Heads They Win: Tails We Lose
01 November 2011
Posted by: Author: John M Walker
Heads They Win: Tails We Lose
Is owning intellectual property in a jurisdiction other than where it was developed smart business or tax dodging?
ActionAid claims that SAB Miller is tax dodging by holding valuable trademarks for African beers in Europe rather than in their African country of origin.The core issue in this debate is whether a person or company should be able to own something to the exclusion of someone else and, thus, determine how and where to use it.ActionAid’s view is the negative.Because the citizens or residents of Africa are in great need and because the African governments claim responsibility for alleviating these people’s plight, these governments through their taxing authority are entitled to all revenues, profits and benefits of the property produced in its country.Property rights follow the politics of need.
The competing argument refutes ActionAid’s statistical view.The company took a risk with its own capital and resources to develop the property.The company paid wages to the people who worked to develop the property who were paid whether the property became valuable or not.The company as the person who risked its own capital and paid for resources owns the property.As the owner of the property, this company may do with the property as it likes.Furthermore, in developing this property, this company pays taxes to the government where the property was developed, thus paying for the country’s infrastructure according to what the tax laws demand.
By tugging at our heart strings for those impoverished in Africa, ActionAid craftily vilifies private property rights through a parasitic view of productivity. When those who take no risk at all or perform no work to develop property assert ownership rights over it, they impoverish all of us through usurpation.They are, in effect, performing the rigged coin toss.Heads they win; tails we lose.
Smart business or tax dodging
The intellectual property of SAB Miller is similar to the crops planted and harvested by a farmer.What farmer would not protect his crops from theft or destruction? What farmer would leave his crops to wither at the time of harvest? What farmer would leave his harvested crops to rot and spoil?
Protecting his crops is the moral imperative of the farmer.Like the farmer, SAB Miller has the same moral imperative to protect its trademarks.Protection of these trademarks depends upon the property laws of the country where the trademarks are kept.The property laws of the common law countries such as the United Kingdom provide good to excellent protection of private property and intellectual property rights.Many European and European Union (EU) countries have followed suit.In fact, Ireland now has some of the strongest protective laws in Europe for intellectual property.
African private property laws are not nearly as strong or as well developed.So, unless SAB Miller is like a foolish farmer who will not protect his crops from theft or destruction, the company must find a place to keep its trademarks where they are well protected.The UK, Ireland, Austria and several other EU countries offer such protection.Only those who begrudge a farmer protecting his crops would find fault with SAB Miller for moving its trademarks out of an African nation to an EU country for protection.
But is such a move a tax dodge? To answer this, we must first address the question of whether a person has the right to order their affairs in such a way as to minimise their tax burden.Judge Learned Hand answered in the affirmative in the landmark US case of Gregory v. Helvering.Such has become an established and generally accepted principle of international tax law.Generally speaking, there are two approaches to determine whether such arrangements go so far as to be unacceptable tax avoidance, i.e. a tax dodge.The US view examines the substance of the transaction over its form.The UK view examines the form of the transaction over its substance.Both views, however, have at their core the issue of whether the transaction has economic purpose independent of the tax implications.
A transaction that exists solely to create a tax benefit or that is no more than an artifice designed to give the appearance of a bona fide transaction has no economic substance.Such a transaction is a tax dodge.
SAB Miller has created jobs in African nations, paid wages for these jobs, paid taxes to African governments on these wages and paid taxes to African governments on the sale of its product in Africa. SAB Miller has provided the economic capability and capital to enable farmers to plant, protect, harvest and sell their crops that SAB Miller needs to make its beer.The African taxing authorities have benefited from taxation on each of these agricultural steps.SAB Miller’s trademarks enjoy less protection under the laws of African nations than under the laws of an EU country.Because the trademarks have value, they are a business asset much like the crops of a farmer.This business asset helps SAB Miller turn a profit which is taxed, generating more tax revenue for the governments.Because the purpose of business is to make a profit, leaving these business assets less protected in an African nation lacks economic substance.Relocation is the only economically substantive transaction.
Although the move is not a tax dodge for lack of economic substance, it still may be a tax dodge from the point of view of disallowed profit shifting.If a business moves an asset from a company it controls in a high tax jurisdiction to a company it controls in a low tax jurisdiction, the company has effectively shifted the profit that asset produces from a high tax to a lower tax jurisdiction.Such a move will deprive one jurisdiction of tax revenue because the profits generated by the asset will no longer be subject to tax there.An entire body of international tax law called transfer pricing has developed to regulate such moves.
The US pioneered this body of law which has now been adopted and further developed by the Organisation of Economic and Co-operative Development (OECD).Most nations, including the African nations, have implemented transfer pricing laws.Thus, the transfer by SAB Miller of its trademarks from one of these African nations to another country are subject to the transfer pricing laws of both the African nation where it may have been and the transfer pricing laws of the country where it may be.
The basic crux of the problem in transfer pricing lies in establishing an arm’s length value for the property being relocated.The laws that describe the transfer pricing in general and the accounting methodologies used to determine the arm’s length price are extremely complicated, especially with respect to intellectual property.The interests of the company and those of each taxing authority of the two countries involved are always in opposition because tax revenues are shifting from one place to another.Disputes between the company and between the taxing authorities are common.
SAB Miller has to comply with these transfer pricing laws in relocating its trademarks.The fact that it may be in a dispute over transfer pricing because of moving a trademark is hardly evidence of tax dodging.In fact, the evidence of a dispute proves the opposite.The dispute has arisen precisely because SAB Miller is trying to comply with the transfer pricing laws of an African nation and the country where the trademarks are going.
Hard to swallow
The intellectual property of SAB Miller’s trademarks clearly has value.This property belongs to SAB Miller, not to the governmental taxing authorities in the countries where the trademarks may have been developed.This property certainly does not belong to ActionAid.SAB Miller must protect this business asset and maximise its value much like a farmer must protect and harvest his crops.To do otherwise is foolish and the opposite of economic substance.SAB Miller has created jobs, thus expanding the tax base of the African nations where it operates and pays taxes to these taxing authorities.Its transactions exhibit economic substance and tax compliance.SAB Miller’s relocating its intellectual property to a country where it is better protected is good business, not a tax dodge.
ActionAid’s counter argument is as unappealing as the fictitious, fouled bottle of Grolsch beer in its marketing campaign.It is even harder to swallow.ActionAid is denying private property rights to co-opt the productivity of others.ActionAid is the one crying for the crops to lie unprotected, to wither on the vine and for the harvest to spoil.And when the crops are destroyed or spoiled, ActionAid, who has produced nothing yet decries the productivity of others will point their accusatory, fatted finger at the farmers and other producers amongst us and claim it is our fault we are impoverished.
Source: By John M Walker (TaxTALK)