An Excellent Draft Article: "Valuing Social Data"

Professors Amanda Parsons and Salome Viljoen have published a draft on SSRN titled, “Valuing Social Data.”  The draft is excellent, provides numerous insights and includes a very nice literature review. 

Here is the abstract:

Social data production is a unique form of value creation that characterizes informational capitalism. Social data production also presents critical challenges for the various legal regimes that are encountering it. This Article provides legal scholars and policymakers with the tools to comprehend this new form of value creation through two descriptive contributions. First, it presents a theoretical account of social data, a mode of production which is cultivated and exploited for two distinct (albeit related) forms of value: prediction value and exchange value. Second, it creates and defends a taxonomy of three “scripts” that companies follow to build up and leverage prediction value and describes the normative and legal ramifications of these scripts.

The Article then applies these descriptive contributions to demonstrate how legal regimes are failing to effectively regulate social data value creation. Through the examples of tax law and data privacy law, it demonstrates these struggles in both legal regimes that have historically regulated value creation, like tax law, and legal regimes that have been newly tasked with regulating value creation by informational capitalism, like privacy and data protection law.

The Article argues that separately analyzing data’s prediction value and its exchange value may be helpful to understanding the challenges the law faces in governing social data production and the political economy surrounding such production. This improved understanding will equip legal scholars to better confront the harms of law’s failures in the face of informational capitalism, reduce legal arbitrage by powerful actors, and facilitate opportunities to maximize the beneficial potential of social data value.

Heavily Taxing Billionaires to Promote Innovation

An important issue confronting the world concerns the high concentration of wealth and redistribution of that wealth through the tax system. Part of the problem is what to do with the wealth gained from additional taxation of billionaires (and what is a politically defensible use of that additional revenue). Democratic presidential candidates are starting to create a "dream list" of things to do with billionaires' money.  Well, why not use that money to invest in research and development which may lead to more jobs, innovation (even life saving innovation), and additional tax revenue.  

Professor Michael Simkovic from University of Southern California Gould School of Law takes on general claims that taxing billionaires may lead to less innovation in a short five page article titled, “Taxes, Spending and Innovation.”  Professor Simkovic points to studies concerning patents and Nobel Prize winners.  Professor Simkovic states:

Public policy can be used to promote innovation by raising taxes and extensively funding high quality science, math, and engineering education, or by encouraging immigration of people with those skills.

There has been a general decline in the amount of federal funding in terms of real dollars for some time for the National Institutes of Health.  Well, billionaires give to universities and other charities, right?  We don't need to heavily tax them as they choose to give their wealth to charitable organizations that innovate.  Professor Simkovic notes that voluntary gifts to charity, including to universities, is relatively small at “2% of GDP”—for gifts from all donors.  He concludes we should look to peer-reviewed empirical work to test claims and that, “Claims that we can drive more innovation and growth through a higher concentration of resources in the hands of a small number of billionaires—while providing fewer resources to middle and upper middle--‐class knowledge workers—are not empirically supported.”  [Hat Tip to Professor Paul Caron’s Tax Prof Blog]. 

Dutch sandwich in danger, but most of the pie remains untaxed

From Mary-Ellen Field (Chairman, Brand Finance), via Mark Colvin, comes news of "No more “Dutch Sandwich”? The Netherlands reviews its role in tax avoidance" by Cyrus Farivar, posted on Ars Technica last week (here). According to this post, in relevant part:

"In recent years, governments have become increasingly aware of the fact that lots of major corporations -- notably tech companies including Apple, Google, Yahoo, Dell, and many others -- are using shady, albeit legal, techniques to shift income in ways that drastically minimize a company's tax burden. A trick known as the “Dutch Sandwich,” in which companies move money through the Netherlands, has become one of the preferred ways of reducing a firm's financial liability. ...

Here’s how it works: as Bloomberg also reported in 2010, a company sells or licenses its foreign rights to intellectual property developed in the United States to a subsidiary in a country with lower tax rates. That means that in many cases, companies will license their own IP to one of their own foreign subsidiaries (often based in Ireland), whose profits then stop over in the Netherlands. In turn, those profits finally settle in Bermuda, a British overseas territory in the North Atlantic, and a notorious tax haven. ...".

Last Wednesday, however, a Dutch parliamentary committee met to consider the fairness of its own tax system and to re-evaluate its role as part of a legal financial chain that allows companies to reduce the amount of tax they pay. Other European countries, including the United Kingdom, Ireland and France, are also looking more closely at the tax arrangements of international IT and online businesses, which either pay little tax of any description or, when they do pay tax, they tend not to pay it in European countries in which they have been profitably trading.

