Tax Credit System for Video Games not Working Well in the United Kingdom?

The United Kingdom’s Tax Watch has an interesting report on the alleged abuse of the tax credit system in the United Kingdom by video game maker, Rockstar North, Take-Two Interactive and related companies.  Rockstar North and Take-Two Interactive are two of the related companies responsible for the hugely popular video game Grand Theft Auto.  Despite making 6 billion US dollars, Rockstar North has apparently not paid any corporate tax in the United Kingdom and has claimed 42 million UK pounds in tax credits.  The Report states: 

Video Games Tax Relief was introduced by the UK government in 2014 to provide targeted support for games that were “culturally British”, with a particular focus on support for small and medium sized businesses.

Our analysis shows that the amount claimed by Rockstar North is the equivalent of 19% of the total relief paid to the entire video games industry in the UK since the programme came into effect. This raises serious questions as to whether the relief is being properly targeted, at a time when the industry is lobbying for the relief to be expanded and made more generous.

This report also raises questions as to whether an appropriate amount of profit has been allocated to the UK companies involved in the game’s development. Seven active companies based in the UK, using the Take-Two and Rockstar names, declared a total profit before tax of £47.3m in the UK between 2013 and 2018. However, over the same period we estimated the operating profit of games published by Rockstar to be in the region of $5bn.

Despite the minimal allocation of profits to the UK, Take Two interactive placed a substantial amount of value on the work of Rockstar employees, including those based in the UK. These key employees were given the rights to substantial amounts of the profit generated by the company in relation to games released under the Rockstar label.

It is our opinion that a more appropriate allocation of profit between the US and UK would have resulted in substantially more profit being allocated to the UK. This would have meant that Rockstar North would not be eligible for a payable tax credit. Instead, Take-Two and the Rockstar companies should have had a substantial tax liability in the UK.

It would be interesting to see data on the supposed overall economic benefit of having the development of Grand Theft Auto in the United Kingdom; although I take that type of data with a “grain of salt.”  Part of the conclusion of the Report states: 

Take-Two appears to believe that it is reasonable that close to 100% of the profit should flow to their US based parent companies and senior management, whilst almost no profit flows back to the UK companies involved in either making or selling the game. We do not believe that this division of profits can be justified under the so-called “arm’s length” standard found in international tax law.

There is no evidence that HMRC have challenged this set-up or that Take-Two or any of the individuals named in this report has acted illegally. However, it is open for HMRC to challenge the allocation of profit under the transfer pricing system and we urge them to investigate this case urgently.

My understanding is that some prominent video game makers suffered a stock price drop soon after President Trump's criticism of violent video games.  The full Report is available, here.  (Hat tip to George Turner)

The World of Concentration and the Absence of Competition Harming Workers/Consumers and Innovation

Jonathan Tepper and Denise Hearn recently published in 2019, “The Myth of Capitalism,” which is around 290 pages with endnotes.  Jonathan Tepper is a former hedge fund analyst and trader, and founded Variant Perception, a consultancy.  Denise Hearn is Head of Business Development for Variant Perception.  In “The Myth of Capitalism,” the authors provide a very ambitious analysis and diagnosis of U.S. economic problems—they start with the question: “Who killed your paycheck?,” and provide many policy proposals.  They critique the Chicago/Harvard School approach to antitrust and point to how investors such as Warren Buffet specifically seek out investing in firms in markets with significant concentration.  They point to the significant increase in merger approvals.  The authors point to the technology companies as problematic, but also point to many other industries which are relatively highly concentrated.  They discuss the problem of “tacit cooperation” between firms in markets with relatively high concentration—smart people do not need to have a meeting to get something done like price fixing.  They further discuss how concentration has led to a monopsony in labor markets—there is only one buyer of labor (or just a few).  This is part of the basis of their argument for why we have for the most part been stuck with relatively stagnant wages.  One of their policy prescriptions is renewed, vigorous antitrust enforcement.  They also discuss intellectual property in various sections of the book and raise some of the well-known critiques of the system.  The authors generally seem to believe that because intellectual property resembles a monopoly (although not always is) then it is problematic.  There is not too much of the book discussing the benefits of intellectual property to start-ups—new entrants to the market and how this may ultimately lead to fewer highly concentrated markets.  However, they do discuss the literature concerning a lower number of startups.  Similarly to Professor Timothy Wu's new book, they also raise issues with respect to political freedom and market concentration. This book is available here for around $18.  

