It has been hard to miss the news lately about US corporate inversions – the practice of purchasing or merging with a foreign entity and then changing headquarters to save on high US corporate taxes. The topic was the cover of July’s Fortune magazine in an article called “Positively Un-American.” President Obama and many in congress have jumped on the issue, declaring that US-based multinational firms are being unpatriotic by moving their corporate addresses overseas in order to reduce their taxes.
Yet in the same news cycle, a US District Judge may have created the ultimate incentive for US-based tech companies to invert while throwing gasoline on the fiery issue of international data sovereignty and privacy.
At the end of July US District Judge Loretta Preska in New York ruled against Microsoft, granting US government agencies the authority (sometimes with a warrant and sometimes without) to reach into a US-based company’s data, regardless of where the data and data center is located. This followed a ruling from a lower court, in which US Magistrate Judge James Francis in New York ruled that a search warrant can be applied outside the country. In this particular case, Microsoft owned and operated a foreign subsidiary company based in Dublin, Ireland.
This ruling makes foreign sovereignty irrelevant. It also makes the EU’s data privacy and protection laws irrelevant, despite European authorities having repeatedly said that regardless of where a company operating in the EU is headquartered, that subsidiary must abide by EU law with respect to its activities within an EU country.
Furthermore, the ruling means that non-US citizen users of Microsoft’s cloud services — and other global cloud providers such as Amazon, Google, Yahoo, Facebook, and Twitter, with a headquarters in the US — are not immune from having their data handed over to the US government for law enforcement or intelligence purposes. All of these firms have been steadily building out data centers across the globe to better serve international users and comply with other legal issues surrounding data.
So let me get this straight: a US-based company is unpatriotic if it inverts to avoid higher US taxes but now the only way this company can compete in the global cloud market is to not be based in the US?
The key phrase above is “with a headquarters in the US” which brings me back to the seemingly inevitable conclusion from Judge Preska’s ruling, should it hold up: why wouldn’t all US tech companies that are competing in the global cloud market invert? Not just to get better tax rates but to grow its business outside of the US and ultimately survive against non-US-based competitors.
About the Author: Joshua Beil (@joshbeil) is the Director of Market Strategy and Research for Parallels, the leading provider of automation and virtualization software to the web hosting community. Previously, Josh was the Director of Social Media & Technology at a Level 3 Communications where he provided strategic and tactical sales support. He holds a Certificate in E-Business from UCSC Extension, and he graduated with honors from the University of California at Santa Cruz with a major in Psychology.