent, compared with 35 percent in the U.S, helped attract a wave of new businesses to Dublin. In less than a decade, the docks became a tech mecca.
The dot-com boom and reckless lending helped fuel a real estate bubble. The market imploded during the financial crisis, and Ireland went hat-in-hand to seek an €85 billion bailout from the EU. But the country’s skilled workforce and low tax rate has helped Ireland repay its debts faster than any other country.
Flash forward to 2016 and Dublin is again facing a crisis. The threat is slow-moving, like an eroding shoreline. The tech cases will wind their way through appellate courts or the treaty process.
The EU and U.S. are now scrambling to forge a new pact that can withstand future court challenges.
Businesses hate this type of uncertainty. It clouds strategic decisions.
“It is a very risky strategy for a country to take,’’ having such a dependence on low corporation tax, said Seamus Coffey, a lecturer in economics at University College Cork. “It brings in huge numbers of jobs, huge amounts of tax revenue. It’s a huge source of income for the country. Without a replacement, it’s not going to move away from it.”
Dampening Ireland’s draw
And the headaches don’t end there. Ireland’s data protection commissioner was dragged into a high-profile legal battle with privacy activist Max Schrems.
Schrems complained that his data stored by Facebook might not be adequately protected from U.S. mass surveillance when it was transferred from Facebook’s Dublin headquarters to the U.S. The Irish commissioner refused to investigate. The dispute went to the European Court of Justice, which sided with Schrems and killed a 15-year-old “safe harbor” agreement that gave more than 4,000 U.S. companies legal cover to transfer data across the Atlantic.
The EU and U.S. are now scrambling to forge a new pact that can withstand future court challenges. If there is no deal by Wednesday, EU data protection authorities will decide whether to give them more time or start investigating complaints and companies.
“If the issue of safe harbor continues to be problematic,” said Simon McGarr, a lawyer for Digital Rights Ireland, an advocacy group, “it will make Ireland an attractive location for data [servers].”
However, that allure may be tarnished if the 2nd U.S. Circuit Court of Appeals rules the Justice Department can have access to data stored in Microsoft’s servers in Ireland, without going through Irish law enforcement. It would trouble companies and citizens if the U.S. is granted power to retrieve data held outside of its borders, and could hit Ireland’s ability to attract the world’s largest tech players.
Microsoft is fighting to protect emails linked to a drug trafficking investigation, saying they belong to the user. The company has pledged to appeal to the U.S. Supreme Court if it loses.
Kearney worries most about that case. His company, Jumble, encrypts emails with a push of a button. But one of his competitors, Lavabit, was used by Edward Snowden and went out of business in 2013, after receiving gag orders and demands from the U.S. to hand over encryption keys.
“Being Irish gives us some protection but it’s a perpetual concern,” Kearney said. “We’re never fully insulated from that behavior. We would potentially look at moving our jurisdiction to a place that’s more beneficial. It’s an unlikely scenario but it’s worth keeping an eye on.’’
And then there’s the Godzilla decision: Ireland’s tax regime.
The Commission has accused Ireland of allowing Apple to shield billions in profits from taxes, giving the iPhone-maker a cutting edge over rivals. The penalty could be as much as €8 billion in back taxes, according to Bloomberg. Ireland has said it will appeal a negative ruling to the European Court of Justice.
Defeat in the courts would open up other companies to retrospective action and lead them to review their tax exposure. And although Ireland is unlikely to change the tax rate, it could damage Ireland’s reputation as a tech magnet.
The Commission’s verdict on Apple is expected within months.
“The old way of integrating Europe and allowing national governments discretion to conduct their business has progressively been eroded,” Erixon of ECIPE said. “An EU which moves stronger into issues of core national sovereignty is asking for trouble. If you step into tax harmonization in a detailed way, there’s going to be a reaction.”
Jenni Duggan contributed to this article.