Minimum Competence - Daily Legal News Podcast
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Legal News for Tues 2/6 - Feds Silent on Trump Ballot Issue, TikTok v. Universal, CA Ammo Background Check Law Upheld, SEC Treasury Dealer Rule and AI Utility in Transfer Pricing
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Legal News for Tues 2/6 - Feds Silent on Trump Ballot Issue, TikTok v. Universal, CA Ammo Background Check Law Upheld, SEC Treasury Dealer Rule and AI Utility in Transfer Pricing

US Gov's silence on Trump's ballot battle, TikTok vs Universal Music AI copyright standoff, CA's ammo background check law upheld, SEC's new Treasury dealer rule and Column Tuesday.
Transcript

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A column labeled "Tuesday," pencil sketch.

This Day in Legal History: The Permanent Court of Arbitration is Established

On this day, February 6, 1900, a pivotal moment in the realm of international law unfolded with the establishment of the Permanent Court of Arbitration (PCA), marking the inception of the first international tribunal dedicated to resolving disputes among nations. This historic event was precipitated by the ratification of the 1899 Convention for the Pacific Settlement of International Disputes, setting a cornerstone in The Hague, Netherlands. The PCA's creation underscored a global aspiration towards peaceful resolution of conflicts, departing from the traditional reliance on military force and diplomatic pressure.

In the years that followed, the PCA's foundational principles and structure were further refined and strengthened by the 1907 Convention for the Pacific Settlement of International Disputes. These conventions collectively laid down the legal framework and procedural norms for international arbitration that continue to guide the PCA's operations.

Now, more than a century later, the PCA stands as a testament to the enduring commitment of the international community to the principles of justice, peace, and cooperation. Housed in the iconic Peace Palace in The Hague, the PCA has grown to include 109 member countries, each pledging to resolve their disputes through arbitration rather than warfare.

Throughout its history, the PCA has played a crucial role in mediating conflicts that span a wide range of issues, from territorial disputes to environmental concerns, and from maritime law to international investment. Its proceedings and rulings have not only resolved conflicts but have also contributed significantly to the development of international law.

Today, as we commemorate the founding of the PCA, it serves as a reminder of the power of diplomacy and the potential for international law to foster a more peaceful and just world. The legacy of the PCA continues to influence contemporary legal thought and practice, reinforcing the importance of dialogue, understanding, and legal arbitration in the international arena.


The federal government has notably refrained from commenting on Donald Trump’s legal battle to remain on Colorado's 2024 primary ballot, despite previously engaging in Supreme Court cases concerning major political and legal issues. This silence, particularly from the Solicitor General's Office, seems to reflect a cautious approach to avoid involvement in disputes directly affecting presidential election outcomes. Trump's legal team is set to argue that the Colorado Supreme Court incorrectly ruled him disqualified from office due to his actions during the January 6, 2021, Capitol riot, a decision with significant implications for his eligibility in upcoming primaries.

Historically, the federal government's stance in similar high-stakes election cases, such as Bush v. Gore, has been to abstain from taking a position, suggesting a consistent strategy to steer clear of cases with direct political ramifications. Observers and legal experts speculate that the decision to remain silent in Trump's case, like past instances, is driven by the political sensitivity of the matter and the desire to maintain the perception of impartiality in election-related legal challenges. The Solicitor General's role as an educator and policy explainer to the court, coupled with their selective involvement in cases, highlights the nuanced considerations behind the government's engagement in Supreme Court litigation.

This careful positioning underscores the complexities of navigating legal disputes that intersect with political dynamics and the constitutional implications of election law. The absence of federal input in Trump's case reflects a broader trend of cautious engagement by the Solicitor General in politically charged cases, emphasizing the delicate balance between legal principles and political considerations in the administration's approach to Supreme Court litigation.

US Silence on Trump Ballot Battle Signals Caution Over Election


The recent licensing dispute between Universal Music Group and TikTok Inc. highlights the growing complexities introduced by AI-generated music in the music and social media industries. Universal's decision to remove its artists' music from TikTok, citing concerns over AI-generated recordings diluting royalties for human artists, marks a significant standoff that could reshape future negotiations and the use of AI in content creation. This conflict reflects broader industry challenges with AI, mirroring disputes in other creative sectors over copyright infringement and the impact of technology on traditional revenue models.

