Commercial Awareness Update – W/C 9th February 2020

The round-up of the stories that a budding Student Lawyer should be aware of this week. Sign up here to get these updates in your inbox every week.

The Coronavirus Outbreak: New Year New Epidemic?

Article by Gina Asadi (recent BPP LLM Legal Practice (Solicitors) graduate)

Recent times have not been gentle on China. Summer of 2018 saw the world’s two biggest economies engrossed in a trade war; fast forward to the summer of 2019 where instability was caused due to the Hong Kong protests. These two events have caused a strain on the Chinese economy; however, many were hopeful that the new year will mean a new chapter, with the US and China finally reaching a middle ground on the trade war.

However, the new year began with a new outbreak. The coronavirus seems to owe its origins to the City of Wuhan’s seafood market where wild animals are sold illegally; with many suspecting that the virus comes from bats. As of 31^st January, China has over 31,150 cases and 636 deaths. With the number of cases rising rapidly, the World Health Organisation has declared the coronavirus outbreak as an international public health emergency.

Looking beyond the outbreak as a public health emergency, it is also seen as a global economic emergency. The coronavirus is already damaging the Chinese economy and local businesses, with China’s shares falling more than they have in the last four years. It’s been reported that the government has extended the Lunar New Year holiday by three days and companies have advised their staff to work from home. These warnings have driven Chinese consumers to hide away in their homes; meaning restaurants, cinemas, shops and transportation are all losing out on business. For example, global businesses such as, Ikea and Starbucks have closed their operations in China as a result. The lack of consumer spending and closing of businesses has meant that the Chinese economy is already slowing down.

The Chinese economy is not the only one feeling the effects of the coronavirus outbreak. China is one of the most important players in the world economy. As a result of the slowdown in China, financial markets globally have been affected with markets around the world falling lower than they were a month ago. Further, companies around the world are feeling pressure due to the closure of Chinese factories and plants; as companies rely heavily on Chinese factories and plants, that usually require cheaper overheads, to make their products for them. Companies from big retailers to car makers to tech giants are all suffering from the disruption of supply chains that has resulted from this outbreak. For instance, Apple relies on Chinese suppliers to assemble its products, these suppliers are currently closed until mid-February leading Apple to face shortages.

The coronavirus has left no industry unharmed, even law firms will feel the effects. Many law firms have offices in the region and the disruptions might lead some of these firms to close down their offices and leave the region. Further, international law firms might find a drop in the commercial deals that usually have a link to China.

You can read more here, here and here.

Apple Fined for Deliberately Slowing Down Old iPhones

Article by Sarah Mullane 

French regulator, the DGCCRF, has imposed a €25 million fine (£21 million pounds) on tech conglomerate Apple for deliberately lowering the performance of their older iPhone models.

According to Apple, their decision to slow down the older iPhones was in order to “prolong the life” of the devices, however, France’s competition and fraud watchdog found that consumers had not been appropriately warned prior to Apple imposing the changes via their ISO updates.

Following questions about the performance of their phones, Apple had released a statement in 2017 confirming that older models had been slowed down due to their age, but that this was not done to encourage people to upgrade, as had been speculated. In their statement, Apple said that the updates provided were intended to smooth out battery performance, as the older lithium-ion batteries were causing phones to shut down in order to protect their electronic components.

According to the French regulator, this year Apple had committed the “crime of deceptive commercial practice by omission” by not displaying a notice on its French-language website informing consumers that installing the IOS updates would slow their devices.

Apple has not contested this claim and has agreed to settle with the watchdog by paying the fine imposed. In addition to paying the fine, Apple has also updated their French language website with a statement confirming that they had “committed unhealthy business practices” in addition to informing consumers that the fine has been paid and that it had resolved the issue with the regulator.

You can read more here and here.

Facebook and IRS gear up for $9 billion U.S. Tax Court Fight

Article by Mared Davies 

The social media giant is engaged in a face off with the tax agency in a rare trial to acquire billions that the IRS thinks Facebook owes – in a case that could cost the Company over $9 billion and revolutionise the government’s ability to crack down on companies’ efforts to move profits to low-tax countries.

The Backstory

When former Google exec Sheryl Sandberg joined Facebook in 2008 to mentor a 23-year-old Mark Zuckerberg, she reportedly urged him to set up shop in Dublin, Ireland. Like many other U.S. tech companies, she planned that Facebook would establish operations in Ireland for the friendly tax rate. Accordingly, Facebook created an Irish subsidiary that licensed tech from the U.S. parent company. Two parts of the same company are technically allowed to do business with each other but only at a fair price for the assets. The IRS maintains that the Irish Facebook paid the American Facebook less than it should have because it wanted to avoid paying 35% in taxes – then the U.S. corporate tax rate. Since then, the IRS has come up with a bill of $9 billion which is roughly equal to FB’s global tax bill for 2018 and 2019 combined.

In response, Facebook has tried to paint a portrait of the company as young, risky and slightly naive; one which claims to have had no mobile advertising revenue, nascent international business, and unproven digital advertising products. The low value represented the uncertainty of the Company’s future.

This argument hasn’t done much to quench the IRS’ fire though – which argues that in 2010, FB’s trajectory was up and to the right and the assets were worth at least double what FB calculated. The government agency also claims to have evidence (internal emails) that shows execs set up the Irish operation mainly to take advantage of the tax benefits.

The Take-away

Despite being decimated by budget cuts, the IRS is mounting a last-gasp charge to rein in the many U.S. corporations scattering profits around the world. A trial is scheduled for February but it’s likely that we will have to wait months to find out whether it is successful.