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?