I am also in the process of reading Harvard Business School Professor Emerita Shoshana Zuboff's book, "The Age of Surveillance Capitalism: The Fight for A Human Future At the New Frontier of Power," almost 700 pages with endnotes.  So far, she does not seem to think that rigorous antitrust review will make a difference at all--the problem is more centered around the new markets of selling our personal information and habits by technology companies, and then framing and controlling our behavior through software we interact with.  The number of technology companies does not matter.  She believes there is a need to redefine what is happening in this new surveillance age without trying to refer to preexisting structures--we're dealing with something very new with great danger.  This is a very ambitious book.  This book is available here for around $23.  It is interesting to read the two books close in time.  

Professor Shamnad Basheer

As IPKat and IP Finance blogger Neil Wilkof recently reported Professor Shamnad Basheer passed away.  Neil wrote a very beautiful tribute on the IPKat blog, here.  I encourage you to read it and particularly note his work with children and youth (also here).  About ten years ago, Shamnad and I were both in Munich teaching.  I became very sick, and Shamnad stepped in and kindly gave a presentation at a conference for me.  That was Shamnad to me.  He was always willing to help and such a very kind soul.  We were able to spend some time together getting to know each other in Munich and over the years exchanged emails.  He was always the same—kind, thoughtful and willing to help.  I know there are so many other stories of Shamnad’s kindness.  Thank you for being you, Shamnad.  You are missed.

New Study Finds Tremendous Economic Impact of US Department of Defense Licensing Program

TechLink--University of Montana, Bozeman; and Business Research Division, Leeds School of Business, University of Colorado have released an impressive report, National Economic Impacts of DoD Licensing Agreements with U.S. Industry (Report), concerning U.S. Department of Defense (DoD) licensing.  TechLink serves as a tech transfer partnership arm of the DoD.  The Report is particularly impressive because of the response rate of surveyed DoD licensees—apparently 95% out of 915 companies with over a 1,000 agreements, and covers the years 2000 to 2017.  Some of the important findings from the Report, include: 

•             $27 billion in total sales of new products and services resulting from the DoD license agreements

•             $4.5 billion in sales of new products to the U.S. military

•             $58 billion in total economic impact nationwide

•             $6 billion in new tax revenues (federal, state, and local)

•             214,791 jobs (11,933 per year) with average compensation of $74,762

Interestingly, about 43% of the over 1,000 agreements resulted in sales in new products and services.  Fifty-three percent had no sales.  The difference in statistics is because some where designated “unknown” and 1% generated sales only outside the United States.  One license agreement resulted in $16.1 billion in sales (Wow).  That agreement concerned an antibody: 

The antibody is used in a top-selling drug, Synagis, to prevent serious lower respiratory tract disease in infants and young children. Without this top-selling drug, commercial sales were just under $4.5 billion and total sales were just under $10.9 billion.

The remaining sales were distributed relatively widely amongst agreements: 

Twenty agreements generated more than $100 million in sales; however, 101 agreements had sales of at least $10 million. Notably, 233 license agreements, approximately 20 percent, generated sales of at least $1 million.

Sales to the U.S. Military were about 42% of the total sales when Synagis sales are excluded.  


Another fascinating statistic is that 82% of the licenses generating sales were to entities that would be characterized as small businesses by the Small Business Administration (basically less than 500 employees).  And, 47% of the 82% are companies with nine or fewer employees.  


Additional economic impact also included: 

[Companies] reported approximately $776 million in total outside investment funding (including venture capital and angel funding) directly related to the licensed DoD technologies. In addition, 25 companies were acquired primarily because of their DoD license agreements. Companies reported that they had sublicensed 64 technologies to other companies. Finally, they reported that they had created a total of 144 new companies to commercialize the licensed inventions, including 23 spin-outs of existing companies and 121 start-up companies.

[Hat Tip to Technology Transfer Central]

Film and TV Tax Credits Working for California?

California significantly increased tax credits to incentivize the location of film and TV production in the state of California in late 2014.  I've written about it and its impact, here, back in 2016.  How is it doing since then?  The California Film Commission, the government entity responsible for administering the tax credit program, issued a Report examining the impact of the program over the last three years from 2015 to 2018.  A press release concerning the Report states: 

Employment – in terms of hours worked in-state by below-the-line crew members. Program year-three continued the long-term growth trend with a 15.6 percent increase in hours worked in 2017 compared to 2014 (the year before Program 2.0 began). This growth builds on 2016’s 12 percent increase over 2014. These figures are based on data for below-the-line workers including Teamsters, IATSE members, basic crafts and others covered under the Motion Picture Industry Pension & Health Plans.  In addition, Los Angeles-area sound stages are operating at near capacity (as reported by FilmL.A.), which is leading to substantial growth in construction for new stages and production support facilities.   

