Roving bandits steal IP

There is a piece in the AFR with the headline:

Why is the technology industry so afraid of tax?

My RMIT colleague Jason Potts and I think we have an answer.

It revolves around differentiating between intellectual property and intellectual property rights. Government thinks that without intellectual property rights that intellectual property doesn’t exist. As such governments think that they can unilaterally expropriate intellectual property by simply varying the rights to that property. Now there are two ways to expropriate intellectual property: outright theft and excess taxation.

This is why, we think, technology companies locate their IP in so-called “tax havens”. To prevent their property from being over-taxed. When Joe Hockey used to claim that we had an out-of-date tax system he wasn’t far wrong – just that he drew the wrong conclusions. Here is Michael Bloomberg explaining the difference between the old economy and the new economy:

For the first time in human history, the majority of people in the developed world are being asked to make a living with their minds, rather than their muscles. For 3,000 years, humankind had an economy based on farming: Till the soil, plant the seed, harvest the crop. It was hard to do, but fairly easy to learn. Then, for 300 years, we had an economy based on industry: Mold the parts, turn the crank, assemble the product. This was hard to do, but also fairly easy to learn.

Now, we have an economy based on information: Acquire the knowledge, apply the analytics and use your creativity. This is hard to do and hard to learn, and even once you’ve mastered it, you have to start learning all over again, pretty much every day.

Anyway – hopefully Jason and I will have a paper setting out the full argument soon.

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21 Responses to Roving bandits steal IP

  1. rich

    The Malaysians did it to Singapore. Maybe SA would grow a spine then.

  2. stackja

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  3. duncanm

    This is why, we think, technology companies locate their IP in so-called “tax havens”.

    bingo.

    Put the IP in a low-taxing location, charge international related entities of the Company for use of the IP. Profits flow back to the low-tax haven, international bits of the company have low profits because the IP costs.

    Double Irish with a Dutch sandwich.

    I don’t think the technology industry is any more afraid of tax than other industries; its just that they know they can out-manoeuvre the current old-school tax regimes, and they don’t want that to change.

  4. technology companies locate their IP in so-called “tax havens”

    You can’t so easily pick up and shift the resourses and inputs for agriculture (dirt & weather) and industrial manufacture. They would have been shifted to low tax regions too if they could have.

  5. duncanm

    You can’t so easily pick up and shift the resourses and inputs for agriculture

    well… unless your a multi-national agro business specialising in engineered crops.

    But yes — the end farmer can’t.

  6. Joe

    Intellectual Property an oxymoron invented by morons to fleece the stupid.

  7. You must fleeced a lot, Joe.

    But yes, it’s important that anything created by someone else should be yours to use and abuse, for free. Never mind that absent property rights, the care factor is close to zero. Don’t believe me? Create a free bike system, or a free car system. It doesn’t matter if you provide ten cars for every person. In a very short while, they’d all be out of petrol, oil, and completely trashed. And besides, who’s going to produce that which they cannot profit? It is the same as working for free. Oh, and you’re an idiot.

  8. Notafan

    I’m with they do because they can school.

    Ip isn’t that new, authors and composers have been dealing with it for centuries.

    Manufacturers, miners and farmers also seek to minimize tax but they have no chance of denying some connection with the countries in which they operate.

    If no one taxed corporations it would be a moot point.

  9. Snoopy

    This is just the old transfer pricing lurk tricked up for the digital economy. Of course libertarians believe transfer pricing is an old wives tale.

  10. Robk

    I think Bloomberg makes a good point but skips over the fact that as technology has progressed so has the amount of training and “mind work” in what used to be what he says “easy to learn”. Today good farmers have an ag science degree or consult someone who does. Mining and engineering, the same. Someone needs to programme a 5-axis CMC milling machine, set up an auto steer tractor with a 50’seeding bar and ten tonne seed and fertilizer cart. So many “trades”have specialized. IP permeates all walks of life. Additionally, government data harvesting and regulations is also becomming rampant in so many incremental ways. Licences and permits, certificates of competancy, indemnity, declarations of best practice the list goes on and on. The data is stored and belongs to someone.

  11. Joe

    Beer Whisperer:

    But yes, it’s important that anything created by someone else should be yours to use and abuse, for free.

    I think … Therefore I can rent seek forever.

