September 30, 2013
The title I chose is triggered by the lack of concern shown by computer scientists when public disclosures that companies like Apple, Google, HP own pay amazingly low taxes. These companies are derided in the press [look here for references]. The critiques provide little background, and often just repeat assertions that it’s all perfectly legal. Why? Corporate taxes are levied on reported US income, and their income is a share of the sales of software and devices incorporating software. That share can be greatly reduced by showing that the rights to the intellectual property (IP), embodied in the products, are held offshore. All multinational computer enterprises can and actually do avoid much taxation by having transferred a large fraction of the rights to their IP to shell companies located in taxhavens, typically subsidiaries of their offshore operations. The true value of such transfers is hard to assess, especially if the IP transfers are made before the products are offered for sale.
Since the IP in their products comprises most of the value of the revenues, most of the profits from selling or exploiting software now flow into taxhavens. Other costs of production, as assembling hardware, duplicating CDs, or shipping products over the Internet are commodity operations, adding little value. At the same time, the actual intellectual property, and the employees that create and improve that IP are praised, as in Apple’s label “Designed in California”, while its valuation is left to accountants, without input by the creators.
It is true that the value of intellectual capital, the creators and the IP they generate, is hard to measure. But being hard has not stopped innovators from trying to solve a problem, and the principles are simple, the financial value of any good is what people are willing to pay for it in the future, discounted to today.
The low financial value assessed to IP transfers to taxhavens mirrors what bookkeepers do. The reported book value of a company is obtained by adding up all visible assets and the financial capital resources of a company, both in the US and held offshore. Investors know better. Shareholders value the company at a market capitalization, the product of the share price and the number of shares in the market. Those market values are 3 to 6 times more than the book values of modern companies. To a company’s shareholders it may not matter that the financial capital and IP rights are held in offshore mailbox accounts, they care about future income. The total amount of capital held offshore by high-technology multinationals is now over 10% of the annual U.S. GDP. Some large companies hold enough that just the taxes they avoided could pay for a year of NSF and DARPA grants combined.
Many computer scientists believe that software – their output – should be a free and common good. But only a fraction of them work pro bono or for organizations supported by grants. The remainder have not convinced the companies they work for to forego income. Avoiding taxes not only a US issue, taxes on IP-based income are avoided worldwide. Operations of multinationals in India or Ireland do not generate profits due to the intellectual capital employed locally either, those rights are also allocated to taxhaven accounts. For instance the low 12.5% Irish tax rate is only applied to a, say 5%, commodity markup of products assembled there. Having good jobs also in countries that want to move up the economic ladder is, of course, a complementary and worthwhile objective.
Should computer professionals care about the exploitation of their work? Other creative disciplines are aware of the value and dispersion of their work, certainly architects, automobile designers, etc. Those professionals do not expect that the results of their work should be free. Nor do they expect that that their employers should escape taxation when the outcome of their work is sold.
Computer scientists do lobby for better and wider education, for computers for every student, for research funding for their projects – all to be paid by taxes on everything and everybody except their products. Government initiatives to help innovation are now hard to motivate, since the models used by economists ignore the contributions of intellectual capital, while focusing on interest rates and incentives that were meaningful 50 years ago.
The SIGMOD blog is not intended for any ongoing discussions, but comments and feedback will be welcome, and indicate that some of us care.
Copyright @ 2013, Gio Wiederhold, All rights reserved.