Both Universal and TikTok benefit from their partnership, with TikTok serving as a promotional platform for Universal's artists and music. However, the disagreement over AI-generated music's role and its potential to reduce reliance on licensed content brings to light the strategic and financial implications for both parties. Legal experts and industry observers are closely watching the dispute, recognizing its potential to set precedents for how AI-generated content is managed and compensated across platforms.

The public nature of this dispute is unusual in an industry where such negotiations often occur behind closed doors, indicating the high stakes involved. Artists signed with Universal, such as Noah Kahan and Yungblud, have voiced their perspectives, highlighting the personal and professional impacts of the standoff. The debate extends to songwriters and music publishers, who advocate for fair compensation and protections against the devaluation of human creativity by AI.

This standoff between Universal and TikTok underscores the ongoing negotiation between leveraging new technologies for innovation and ensuring artists and creators are fairly compensated. As AI continues to evolve, its integration into creative industries will necessitate careful consideration of legal, ethical, and economic factors to balance innovation with the rights and livelihoods of human creators.

AI Fight Complicates TikTok, Universal Music Licensing Standoff


The 9th U.S. Circuit Court of Appeals has ruled that California can continue enforcing its law that mandates background checks for ammunition purchases, temporarily suspending a previous decision by U.S. District Judge Roger Benitez that declared the law unconstitutional. This decision came from a divided panel, with a 2-1 vote in favor of maintaining the law while the state appeals Judge Benitez's ruling, which he argued violated the Second Amendment right to bear arms. Judges Richard Clifton and Holly Thomas, both Democratic appointees, supported the stay, whereas U.S. Circuit Judge Consuelo Callahan, a Republican appointee, dissented.

California Attorney General Rob Bonta celebrated the decision, highlighting the importance of the state's ammunition laws in saving lives and ensuring they remain in effect during the ongoing legal defense. The law, which was challenged by individuals including Olympic gold medalist shooter Kim Rhode and the California Rifle & Pistol Association, requires gun owners to undergo background checks to buy ammunition and pay for a four-year ammunition permit. This measure, initially approved by California voters in 2016 and later amended by legislators to require background checks for each ammunition purchase starting in 2019, faces continued opposition from gun rights advocates.

The legal battle reflects wider national debates on gun control, especially in the wake of the Supreme Court's June 2022 ruling in New York State Rifle & Pistol Association v. Bruen, which recognized an individual's right to carry a handgun in public for self-defense and set a new standard for evaluating firearm laws. Judge Benitez's rejection of California's ammunition background check law cited a lack of historical precedent for such regulations, a point of contention that underscores the ongoing struggle between state efforts to regulate firearms and ammunition and the constitutional protections of the Second Amendment.

California ammunition background check law can remain in effect, court rules | Reuters


The U.S. Securities and Exchange Commission (SEC) is poised to implement a new rule requiring proprietary traders and firms frequently dealing in U.S. government bonds to register as broker-dealers, introducing them to a regime of enhanced scrutiny. This initiative is part of a comprehensive strategy aimed at addressing structural deficiencies in the $26 trillion Treasury market, which have been identified as contributing to liquidity issues. By mandating registration for entities trading over $25 billion in Treasuries across a majority of the past six months, the rule intends to impose capital, liquidity, and other regulatory requirements on a sector that has become increasingly vital for market liquidity.

Scheduled for a vote by the SEC's commissioners, the rule targets up to 46 proprietary trading firms, seeking to integrate them more closely into the regulatory framework governing Treasury market dealers. Critics, including prominent investors and industry groups, have expressed concerns that the rule's broad criteria may inadvertently ensnare corporations, insurers, and pension funds, potentially exacerbating liquidity challenges rather than alleviating them. Despite these criticisms and calls for moderation in the rule's application, the SEC has highlighted the value of industry feedback without committing to specific adjustments.

The adoption of this rule marks a significant step in what is described as the most substantial renovation of the Treasury market in decades, with the potential to alter trading behaviors and the operational landscape for a wide range of market participants. The outcome of the final rule's wording remains closely watched, as it could dictate a pivotal shift in how entities engage with the Treasury market, balancing the push for transparency and stability against the risk of unintended consequences on market liquidity.

