Dear God, has Ritchie gone entirely insane?

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.

But here:

after risk based returns

And here:

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?

27 thoughts on “Dear God, has Ritchie gone entirely insane?”

  1. And MIrrlees is actually a lefty, relative to the readership of this blog at least. A lefty that understands taxation. Here he is in his own words:

    “Evidence is showing that taxation as progressive as in
    Scandinavia is pretty good—more redistribution than I thought 40 years ago. And I can see that, largely for political reasons, many of the free-market economies are doing a poor job of avoiding unemployment and low median-consumption. I favour a highly taxed, highly regulated economy, but not an autocratic State. I suppose that
    makes me a pretty standard-model old-fashioned liberal (in the American sense). It’s implied by fundamental values and empirical observation, not, I suggest, an ideology acquired by infection from friends, gurus or preachers.”

  2. I assume Murphy wants to tax any roce in excess of the return on gilts plus 3% – he and HMRC are incapable of calculating a correct risk-premium for every company – and if they were hordes of lawyers would file claims that they had got their estimates wrong (especially when they had got them right).

  3. Timmy is playing with him. He isn’t talking about taxing any rate of return in excess of anything. He’s only saying that companies make excess profits on this thing called IP because companies are evil and so should be taxed to buggery, with IP ignored in whatever formula you use.

    Just one questions (for starters) Richard; if you want to discuss a formula – which it very much appears you do – why do you insist on this cbc, with a whole battery of reporting requirments for things that you then intend just to ignore? Because there is a sense here that you just want to put companies to as much regulatory trouble as you possibly can for the sake of putting them to that trouble.

  4. He’s talking in a very narrow sense: I think what he means is that the most you can justify charging for a royalty is a return on the capital employed in creating that IP, not a return on the value of the IP. So if you spend a million creating an asset you can justifiably expect to receive a few tens of thousands a year back from it: any other value created used that asset is created by the person using it.

    This works perfectly if you use land and property as an analogy. The value of a property comes from the use to which it is put: for example, if you build a house the main value of that house is that people get to live in it as their home. The value to those people is greater than the cost of building it, but they are the ones who have made the house their home and thus created most of the value. That is why house rents are always directly related to the cost of building, and not to some arbitrary market value determined by economic factors such as how much people are prepared to pay for a house.

    Oh, wait.

    OK, here we go: house rents are too high, and it’s unconscionable to allow someone to profit out of someone else’s home – even if they provided the money to build it and do all the maintenance and insurance and so on – and so in an ideal socialist world no-one could ever charge more in rent than the cost of their capital. Right, now the analogy works perfectly: once you assume that everything should be done altruistically and no-one should ever try to make a profit, it is clear that IP royalties should be low. And if they’re going to be low we can treat them as zero quite happily because… well, anything complicated is always done to avoid tax, isnt it?

    QED

  5. Curious little aside: he writes that his funders DO NOT pay hm to write his blog. Well, that is a lot of money for no reason, certainly it can’t be a hardship grant. So, what exactly is it they pay him for doing?

  6. I should probably read this again, please slag me off if I’ve missed the point, but so far as I can tell and from Pellinor’s comment, Ritchie is trying to calculate a “just price” for IP which, as we know, cannot be done as there is no such thing as a just or calculated price.

    IP is like any other property; in the absence of State interference, the price of it is whatever the market makes it at any particular transaction. You cannot calculate a price for those goods defined as “IP” any more than you can for land property, or goods, or a service like hairdressing.

    Whatever the price of a copyright work, or a patent, or a royalty is, is the precise length of a piece of string. You can’t invent a macroeconomic equation for it. It just isn’t possible.

    Subjective value and all that.

  7. Ritchie is again speaking out of both sides of his mouth – snd I can’t belive he doesn’t know it.
    Every second post is about one or other multinational hiding or moving its PROFITS around. His cbc is about groups being required to show every entity in every jurisdiction, its cashflows and its PROFITS; a huge obligation. His support for the Common Consolidated Tax Base is about forcing groups to be charged as a single entity on its PROFITS and then allocate those profits.
    And then we get to this allocation. Now, if it were just about groups transferring the IP across borders to get profits to flow to tax havens, well he might have a point. What he is saying though is “Just ignore IP”. The World, the real, commercial, non tax world, works on IP. Kings’ ransoms are invested to develop it. Profits from it are used to invest more. Diseases have been cured using the proceeds of IP. Businesses live and die by it, siting entire divsions in different states to maximise the chances of developing it and making use of it, to maximise profit. And Ritchie and his friends want to take those profits and apportion/allocate taxing rights to different states based upon a formula that ignores the very thing that generated those profits. Because, make no mistake, those profits were indeed generated by that IP and no end of drivel from Richard Murphy will change that.

    P.S. He wrote recently to a minister that he was paid expressly to influence opinion. So how is he not paid to write his blog? I ask again, what is he being paid for exactly?

