Richard Murphy on IP

Richard Murphy has a post on his blog about IP, and why it should be disregarded for tax purposes: http://www.taxresearch.org.uk/Blog/2013/11/13/why-intangibles-should-very-largely-be-ignored-in-international-tax/

I posted a response but as he’d apparently deleted it I thought I’d stick it up here for comment.  (EDIT: actually it was my mistake: he hadn’t deleted it, just hadn’t moderated it in yet.)

His argument basically comes down to:

– It is hard to get an accurate assessment of the value of IP to a business
– Some IP (like his blog) has no value
– Therefore IP doesn’t really add value
– So no profit should be attributed to it (beyond perhaps a nominal amount)
– So for tax purposes it should be disregarded

This would mean that multinationals would be unable to manipulate profit flows, to avoid tax.

I think that by setting the value of IP to nil in all cases you introduce just as many problems – or more, even – than you remove.  You are basically guaranteeing that the value will be wrong.

The examples I gave in my response were (I’m reconstructing here, as the post was deleted, so this is not exactly the same):

– A UK firm builds a brand in the UK, then sets up a subsidiary in France which uses that brand.  If the IP has no value then France gets to tax all the profit of the French company, which is therefore getting profit for nothing.  The UK company will have had a deduction for the costs of building the IP, and so will pay less tax: Murphy’s proposal therefore shifts taxable profit from the UK to France.

– The same firm also licenses the brand to a third party franchisee in France.  There will be a commercial royalty: no firm it its right mnd would allow IP to be used without payment.  If the IP must be ignored for tax purposes we deny a deduction for a cost in France, so the franchisee has a much higher effective tax rate and the UK licensor gets tax-free income.  Alternatively, if we allow a deduction in a third-party situation we introduce a major asymmetry between intra-group and third-party positions, which will mean the tax tail wagging the commercial dog.

I suspect Murphy’s response would be that Unitary Taxation would do away with all these problems, though I note that it would give a very different result: if you include the headcount and costs in the UK of developing the IP, Unitary Taxation would allocate profit to the UK that under the normal rules (but where the IP is considered to be worthless) would stay in France.

The whole suggestion seems somewhat incoherent.  What am I missing?

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14 thoughts on “Richard Murphy on IP

  1. Pingback: Tax Research UK » Are accountants or tax lawyers right? Do we ignore intra-group intangibles, or not?

    • Actually, I seem to have done him a disservice – my comment now shows up and he’s replied to it.

      When I looked this morning it had disappeared, which is what happens when he deletes my comments, but it might also be something that happens when I open a new browser session or something: I’m not sure how that thing about being able to see your own pending comments works.

      • You can also resurrect deleted comments from the trash bin when you get embarrassed by failing to publish them…

        Last time I commented on his website I’m pretty sure it retained the comment with a “waiting for moderation” disclaimer when I went back to it. I’m sure I cut and paste a comment to my blog from there previously.

        But these sort of things do change and I might be thinking of the Fair Tax Mark website anyway.

        Either way, he didn’t moderate your comment until he had his reply ready the next day. You must have noticed that his comment count is always an even number… 😉

  2. Murphy just throws out random suggestions without thinking them through. In his mind all IP is routed through evil tax havens and so if we simply disregard it then it’s quids in for the UK Exchequer. He doesn’t stop to think that there are UK companies that license valuable IP to foreign affiliates (the music industry is an obvious example) and his proposal would create a tax-free bonanza for them.

    I have also made this point on his blog but I rather suspect he will delete it.

  3. I’m not really a tax expert, so I’ll defer to those of you that are on tax detail. Yet as is so often the case, Richard does have a point. It’s just that he’s not entirely clear what that point is, nor is he particularly good at handling criticisms of his proposals to solve what is a real issue.

    I think his point is:
    1. Most groups don’t value their internally generated intangibles for financial reporting purposes.
    2. Therefore their internally generated intangibles have no balance sheet impact at a consolidated group level.
    3. Also, any intra-group transactions are eliminated.
    4. Therefore most internally generated intangibles don’t have a balance sheet *or* profit/loss impact at a group level.
    5. Therefore it’s bad that they should be allowed to influence the amount of tax paid by the group.

    And I would have some sympathy with his view if there were no other remedies to ensure that intangibles aren’t being abused to manipulate tax. Of course, there are. [Yes, we can have a debate about whether they’re effective]

    I also have some sympathy with his overall observation. We don’t recognise many internally generated intangibles precisely *because* their value cannot be measured with sufficient accuracy. So it does seem a bit unfair that they can be used in tax when their values are so iffy they can’t be used in financial reporting.

    But I cannot agree with him that the best value for tax purposes in a group context must therefore be zero. Because:

    1. Some similar intangibles do get measured for financial reporting purposes: on a business combination. So it seems silly to have purchased intangibles with a reliable-looking value being ignored.

    2. A good, supportable estimate must be a better estimate than zero (this could apply equally to financial reporting, not just tax).

    3. It would mean that businesses with intangible-heavy business models could end up with some very bizarre, distorted tax results.

    4. I worry about his UT proposal too. It seems to be just as open to abuse as the current system; it’s just a different sort of abuse. (For reasons, @bencta and @timjohnsonltd had a good discussion today on twitter). Whereas at the moment countries that are unhappy can attempt to disallow certain deductions, it’s less clear how they can seek redress in a formulary apportionment situation.

    5. A minor point, but I can’t see that measuring tangible assets at historic cost (depreciated?) is fair when businesses that purchase new assets or another business will measure the same assets at current value. That’ll give them a tax dis/advantage. Would we see more tax-driven asset purchases and business combinations in countries with low tax rates in order to boost their weighting?

    [Sorry for the length of this post]

    • I agree that one problem with internal IP is that the valuation is decided internally, and so is open to manipulation by the company – but as you say, there are remedies for that.

      On your last point, I think that’s quite a serious issue. For the UT formula to work sensibly you’d have to value assets each year. That’s a fair bit of work to do, which feeds directly into the tax line so would need to be rigorously audited. You then get into questions of what assets should be included (is this demonstrator vehicle stock or a fixed asset? What about leased assets, do they count?), and of course you are back to the position where the tax charge depends on an internally-produced valuation, which is the problem you were trying to avoid with IP in the first place!

      To use historic cost would not only be unfair but would be open to abuse – you might sell low-cost assets and buy them back, for example. Although of course you might do that anyway, as having equipment rental costs in the P&L rather than fixed assets on the balance sheet would change the UT formula inputs and so might affect the tax charge…

  4. Pingback: Some thoughts on unitary taxation… | Ben's white space entries

  5. Pingback: The OECD’s public consultation on transfer pricing – and a lively discussion on tax and intellectual property | Andrew Goodall CTA

  6. Andrew and Ben: You could offer to be peer reviewers for this ongoing research project on Unitary Taxation http://www.ictd.ac/en/unitary-taxation-transnational-corporations-special-reference-developing-countries which is being run by the International Centre for Tax and Sustainable Development (authors including Richard Murphy, Sol Picciotto and Prem Sikka). These important questions ought to be included in the papers and research on the subject – not just confined to blog comments!

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