It has been bad quarter for Big Tech.
In the EU, Apple has been ordered by its highest Court to pay back taxes plus interest of 21 billion to Ireland. In the USA, a federal judge has decided that Google’s monopoly over online searches and related ads violated the law. In Australia, Facebook has acknowledged that it is using every adult Australian user’s public image and post for AI training, and giving them no way to opt out.
These momentous developments have far reaching implications on the way these Tech behemoths conduct business globally. Here are the details.
RULING 1: The EU’s top court has ordered Apple to pay $21 billion to Ireland.
The iPhone manufacturer has had a preferential tax agreement from Ireland for years, allowing Apple to pay less than 1% tax on its enormous global profits. However, the EU’s highest court decided in September 2024 against an appeal by Apple that a 2016 ruling that it should pay taxes should be set aside. As a result, Apple now owes the Irish government €13 billion ($21.5 billion) in taxes plus interest.
Interestingly, although Ireland, along with Apple, had previously opposed the bill’s enforcement, the country now plans to put the funds into a sovereign wealth fund (Linder, 2024)
What was the Tax Agreement Between Apple and Ireland?
Due to Ireland’s low corporate tax rate (12.5%), lower than other European nations, it has long been seen as a tax haven for multinational corporations. France levies corporate earnings at a rate of 25%, while most other European nations impose rates higher than 20%.
However, in 2016, an EU Commission probe found that the actual corporate tax rate was even lower than 12.5% for Apple. In fact, due to agreements between the tech giant and the Irish government, Apple was paying less than 1% of its revenues as taxes. Offering Apple tax breaks was part of Ireland’s strategy to persuade the business to locate its European headquarters in Ireland.
The 2016 EU case found that Apple’s EU, African, Middle Eastern, and Asia-Pacific markets were handled by two Irish subsidiary businesses that the corporation had created. These companies’ earnings were then transferred to the US parent company.
After a two-year probe, the EU Commission found that the Irish government has, since 1991, let Apple record the majority of its revenues on goods and services sold in the EU in a “head office” that is not governed by Irish tax laws. This is because this “head office’ is, in effect, registered nowhere according to the EU Commission probe. Consequently, the agreement allowed Apple to pay as little as 1 to 0.005 percent in taxes on its revenues in certain years between 2003 and 2014 (Linder, 2024).
The eight-year prosecutor of the case, EU Competition Commissioner Margrethe Vestager, referred to the court’s ruling in 2016 as a “… huge win for European citizens and tax justice. The commission’s investigation concluded that Ireland granted illegal tax benefits to Apple, which enabled it to pay substantially less tax than other businesses over many years,”
Apple’s agreement was referred to as “selective treatment“, because Ireland did not extend the same terms to other companies.
Apple appealed the 2016 decision, but in September 2024, the European Court of Justice upheld that 2016 decision, i.e., that Ireland had permitted Apple to use this arrangement to avoid paying billions of euros in taxes on the company’s Irish profits.
What Do Australian Tech Businesses Like Apple, Pay as Corporate Taxes?
The corporate tax rate in Australia is 30%. However, the Australian Tax Office reported that although Apple’s Australian business generated $9.33 billion in revenue during the 2021–22 fiscal year, its taxable income was just $459 million, resulting in having to pay only $137.3 million in taxes (just 1.5% of revenue) (ATO, 2023). This sort of tax avoidance happens frequently. For example, despite earning nearly $1.15 billion in revenue over the same fiscal year, Facebook only paid $30.2 million in taxes.
According to the ATO’s corporate tax transparency report published in the fiscal year 2021–22, almost 800 big businesses paid no taxes using a strategy known as “profit shifting” to lower the amount they owe the ATO.
Big tech companies shift their profits offshore by claiming that the value-add of the products and services is in the Intellectual Property (IP), i.e. the research and development (R&D) that goes into creating each product. It is this IP that they then pay to the parent company of Apple, which they treat as a completely separate entity (Khadem 2023).
Therefore, even if the company makes money in Australia from selling products and services like iPhones, its earnings structure permits it to pay 12.5% tax in Australia instead of 30%.
Facebook’s parent company Meta, a company registered in Ireland as well, operates under similar tenets, contending that the majority of its earnings from social media advertising come from selling Meta’s intellectual property to Facebook’s Australian subsidiary rather than from selling ads on the platform itself.
Several governments have attempted to combat this in various ways. One such measure was the news media bargaining code that the Australian government implemented in 2021, which required businesses like Meta to pay for Australian news material that appeared on their platforms. Earlier this year, however, Meta made the announcement that it will no longer finance those deals (Roberts and Doran, 2024).