In other words, in plain English, this new rule is a big deal because it's part of the biggest changes to the Treasury market we've seen in years. It could really change how people trade and work within this market. Everyone is keeping an eye on the exact language of the rule because it will play a key role in shaping the future of trading in government securities. The goal is to make trading more open and stable, but there's a bit of worry about whether this might make it harder to buy and sell quickly, which could shake things up for everyone involved.

US SEC set to adopt Treasury market dealer rule as part of market overhaul | Reuters


In my column this week, I explore the transformative potential of artificial intelligence (AI) and machine learning in enhancing transfer pricing tax transparency. 

By way of very brief background, transfer pricing refers to the pricing of goods, services, and intellectual property when these are exchanged between divisions, subsidiaries, or affiliated companies within the same multinational enterprise. For example, if the Coca-Cola Company owns a subsidiary in Country A that develops the secret recipe for Coca-Cola and another subsidiary in Country B that manufactures the drink, the price set for transferring the recipe (an intangible asset) from Country A to Country B is subject to transfer pricing regulations. This practice is crucial for determining the income and expenses of each entity, thereby affecting the taxable income reported in different countries with different tax rates. Transfer pricing is closely regulated by tax authorities worldwide to prevent tax avoidance, ensuring that transactions between related parties are conducted at arm's length—that is, under conditions and prices that would apply if the entities were unrelated. The complexity of transfer pricing lies in its need for meticulous documentation and compliance with international guidelines, such as those set by the Organisation for Economic Co-operation and Development (OECD), to justify the prices set for these internal transactions. 

In other words, using the above Coca-Cola example, ideally acting as Coke I would want to shift income from a high-tax country to a lower-tax country. One way to do that would be to “charge” the subsidiary that manufactures the soda a very high cost for the recipe, assuming I want to move income out of the manufacturing country by way of expensing the cost of the recipe. There are myriad issues to be concerned about when related entities are setting prices for things like intangible assets which are very hard to place a real world market value on–there is always the risk of shenanigans. 

Transfer pricing, a critical yet contentious aspect of global taxation, is prone to manipulation as multinationals navigate the complexities of international tax law. I argue for the adoption of an open-source, public-facing AI model that can offer consistent and reliable valuations, providing a safe harbor for compliant taxpayers.

AI's prowess lies in its ability to simulate market conditions and assign value to transfers between controlled entities, including intangible assets. This technology promises to bridge the gap where no market repository exists, offering a novel approach to assessing arm’s-length transactions. The significance of precise valuation is underscored in transfer pricing, where the crux of compliance hinges on mutual understanding between taxpayers and regulators regarding valuation factors.

By analyzing vast datasets and applying sophisticated algorithms, AI can deliver precise, consistent valuations with reduced administrative burdens. Such an approach not only fosters transparency but also mitigates the risk of non-compliance and associated penalties. As I emphasize, this is a critical juncture for regulators to incentivize adoption through the provision of benefits, alongside the traditional enforcement measures.

The complexity of international transfer pricing regulations has escalated following initiatives like the OECD’s base erosion and profit shifting (BEPS) project. This backdrop makes the case for AI even stronger, as it aligns with efforts to combat tax avoidance and ensure that income correlates with the economic activities generating it. AI models, if properly developed and utilized, could revolutionize the practice by making compliance more manageable and equitable, particularly for developing countries.

Looking ahead, the integration of AI into the tax domain appears inevitable. The challenge lies in who will dominate the development and application of these models. With strategic investment, AI tools could be made universally accessible, dramatically reducing compliance costs and promoting tax justice. This vision for the future leverages AI to encourage transparent compliance, potentially reshaping international trade and taxation for the better.

Using AI Would Provide Greater Transfer Pricing Tax Transparency

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Minimum Competence - Daily Legal News Podcast
Minimum Competence
The idea is that this podcast can accompany you on your commute home and will render you minimally competent on the major legal news stories of the day. The transcript is available in the form of a newsletter at www.minimumcomp.com.
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