- Big-Budget Films (over $75 million) – which are a target for the uncapped incentives offered by other states and countries. During year-three of Program 2.0, California attracted five additional big-budget films (“Call of the Wild,” “Captain Marvel,” “Ford v. Ferrari,” “Island Plaza” and “Once Upon a Time in Hollywood”). To date, the expanded tax credit has attracted a total of 10 big budget films. 

- Relocating TV Series – which have their own dedicated allocation of tax credits. During year three of Program 2.0, California attracted two additional relocating TV series (NBC’s “Timeless” from Vancouver, and Amazon Studios’ “Sneaky Pete” from New York). To date, the expanded tax credit program has gained a total of 15 relocating TV series from across the U.S. and Canada. 

- Production Activity Statewide – for which Program 2.0 provides an added incentive uplift. During the program’s first three fiscal years, tax credit projects spent a total of more than $78 million in 19 counties outside the Los Angeles 30-Mile Zone. This figure will continue to rise as more tax credit projects for year-three (and prior years) report their out-of-zone spending.

Moreover, the supposed impact of Captain Marvel on the local California economy has been estimated to be around $100 million.  The latest installment of Sherlock Holmes will also be shot in California, estimated to provide another $100 million boost to the local California economy.  Notably, Governor Newsom has pointed to restrictive social policies concerning abortion (mostly in Southern U.S. states, such as Georgia) as a reason for production companies to move their operations back to California. 

Reinvigorating Competition Law in the United States: A Path Forward?

In late 2018, Professor Timothy Wu at Columbia University Law School published a short, readable and nicely priced book at about 140 pages titled, “The Curse of Bigness: Antitrust in the Gilded Age.”  This ambitious and accessible book lays out and defends the general thesis that American antitrust law (competition law) has gone astray.  He essentially attacks the narrow focus on the consumer welfare theory of antitrust law as failing to completely encompass other values, particularly related to the protection of democracy from influence by a concentrated private sector relying on the work of U.S. Supreme Court Justice Lewis Brandeis.  He traces the history of antitrust enforcement in the United States from the “Gilded Age” and notes that the remedy of breakup of concentration has historically led to more innovation, and an important harm of the narrow Chicago/Harvard School approach to antitrust is a failure to find actionable concentration enough and that “bigness” in and of itself is harmful.  Indeed, concentration leads to those benefiting from it doing whatever necessary to preserve their position, which includes suppression of innovation through raising rival costs, mergers and cloning, and exercising control over government.  Cloning is essentially copying of the features of smaller rivals, particularly in the technology/internet industry.  It seems that intellectual property protection may provide some cover for small firms from abuse.  He points to the lack of enforcement by the George W. Bush administration (and also points the finger at the Obama Administration, but gives them the excuse of the background of a judiciary that has adopted the Chicago/Harvard School approach--perhaps the W Bush Administration may benefit a bit from the same excuse) that led to a significant amount of concentration across several industries.  Interestingly, the Trump administration recently approved the Sprint/T-Mobile merger. 


Professor Wu is particularly concerned about the technology sector and specifically critiques the behavior of Google, Facebook and Amazon.  Professor Wu points to several policy prescriptions: 1) reinvigorate merger review, including “a simple but per se ban on mergers that reduce the number of major firms to less than four”; 2) "democratization of the merger process"; 3) taking on big cases (he lauds the EU's approach); 4) using the breakup remedy; 5) adopting a “market investigation” practice similar to the United Kingdom; and 6) essentially “abandoning ‘consumer welfare’ as the lodestone of antitrust law” and adopting a standard based on the “protection of competition” that is process oriented in nature.  Notably, other additional values worth protecting could include individual privacy and even more difficult to cabin in today's age--national security.  Professor Wu’s book lays out a strategy for approaching antitrust issues in the Internet Age and perhaps he will be the one to lead the next Democratic administration’s antitrust enforcement.  The book is available for purchase, here, for around $12 new and $8 used. 

Another Upside of Intellectual Property's Downside?

