For he’s talking sense for a change.
So what should instead be done is to ask how this excess profit over the risk adjusted interest return for the period can be allocated for the period when it arises – which is what taxation is about. The answer to this question is, in my opinion, to go back to what drives profit. Ownership definitely does not. But the process of selling does. And the people who work within an entity do create value (hopefully). And they need real, tangible assets to support their work – which indicate whee they are. Purchases also indicate value creation – because there is value in what is bought in, of course, but given that this value is taxable in the hands of the suppliers of those goods this is not a great indicator of where taxable profit should be allocated within a company. In that case the allocation formula to indicate where value (after risk based returns) is generated in a period is, I think, fairly based on a formula based on where these real activities undertaking by human beings take place, but what is very clear is that the formula cannot take IP into account.
There is good reason for that suggestion that IP is not in any formula. Ip cannot generate profit. It is undoubtedly true that it can protect or defend such a stream but it cannot create one. In that case the ownership of IP is not a profit driver, wherever it is located and so profit cannot be allocated to it beyond an adjusted rate of return on capital , which once the IP is in use will be relatively modest as the risk related component of that return will usually by then be relatively small.
To put it another way, for profit allocation purposes IP can effectively be ignored. Doing so would undermine tax abuse models used by many multinational corporations. As importantly, the whole transfer pricing area will be simplified, considerably. You can see why the former is why many large companies are reluctant to see change in this area and the latter is a reason why tax authorities may want change. I am neither such body; I simply want fair taxation and to allocate profit to an intangible asset makes no sense in that context. To use an idea not wholly unrelated in tax, such an asset can have no incidence relationship with tax generation. In that case it’s time to ignore such assets for tax purposes.
Well, he’s still insane about IP of course. I think Apple would take issue with the idea that the patents that make up the iPhone have no to little value. And Microsoft certainly would with the idea that the FAT stack IP rights have no value: it’s thought that the company gets $2 billion a year in royalty fees for it from all those Android handset makers.
after risk based returns
excess profit over the risk adjusted interest return for the period
Hew’s suggesting that corporation tax should only be on excess profits not on “normal” ones. This is so much straight out of the neoliberal playbook that it’s actually a suggestion from Sir John Mirrlees.
And how would we measure that normal profit? Well, if a company’s profits are around and about its cost of capital then that’s a pretty good indication that it is making normal profits, not excess ones. And taxing only excess profits would leave perhaps three and a half companies left to tax in the economy we actually see outside our windows. And the revenue from that would hardly be worth the candle, would it?
So, there we have it, Ritchie himself offering us the best reason to abolish corporation tax altogether. For, as he says, the aim is only to tax excess profits when currently we tax both that and normal ones. And if we were to tax only excess profits then the revenue collected compared to the expense of doing so would be so trivial (if even positive) that there’s just no damn point.
So, abolish corporation tax then, yes Ritchie?