  8. Tell me if I am speaking Bollocks BUT ….

    IP rights are monopoly rights granted by the State to encourage innovation. Therefore most of the “profit” generated by IP is essentially monopoly profits rather than what would be described as “normal” profits in a competitive marketplace. Therefore all profits that derive from IP rights are in economic terms super-normal profits aren’t they.

    So he is arguing to ignore all IP rights for tax purposes because we only want to tax super normal profits like the ones that are generated by IP??

    Then again I have been drinking so this might be more bollocks than I usually talk.

  9. Offshore Observer

    Drinking helps sometimes, especially when reading Ritchiebollocks.
    You’re reading of Ritchie’s argument is pretty much spot on for me. However, your view of IP being a state monopoly can’t be right. IP rights are granted by Law, but that is not the state, not yet. And they represent a recognition of ownership, properly passing the person (or firm) that had the inspiration, did the work, took the risk to develop the intellectual property.

    Noel Scoper

    That doesn’t really add up. The JRF has been paying him for a long period of time, which covers a number of books (big roaring fires in my home). So. For what have they been paying him? He calls them his ‘funders’, funding what? They must expect something from him; what is it?

  10. I think you can boil his argument down to:

    – IP is complicated
    – So it’s hard to value
    – He doesn’t know how valuations are arrived at
    – So they might as well be plucked from the air
    – Allowing people to pluck numbers from the air allows tax avoidance
    – IP should therefore never have a value.

    The key point is that if he doesn’t know how to do something, it must be impossible to do it.

  11. Ritchie, in his usual abuse of words, is probably right in that no one actually pays him to blog – directly. They pay for his reports and articles and opinions. He gets paid so much for so little that he is left with so much time in profit that he can afford to blog.

  12. @ Ironman
    “Curious little aside: he writes that his funders DO NOT pay hm to write his blog.”
    This is Murphy’s tax avoidance scheme which looks like tax evasion to me. If his sponsors paid him then he would hjave to pay self-employed NI contributions on his net income: instead they pay money to Tax Research LLP and Murphy books expenses to the LLP and enjoys 99% of the resultant net income. So far, just perfectly legal tax avoidance (but a format I eschew on ethical grounds); what looks like tax evasion to me is that the personal grant from Joseph Rowntree Trust to Murphy is included in Tax Research LLP’s income “for clarity”.

  13. @ Offshore Observer
    Some IP retains value after its patent protection period expires. For instance Ventolin is still, I think, the most common (even though not the most lucrative) treatment for asthma more than twenty years after the patents expired.
    So any argument that profits from IP are purely due to a grant of monopoly from the state are as false as most of Murphy’s claims.

  14. john77

    No jokes, no clever remarks: that is pure hyprocrisy.
    Additonally, it has just been pointed out to me that Tax Research LLP isn’t registered for VAT because these apyments aren’t chargeable to VAT apparently. Is that right? Can it be right?

  15. @ Ironman
    Its VAT-liable output that counts. And publishing is zero-rated for VAT. Anyone with VATable output below £79k does not need to register for VAT So if a chunk of payments to Tax Research relate to Murphy’s books it can be right.
    I don’t know the facts of the case, but that’s the theory.

  16. VAT liability depends on the value of VATable supplies made, which is normally the amount received for those supplies. A gift of cash freely given with nothing received in return is not consideration for a supply, and so is not VATable. It’s not even exempt from VAT, it just doesn’t come within the scope of VAT.

    Although if Tax Research UK’s income is primarily gifts, then that would suggest Murphy is effectively sponging off charity. If he does provide any services of course then they wouldn’t be gifts and so the LLP may need to register for VAT. I do hope he’s thought this through properly – it could be very embarrassing (and expensive) if not 🙂

  17. Tim

    The huge mistake you make is expecting that any argument Richie makes can form part of a logical chain. Just because he says something that for the rest of us has a logical sequentia, (only taxing excess profits would imply you weren’t taxing normal profits) simply doesn’t apply in Richie’s world. You and I might think a logical sequence was 1, 2, 3, 4, 5 and so on but for Richie it’s 1, 2, balloon, car park, yellow, and so on. Once you get the hang of Murphynomics it all makes sense.

  18. On the subject of Richard’s tax position, I found his declaration that his blog doesn’t carry advertising quite an interesting one.

    His blog, or should I say Tax Research LLP’s blog, clearly carries advertising for books that are written by one Richard Murphy who is legally a separate person from TR LLP and you would anticipate receives some sort of benefit worth paying for.

    TR LLP is transparent for income tax purposes, but it is actually a separate legal person which is still relevant for VAT purposes. So he might be failing to correctly calculate VAT. And even if he is required to register for VAT. I think it is questionable whether the grant is VATable or not.

    Sponsorship can be VATable when the recipient provides benefits to the sponsor, including publicity or advertising (Tron Theatre Ltd case being an example).

    TR LLP could well be over the VAT threshold based on its accounts.

    From a direct tax point of view, the members of TR LLP could be avoiding NICs by not recognising this income.

