How Microsoft’s Irish Problems Could Cripple U.S. Tech Companies Abroad

Microsoft (MSFT 1.65%) recently lost its appeal to block the U.S. government's search warrant for a customer's web-based emails stored in its data center in Ireland. Microsoft has argued that the warrant, which was issued in a drug investigation, is illegal and forces the company to break Irish law. Microsoft plans to appeal the ruling again.

One of Microsoft's offices in Ireland. Source: Microsoft.

The government and Microsoft are at odds regarding the reach of the Stored Communications Act, part of the Electronics Communications Privacy Act of 1986 that allows law enforcement officials to obtain digital information through court orders. The government argues that it is the location of the provider -- not the location of the information -- that matters. Microsoft argues that turning over emails from customers in other countries would be "an astounding infringement" of national sovereignty.

Microsoft and its supporters -- which include Apple, AT&T, and Verizon -- also believe that the U.S. government's request could irreparably damage the overseas reputations of American tech and telecom companies. If Microsoft eventually surrenders its emails in Ireland, what would it mean for its business in other countries, and could other tech companies suffer as well?

Is the U.S. government crippling tech companies?
As the world shrinks due to exponential improvements in technology, major issues like privacy, national security, and international jurisdiction arise.

Last year, revelations about PRISM, the NSA's tool for collecting private electronic data from Gmail, Facebook, Outlook, and other services, caused alarm among tech companies, customers, and foreign governments. Last December, eight tech giants -- AOL, Apple, Facebook, Google, LinkedIn, Microsoft, Twitter, and Yahoo! -- joined forces and demanded that the NSA reform its surveillance practices.

The companies have requested five governing principles of surveillance to limit data collection to "specific, known users for lawful purposes" instead of analyzing bulk data from Internet communications. The campaign also requests a transparent framework to "govern lawful requests for data across jurisdictions" to avoid spy-related conflicts between countries. Google, Microsoft, and Yahoo! have also started encrypting their data to shield their users from further NSA surveillance.

Despite these efforts, many countries are distancing themselves from American companies. The German government dumped Verizon for Deutsche Telekom in June, citing surveillance concerns. In May, China banned Microsoft's Windows 8 on its government machines for similar reasons, then raided its offices in an anti-monopoly probe earlier this month. The Chinese government also recently banned government purchases of Apple iPads and iMacs, citing security concerns.

Simply put, if Microsoft allows the U.S. government to grab emails off of its Irish servers, it sets a precedent for the government to circumvent diplomatic channels and grab emails from any country it wishes, as long as the provider is located in America. That's dire news for any company that wants to promote cloud-computing solutions to enterprise customers in overseas markets.

Could this affect other U.S. companies in Ireland?
The U.S. court ruling could also affect other American companies operating in Ireland. Over the past few years, U.S. companies -- including Sara Lee, Actavis, and Medtronic -- bought smaller Irish companies and moved their headquarters to Ireland to reduce their corporate tax rate from 40% to 12.5%. Republicans and Democrats are at odds over these tax practices -- the former calls them "economic refugees", while the latter calls them "corporate deserters".

Other companies headquartered in America, like Microsoft and Apple, use Irish subsidiaries to reduce their taxes. Back in 2012, the U.S. Senate accused Microsoft of using these subsidiaries to avoid paying $6.5 billion in taxes between 2009 and 2011. Apple also barely pays any taxes on its overseas revenue.

Microsoft's Irish subsidiary Round Island One houses $16 billion in Microsoft assets. Source: Google Maps.

It would be hard for the U.S. to touch companies that have already moved their headquarters to Ireland. But the U.S. government could use the ruling against Microsoft to extend its authority over companies that send money through Irish subsidiaries, like Microsoft and Apple, without checking in with either the EU or Irish government.

The Foolish takeaway
The more the U.S. government tightens its grip on tech companies, the more reluctant foreign governments are to work with them. Meanwhile, tech companies don't want to be the pawns of the NSA, but the government's actions speak otherwise.

All of this could have been avoided if the U.S. respected the fact that Ireland falls under EU jurisdiction, and approached the problem through proper diplomatic channels. Instead, the U.S. has now told Microsoft that all of its emails on overseas servers are equivalent to expats and can be subpoenaed at will.

If this trend continues, I wouldn't be surprised to see American tech giants relocate their headquarters overseas -- not to escape taxes, but to distance themselves from the long arm of the American government.