In an article titled, The Upside of Intellectual Property Law’s Downside, Professors Christopher Cotropia and James Gibson discuss how IP’s downside, exclusion, can result in some positives or upsides.  For example, so-called “copyright trolls” may be beneficial to society by shutting down and slowing the distribution of pornography.  One relatively “hot topic” in IP law has been the presence and merits of so-called “trademark bullies”—ordinarily a well-resourced individual or large corporation, who uses overbroad trademark claims in a cease and desist letter with the effect of chilling speech, or stifling competition or creativity (for more on trademark bullying, see here and here).  The target of the cease and desist letter usually capitulates in the face of the prospect of paying large legal fees.  

Recently, an organization, Super Happy Fun America, set up a website to publicize its “straight parade.”  In doing so, it also listed a group of companies that purportedly were either associated with the parade or were in negotiations to sponsor it.  Apparently, the companies were not associated with or in negotiations with the parade in any way.  A number of companies responded with cease and desist letters and one stands out.  Adding to the fantastic list of creative cease and desist letters, an attorney at TripAdvisor sent a letter full of references to gay pride anthems.  Do we have another example of an upside of intellectual property law?  There doesn’t seem to be much free speech value in misrepresenting the relationship between one group and another—I guess I could find some comment here (that may eat up a fair bit of trademark law). Surely, this will squelch potentially harmful associations between entities. And, the added benefit of a creative cease and desist letter is the potential positive publicity and reinforcement of corporate values (at least in this case).  

After receipt of the cease and desist letters, the organization is still using the marks with "Xs" on them (sometimes, but apparently with some advice of trademark and copyright counsel) and includes a nice list with reproductions of all of the cease and desist letters its received thus far, here (which includes apparently truthful statements about their relationship with those companies). Ultimately, it appears that free speech is a winner here--and intellectual property law did not stand in its way and, indeed, may have worked to eliminate confusion as to a "true and accurate relationship" and the messages are being heard.  Here is a copy of the TripAdvisor letter: 

Dear Mr. Hugo,

I am writing on behalf of TripAdvisor LLC concerning Super Fun Happy America’s unauthorized use of TripAdvisor’s logo, as displayed on your website at superhappyfunamerica.com/2019/07/09/corporate-sponsors/. I’m Coming Out and saying this clearly: you are infringing upon TripAdvisor’s intellectual property rights. Further, your statement that you are “in negotiations” with TripAdvisor as a “potential sponsor” is completely false.

To be precise, your use of the TripAdvisor trademark and our Beautiful logo infringes TripAdvisor’s trademark and trade name rights. TripAdvisor’s trademarks are protected in many countries around the world and Over The Rainbow, including in the United States under Registration Nos. 2727627, 3171193, 4612678 and 4454774. We have become a well-known brand for our reviews of hotels, restaurants, experiences and even the occasional YMCA, but we weren’t Born This Way – we obtained that recognition through significant advertising and promotion since as early as 2000. As a result of the breadth of the services it provides and its widespread renown, TripAdvisor enjoys substantial rights in its mark and name.

Contrary to your claims, TripAdvisor is not “in negotiations” with your organization for sponsorship of its “Straight Pride Parade.” Similarly, we have not authorized you to use our name or logo in any way. You Need To Calm Down – you are not sponsored by, associated or affiliated with TripAdvisor in any way, and thus, your use of our marks could confuse the public as to an affiliation with TripAdvisor. These inaccurate statements, which I trust do not show your True Colors, infringe on TripAdvisor’s rights under the Lanham Act, and impinge upon our Freedom! to decide with what organizations we want to associate our brand. Have A Little Respect and remove those statements. TripAdvisor and I Will Survive without being associated with your event.

There is nothing Vogue or acceptable about making false claims about others merely to support your own cause. If I Could Turn Back Time, I would tell you not to use our name in the first place. But now that you have, TripAdvisor demands that you remove all uses of our name, mark and logo from your website (and anywhere else you might use it) within 24 hours and not use them again. In other words, Black Me Out with an “X” on the above webpage. You Make Me Feel (Mighty Real) disappointment that you thought this might be an acceptable way to do business.

TripAdvisor is willing to resolve this matter amicably, today, on the above terms. That said, if you Don’t Stop Me Now by taking the requisite actions, TripAdvisor reserves all rights to take whatever enforcement actions it deems appropriate, including – if necessary – taking legal action against Super Fun Happy America, its principals, affiliates, or those acting in concert with you. Finally, I likely am not Dancing On My Own here, as I suspect the above arguments apply to most or all of the companies listed on the above webpage.

Please know and Believe that we take this matter seriously and look forward to your prompt compliance.

Sincerely,

Bradford Young

Vice President, Associate General Counsel

For more discussion concerning this event, please see here, here, here and here.