    For income tax purposes transfer pricing isn’t actually required because TR LLP falls within the SME exemption, but the costs associated with advertising his personal books should not be considered to be an allowable deduction for tax purposes. They are not incurred wholly and exclusively for the purposes of the trade of TR LLP. So he should be adding back a proportion of TR LLP’s costs in running the website and things like that.

    This is all stuff you’d consider if you had this business as a client. You couldn’t say it would be an issue without further investigation, but you’d definitely have to do some investigating to make sure it wasn’t an issue….

    Apologies for the long comment, I got a bit carried away….

  19. Ben

    You should also factor in that some profits from the sale of Richie’s books are “evil profits” because they arise from sales on the Amazon website. I’m fairly sure that Richie wants “evil profits” taxed more heavily. Although I wouldn’t be surprised to find a get-out if “evil profits” are earned by anyone with the initial’s RM.

  20. You and I might think a logical sequence was 1, 2, 3, 4, 5 and so on but for Richie it’s 1, 2, balloon, car park, yellow, and so on.

    I love this. Thanks for the (genuine) LOL.

  21. @ Ben Saunders
    Advertising is trivial.
    The latest accounts show total revenue for Tax Research LLP as less than the £79k threshold for registration for VAT
    I am tempted to ask No 1 son (the frighteningly bright one) to sue you if I die from a heart attack as a result of defending Murphy

  22. John 77

    He can sue me instead. In what year is £79k the threshold – and what year’s accounts are you looking at?

    On the subject of IP. Ritchie is doing his usual routine of bed-hopping, hoping that his latest partner hasn’t noticed the stain on his PJs.

    As he would say, let’s be clear: cbc is an entity-based idea. All entities in all jurisdictions to see the cashflows etc. Unitary Taxation explcitly seeks to ignore the existence of separate eneities, a fiction it calls them. Under Unitary Taxation the information required under cbc is redundant. Back to U.T. below.

    Now IP: in Blog 1 we should ignore it. Of course that changes when he is challenged. So in Blog 2 he makes it clear – candidly of course – that it is Intra- Group payments for IP that should be ignored. Then in Blog 3 he gives us a lecturing video on transfer pricing and points us towards Sol Piciotto’s flimsy piece of ricepaper called Unitary Taxation (oh the working knowledge of tax and transfer pricing Sol displays!).

    Now here’s the thing: the ‘formula’ incorporates sales, employees and TANGIBLE assets. That expressly excludes IP. And there is no exception for businesses whose genuine business model is based upon exploiting IP rights – music and publishing and pharma and IT and…

    So Blog 2 is wrong, plain wrong. Even on Ritchie’s own terms he’s wrong. Not once, but twice.

    So, not just a tax avoiding hypocrite; a fool.

  23. @Ironman
    £79k is the limit in 2013/4
    In 2011/2 Tax Research LLP had revenue of £77k
    I didn’t check all the details because backtracking from £79k by the inflation rate would not be far short of £77k and we know that Murphy writes books (OK – I couldn’t stand reading them so I just assume that they are books but Tony Benn or somesuch would have complained if all the pages were blank)
    CBC – has no-one noticed that every company has to report to every country where it operates its taxable profits in that country? Murphy’s whole campaign is based on the assumption that (an) English accountant(s) can find out where a multi-national is making profits but not paying tax because a crooked tax inspector is taking a pay-off.
    Stargate fans will talk about hieroglyphs on Mars, but I am not Supermurphy so I cannot read them at this distance

  24. John 77, I agree. But you’d need to consider it in deciding whether he breaches the VAT threshold. And because you look at sales on a rolling 12 month basis for that, he could well have failed to register for VAT, depending on the exact timing of sales.

    But the point I had originally wanted to make is the direct tax point. That is, if he is openly admitting TR LLP isn’t being paid for writing the blog, then it has no trade purposes except for advertising books which directly benefits Richard Murphy rather than TR LLP.

    So my concern would be that, if he were my client, he shouldn’t be claiming costs of running the website as allowable deductions of TR LLP’s trade for tax purposes.

  25. 1. I would have thought his publisher paid him to write books; not some social foundation.
    2. What is it he is being paid for, from these different sources? Even if it is noy for producing a specific piece of work, quite obviously the JRF pays him because he does certain things, it expects him to continue doing those and will stop giving him ‘grants’ if he stops doing those things.
    3.Are we all guilty of applying the same standards here we would to any other client or taxpayer? (I never thought I’d find myself writing a sentence like that!) This is someone who has built a career calling for total, TOTAL disclosure from taxpayer, who has most recently insisted (before squirming away) that HMRC is at liberty to discuss taxpayers’ affairs AND SHOULD DO SO, and who has consistently condemned those who, whilst being legal, do not match up to his moral scrutiny.
    Well, his affairs may well be strictly legal. Nevertheless, he knows that this is his business, his living. He knows that this is income from his business and he knows that if he ‘did the right thing’ he would be registered for VAT.

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