This article was originally published on Forbes.com.
For major tech companies—Google, Apple, Amazon—it must feel as if they’ve landed on Omaha Beach and the entire continent has taken up arms to repel their advance.
Google got the lion’s share of attention last April when, after prolonged negotiations, Margrethe Vestager, the European Commissioner for Competition, issued a “statement of objections” with respect to Google’s purportedly diverting traffic to favor its own comparison shopping sites. Google’s exposure is significant: potentially more than 6 billion. The company would have to rethink its search practices, and therefore its entire European operation, if it cannot placate the regulators.
The case is seen as the biggest antitrust case (at least in the tech sector) since Microsoft’s Armageddon of the 2000s. Yet Vestager has also been busy on other significant fronts. Indeed, one separate prong of her agenda may ultimately prove the most significant on a long-term basis as it certainly affects businesses in all industries. Here, among other examples, the EC is looking into Apple’s low-tax arrangements in Ireland and Amazon’s in Luxembourg—the idea being that favorable tax breaks can create un-level playing fields.
“If one company has higher costs and another company has lower costs solely because of aggressive tax arrangements, then you have a problem,” said Vestager. Here too, Google is under siege; earlier this year, Vestager announced that she might investigate a $185 million tax settlement reached with the UK. The scenario has ideological undertones, pitting the aggressive regulator against Prime Minister David Cameron’s conservative regime.
It must be emphasized that, while the U.S. tech giants have been getting the most attention, all global companies are sorely affected. To wit: Vestager has already ordered Luxembourg to recover about $34 million in unpaid taxes from Fiat. The Netherlands has been directed to recoup about the same amount from Starbucks. Vestager likewise wants Belgium to claw back about $765 million Â from some thirty-five companies, including Anheuser-Busch InBev.
Dr. Frank Montag, a Brussels-based partner at Freshfields Bruckhaus Deringer, explains that, according to EU “State aid” law, tax considerations extended by an EU member state can be prohibited state subsidies if they provide multinationals with preferential treatment over national companies. For example, excess profit exemptions for multinationals as in Belgium raise red flags, adds Montag. High-interest loans to a European branch of a company by another branch based in a low tax country are likewise on the regulatory hit list as those high interest rates reduce taxable profit margins for the European entity even as the money still stays in the corporate coffers.
“I am quite confident that the EC will only be applying and enforcing the State Aid rules with greater frequency to preferential tax rules going forward,” says Montag.
European antitrust regulators thus have a powerful tool in their arsenal; for businesses, tax breaks that seem to be pure windfalls may really be ticking time bombs. Meanwhile, Vestager’s actions have resulted in a complex and sensitive political dynamic via-a-vis the U.S.
On the tax end, it’s likely all welcome news to American liberals apoplectic about corporate tax windfalls of any sort—while conservative interests, including the National Association of Manufacturers (NAM), want to push back against the country-by-country reporting that State aid law entails.
In other areas, the U.S. and the EU may have even fewer interests in common, especially where Vestager’s campaign has ignited concerns in the U.S. that she and the EC are using competition law to, in effect, stifle competition. President Obama himself voiced precisely that concern, urging the EU against “commercially driven decisions” that target American competitors.
“President Obama’s statement underscores the gravity of the potential threat to U.S. tech companies in Europe,” says Eliot Edwards, Director of Public Affairs & Government Relations at Aspect Consulting, a strategic European corporate communications and government relations agency based in Brussels. “U.S. tech firms seem to be in continuous fire-fighting mode in Brussels, from antitrust probes and competition issues, on the one hand, to disputes around privacy and sweetheart tax deals, on the other. They have little choice but to come to an accommodation with Vestager, for the lifespan [expiring in 2019] of the Jean-Claude Juncker Commission at least.”
That said, U.S. companies do certainly have strategic weapons at their disposal. They need to “urgently join forces with bona fide European stakeholders and more cannily leverage whatever political support they have on the ground in individual member states,” says Edwards, especially if the UK exits the EU. In that event, “you can bet your bottom dollar that U.S. companies will face even more problems in Brussels as the Brits would no longer be a moderating influence on some of their more protectionist counterparts.”
Vestager, in turn, insists that her actions are not protectionist; that, in fact, they were prompted, at least in part, by complaints from American companies, notably Microsoft. It’s an interesting position for Microsoft, which was the target of EU competition initiatives in the past. “There’s a long backstory that explains why Microsoft now acts as it does,” says Edwards. “The most glaring difference between Microsoft and Google is that the former has been quick to learn lessons the hard way and, as a result, now boxes clever in Brussels, although, in all fairness, Google has become more sensitive to the cultural peculiarities at work at the EU level in recent months.”
In any event, the political tensions will simmer as long as major cases like Google drag on. And new cases of considerable magnitude are being born every day. For example, in a separate matter brought against Google, it will take years for European regulators to investigate whether Google violated the law by pre-installing Android smartphones with the apps and services that allegedly provide an unduly favorable advantage.
Meanwhile, the agreement on the huge search case reached with Google in February 2014—and hailed by then-European Commissioner for Competition Joaquín Almunia as “far-reaching and creat[ing] a level playing field across Europe”—was never finalized. That agreement included harsh penalties but protected Google’s secret algorithm from regulatory oversight. Vestager, who succeeded Almunia in 2014, now says the EC needs more data to get a “comprehensive” picture, not just Google’s version.
Frank Montag points out that â€“ while Google was perceived by the regulators to have been biding its time as much as possible in order to avoid making changes for as long as possible â€“ there has also been much criticism of the EC for reaching too many settlements.
“Absent final decisions in significant cases, there can be no reliable guidelines—and what businesses need most is predictability,” says Montag. Meanwhile, Vestager has become a veritable regulatory celeb. (She’s the inspiration for the popular Danish TV show Borgen.) Vox populi being vox populi, one can safely assume she’ll stand firm against perceived corporate Goliaths, upping the ante wherever she can.
Yet Montag, for one, praises her consistency and transparency. “American businesses need to remember that European Commissioners have cabinet-level rank; they are responsible for all EU policies from foreign affairs to agriculture, not just narrow regulatory issues,” he says. “In Europe, Vestager has a profile similar to what the Attorney General has in the U.S.”
For even the most judicious politician, however, the hero’s role is hard to resist. For U.S. companies, especially those that still like to think of themselves as feistily iconoclastic, the villain’s role is hard to swallow.
Richard S. Levick, Esq. is Chairman and CEO of LEVICK and a contributing author to Tomorrow.