Governments could legislate a number of other regulations to prevent the transfer of profits abroad, such as recognising acquisitions made by subsidiaries as transfers of intellectual property in order to permit appropriate profit taxation. However, such legislation needs a coordinated approach globally. The biggest problem preventing such a global approach is that governments believe it is really hard to go alone — and as such there’s a strong sense that the world should move and have similar laws to stop it this most unethical tax avoidance schemes (Roberts and Doran, 2024).
RULING 2: US Judge Rules that Google has a Monopoly on Search.
A US federal judge has decided that Google’s monopoly over online searches and related ads violated antitrust law. The judge stated that in order to maintain its dominant market dominance and to guarantee that its search is the default on smartphones and browsers, Google paid $US26.3 billion ($41 billion) in 2021 to the smartphone manufacturers.
The verdict is the first significant finding in a string of litigation challenging purported internet company monopolies, being the US Department of Justice’s (DOJ) first win against a monopoly in more than 20 years. The DOJ, which had sued the search engine behemoth for controlling about 90% of the online search market and 95% of the smartphone industry, is celebrating a major victory with the ruling.
Judge Amit Mehta’s ruling in the Google case centred on the massive sums of money the company paid firms like Apple and Samsung to make its search engine the default on their smartphones and browsers. Judge Mehta wrote that:
“These ‘exclusive agreements’ offered Google access to scale that its rivals cannot match” and left other search engines “at a persistent competitive disadvantage. By effectively ‘freezing’ the existing search ecosystem in place, the payments “reduced the incentive to invest and innovate in search” (Corrigan, 2024).
US District Judge Amit Mehta observed, “The court reaches the following conclusion: Google is a monopolist, and it has acted as one to maintain its monopoly.”
Attorney General Merrick Garland declared, “This victory against Google is a historic win for the American people. No business, no matter how big or powerful, is above the law. Our antitrust rules will remain strictly enforced by the Justice Department.”
The decision by Judge Mehta to invalidate Google’s primary source of income opens the door for a second trial to identify potential remedies, like mandating that the business cease giving smartphone manufacturers monthly payments in the billions of dollars to have Google appear as the default search engine on new phones.
In the case, Google was portrayed as a technological bully that deliberately stifled competition to safeguard a search engine that has grown to be the heart of an enormously profitable digital advertising business that brought in close to $US240 billion in revenue last year (Early and Robins, 2024).
The Power of Google’s Search Monopoly (8.5 billion queries per day).
According to a recent report released by the investment firm BOND, Google’s search engine today processes an estimated 8.5 billion requests a day worldwide, roughly doubling its daily volume from 12 years ago.
Attorneys for the DOJ contended that Google’s monopoly allowed it to charge advertisers unnecessarily high fees while also enjoying the luxury of not having to spend more time or money on search engine quality improvements, a careless strategy that injured users.
The trial’s evidence, according to Judge Mehta, demonstrated the significance of the default settings. The judge stated the fact that 80% of searches on the Microsoft Edge browser were conducted via Microsoft’s Bing search engine demonstrated the viability of other search engines in the event that Google was not locked in as the predefined default choice.
The above ruling is a significant blow for Google and its parent company, Alphabet, which had adamantly maintained that the reason for its success was the overwhelming desire of users to use a search engine that is so adept at what it does that it has come to be associated with doing online research. In fact, even Judge Mehta asserted unequivocally that “Google is widely recognised as the best [general search engine] available in the United States,” attributing much of the company’s supremacy to the quality of its offering.
Google’s head of worldwide affairs, Kent Walker, announced that the corporation planned to file an appeal against the judge’s decision, stating that, “This decision recognises that Google offers the best search engine, but concludes that we shouldn’t be allowed to make it easily available.”
Impact of the Ruling on the AI Industry
Many experts have speculated the landmark decision will make judges more receptive to antitrust action in other ongoing cases against the Big Tech platforms, especially with regards to the burgeoning AI industry. Today, the AI ecosystem is dominated by many of the same companies that the government is challenging in court, and those companies are using the same tactics to entrench their power in AI markets.
Today, a similar type of arrangement to what Google had is cropping up in the AI sector. Companies like Google, Amazon, and Microsoft have cemented numerous partnerships in which developers agree to use — sometimes exclusively — the company’s cloud services in exchange for resources like cash and cloud credits. Given the high cost of computing hardware and developers’ incessant demand for this infrastructure, the tech giants can often negotiate additional concessions like equity, technology licenses, or profit-sharing arrangements. Though these cloud partnerships are structured differently than the deals at issue in the Google case, they similarly serve to lock up revenue streams and possibly exclude disruptive rivals from lucrative distribution channels.