  12. Joe, no doubt you love Turnbull and Shorten.

  13. Neutrality is overrated

    It will be interesting to see how this plays out. ecommerce and supply chains shift the taxing point and diversify it. If this produces lower company tax rates will it also produce lower personal tax rates? Logically it should. In which case we might end up with big consumption tax rates and higher taxes on fixed assets like land. Unless of course governments shrink (kidding).

  14. Tel

    Government thinks that without intellectual property rights that intellectual property doesn’t exist. As such governments think that they can unilaterally expropriate intellectual property by simply varying the rights to that property.

    It’s an interesting question, we are talking about brinkmanship. Let’s suppose Apple closed down that expensive advertising budget known as “The Apple Store” in Australia and just kept their focus on maximum profit and turnover. They would sell iPhones, etc via other retailers and probably make *more* profit but all of the profit would be outside Australia. Local retailers would make razor margins while competing with each other to import the product. So, the Australian government could think about ways to tax that… well they could (in theory) retaliate by offering a haven for people who want to make pirate copies of Apple’s IOS and start up a market in fake iPhones.

    That’s kind of the nuclear option, Australia would quickly be in violation of various treaties. The USA would kick our collective backside. Well, they wouldn’t need to do that much, they would just have a quiet word with out PM who would quickly get down on his/her knees and offer to kiss it all better.

    The Aus government could impose an import tariff on iPhones, but Apple would still make the same profit per phone (they would sell fewer phones) and Australian people would pay the tax given that no locally produced substitute is available. At least our PM would avoid the carpet burn, but Apple wouldn’t really care.

    Frankly it’s difficult to see what leverage the Aus govt has in this game. Apple’s IP is guaranteed by the USA, backed up by the US Navy. We can’t mess with that.

  15. Empire

    Government thinks that without intellectual property rights that intellectual property doesn’t exist. As such governments think that they can unilaterally expropriate intellectual property by simply varying the rights to that property.

    Thinks? How about knows?

    Practically, IP rights are little different to real property rights in that regard. If the state doesn’t guarantee real property (by way of the crimes acts, policing, justice, contract enforcement etc.) the only alternative is self defence of property. With punishing effective rates of taxation and the erosion of common law self defence rights, this is already happening with tangible property.

    Why would the statanist shakedown merchants be any less inclined to erode intangible property rights? If it has value, those who hold the monopoly on legal violence will endeavour to steal it. It’s as sure as shit sticking to fur. The only constraint is a bigger badder state.

    The parastate makes Camorra look like amateurs.

  16. Luke

    It’s tax avoidance pure and simple. Like it or not, IP only exists as a right created by the State and only ever has. It is a ‘temporary’ monopoly over an idea, like the way the old guilds were given monopolies by the crown once.

    If these companies were claiming to be based in their countries of origin or largest employments – or even the country in which their board live! – I’d give some credence to their claims.

    You might also want to consider that at the end of the day, should these companies violate the rights of consumers or competitors for which they would be entitled to compensation that these companies aren’t just ‘located’ where they pay little tax but also where you can not register/action your local court order against them. See how far your rights go against a shell company!

    The people who created these scheme were not some great protectors of legal rights fighting the good fight.

  17. Rococo Liberal

    Property does not exist because of the State, the State exists because of property.
    The State came into being so as to help people peacefully enjoy their property.
    If the State withered away, people would still have property, but they would have to fight to keep it.

  18. Jessie

    Beer Whisperer at 6.43

    These days, isn’t the term for your description – Cultural Heritage, with the tag legislatively mandated IP?
    A massive ‘information’ economy.

    Look forward to reading the upcoming paper Sinclair.

  19. Tel

    It’s tax avoidance pure and simple. Like it or not, IP only exists as a right created by the State and only ever has. It is a ‘temporary’ monopoly over an idea, like the way the old guilds were given monopolies by the crown once.

    OK, to demonstrate why this is wrong, let’s suppose you are an Australian entrepreneur and you want to take a shortcut by making an online business by copying gmail and google apps.

    Let’s even suppose the Australian government has agreed to actively help you in your endeavors. Hmmmm, maybe I’m being a little cruel there, but suppose our government has agreed to take a passive “hands off” approach and let you do what you like, because google somehow pissed them off.

    So how do you make a copy of gmail and google apps?

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