Should the courts continue to rule against tech giants in ongoing antitrust cases, they would equip U.S. authorities with powerful ammunition to challenge the companies in the AI industry. Effective enforcement could help foster a new generation of startups looking to build types of responsible, socially beneficial AI tools that may not otherwise reach the market.
ADMISSION: Facebook admits that Australians cannot opt out from their public images and posts being used for AI training.
Melinda Claybaugh, global privacy director of Meta, the parent company of Facebook, was asked during an Australian government questioning session whether the social media behemoth was collecting Australians’ personal data to develop its generative AI technologies.
At first, she denied the accusation, but after an investigation, finally admitted that it is collecting every adult Australian user’s public images and posts on its social media network for AI training but giving them no way to opt out. Because it is not compelled by privacy law to do so, the firm does not provide Australians with the same opt-out option as it offers for users in the EU.
After much questioning, Ms. Claybaugh admitted that Meta decided to scrape all of the images and all of the text from every publicly accessible post on Instagram or Facebook since 2007 unless there was a deliberate decision to set them to ‘private’.
The Facebook official was unable to respond when asked if the firm collected information from users who were younger than 18 when they registered for an account but were now adults. It appears that public images of children on their parents’ accounts were also being collected.
Australian users could set their data to private, according to Ms. Claybaugh, but European users could opt out due to rules that were in effect there.
According to her, Meta needs a large amount of data to provide the most “flexible and powerful” AI tool possible, as well as a safer product with fewer biases.
Users in the US and the EU were informed by Meta in June that, unless they choose to opt out, the company would use their data to train its generative AI products, like Meta AI. Due in part to the legal ambiguity around the stringent privacy rules that apply in those countries, the company offered customers in the EU the option to opt out.
Ms Claybaugh stated that:
“In Europe there is an ongoing legal question around what is the interpretation of existing privacy law with respect to AI training. As things are unclear, we have put off releasing our AI solutions in Europe. Therefore, you are accurate that consumers in Europe have the option to opt out. I will state that the current regulatory environment directly contributes to the ongoing discussion in Europe” Evans (2024).
Further, Facebook executives were unable to confirm if Australians would eventually be given the choice to opt out.
Summary
The rulings and admissions made by Tech Behemoths the third quarter of 2024 may have a lasting impact on how they conduct business globally. These range from illegal transfer pricing arrangements between Apple and Ireland, to antitrust behaviour by Google. Facebook has also admitted what would surely be unethical behaviour in collecting public information from Australians without providing them with an opt-out choice.
These have far reaching implications on future developments. For example, we will never know how many technological breakthroughs died on the vine thanks to Google’s monopoly over internet search. But with the right approach to competition policy, we can promote a healthier, more dynamic ecosystem for AI.
References
ATO (2023), “Highlights of the Corporate tax transparency report 2021-22”, Australian Tax Office, 9 November 2023. https://www.ato.gov.au/businesses-and-organisations/corporate-tax-measures-and-assurance/large-business/in-detail/tax-transparency/corporate-tax-transparency-report-2021-22/about-this-report
Corrigan, Jack (2024), “What Google’s Antitrust Defeat Means for AI”, Time Magazine, August 29. https://time.com/7015493/google-antitrust-defeat-ai-monopolies/
Evans, Jake (2024), “Facebook admits to scraping every Australian adult user’s public photos and posts to train AI, with no opt-out option” ABC News, September 11. https://www.abc.net.au/news/2024-09-11/facebook-scraping-photos-data-no-opt-out/104336170
Khadem, Nassim (2023), “More than 800 large companies paid no tax in 2021-22, Australian Taxation Office reveals”, ABC News, 9 November. https://www.abc.net.au/news/2023-11-09/831-large-companies-paid-no-tax-in-2021-22-ato-tax-transparency/103079948
Linder, Esther (2024), “Apple owes $21b to Ireland in taxes after a sweetheart deal was deemed illegal. Would this happen in Australia?”, ABC News, September 11. https://www.abc.net.au/news/2024-09-11/apple-to-backpay-13b-euros-to-ireland-in-corporate-tax/104336492
Roberts, Georgia and Doran, Matthew (2024), “Meta won’t renew commercial deals with Australian news media, ABC News, 1 Mar, https://www.abc.net.au/news/2024-03-01/meta-won-t-renew-deal-with-australian-news-media/103533874