 It seems to this blogger that European countries will have to sort out their priorities before they can individually get to grips with the problem of international companies which earn megabucks and pay little or no tax in the EU.  This is because real and meaningful taxation is only going to be raised when all 27 (soon to be 28) Member States have identical tax rules, while each EU Member State would like to be seen to be that bit more attractive in tax terms than its neighbours, in order to attract foreign businesses to base themselves and their IP portfolios locally.  The businesses themselves will naturally wish to exploit any tax differentials and pay where tax is at the lowest rate, thus encouraging a race to the bottom.

Double Irish Dutch Sandwich explained here

Taxation of IP transfers in Lithuania

"Key tax aspects of IP rights transfers", by Edita Ivanauskienė, Antanas Butrimas and Jurgita Randakevičiūtė (LAWIN Vilnius), provides a handy introduction to the niceties of the taxation of intellectual property right transactions in Lithuania. Published on International Law Office (here), this piece outlines the country's basic tax regime and then considers the position of tax-resident individuals, non-resident individuals, taxation of entities, Value-added tax (VAT) and the avoidance of double taxation.

Regarding VAT,

"The transfer of copyright and related rights, industrial property rights, franchise rights or know-how is considered a provision of services and is subject to value added tax at the standard rate of 21%".

It always seems strange to this blogger that an outright transfer of an intellectual property right should be regarded as the provision of a service.

A uniform transaction tax regime for the EU?

1709 Blog reader John Walker posted the following question as a comment on that blog, but it seems to me that it's more likely to receive an answer on this one. He writes:

"Australia used to have a very complex sales tax regime (for example the tax on tissue paper in a box was much more than the tax on the same tissue paper if wrapped around a toilet roll). Australia in the year 2000 introduced a uniform Goods and Services Tax (GST). GST largely replaced a complex and hard to see system, levied by both the Federal and the individual state governments, with a uniform tax levied at the same rate on every transaction. (there are some exceptions, but nobody's perfect)

Many of the EU's copyright' levies are transaction taxes; the nexus between the consent of a right holder and payment to the same right holder is clearly severed.

Doesn't the EU have any policy about aiming for a reasonably uniform transaction tax regime?"

Can any reader give John some assistance on this point?

Latest tax news from Malta

The Fenech Farrugia Fiott Legal newsletter, Malta 2012 Budget -- Tax Highlights", contains some good news for IP owners:

"Copyright & IP royalty exemption

The tax exemption on royalties from qualifying patents introduced in 2010 has been extended to cover royalty income from works protected by copyright and other IP including books, film scripts, music and art".

Anne Fairpo covered Malta's tax exemption for patent royalties on IP Finance in April 2010, here.

"Film" includes the copyright in it for tax purposes, says Court of Appeal

Last week the Court of Appeal, England and Wales, in Micro Fusion 2004-1 LLP v Revenue & Customs Commissioners [2010] EWCA Civ 260 (not yet on BAILII, but noted on Lawtel), had to consider the meaning of the word "film" for the purposes of the Finance (No. 2) Act 1992, section 42 -- the film in question being Mrs Henderson Presents.

This was an appeal by Micro Fusion against a decision relating to the deduction of film production costs. In its tax return for the year ended 5 April 2005 Micro Fusion had sought to deduct from its profits and gains from trade or business the costs it incurred in the production of a film, under the Finance (No. 2) Act 1992 section 42 and the Finance (No. 2) Act 1997 section 48. The commissioners rejected this claim on the grounds that Micro Fusion's trade or business did not consist of or include "the exploitation of films" for the purposes of section 42 and that, even if it did, the film in question constituted "trading stock" as defined in the Income and Corporation Taxes Act 1988 section 100(2).

Micro Fusion appealed and the commissioners raised an additional ground: that the Finance Act 2005 section 60 reduced the amount of any relief to which Micro Fusion was otherwise entitled. The commissioners submitted that the concept of "films" in section 42 comprised only the physical record on or in which the sequence of images was embodied and that the substance and effect of a distribution and commissioning agreement (DCA) entered into by Micro Fusion was that it had sold the master negative of the film for at least a 21 year period. This being so, it was not exploiting the film. Micro Fusion disagreed, arguing that a "film" included the intellectual property rights in it and that, by entering into the DCA, under which it retained a residual or reversionary interest in the master negative, Micro Fusion had exploited its interest in the rights it held in the film.

The Court of Appeal (Sir Andrew Morritt, Lords Justices Rimer and Etherton) allowed Micro Fusion's appeal. In its view,

* the word "film" in section 42 was to be construed in accordance with the definition of the same word in the Films Act 1985 Sch.1 para.1. In that context "film" was not confined to the master disc, negative or tape and included the intellectual property rights -- it was a compendious word and its meaning was not confined to, and did not require, the inclusion of ownership of the original physical record;

* it was self-evident that the value in a film susceptible of exploitation lay in the copyright, not in the physical embodiment of the sequence of images.

* it was not the case that the intellectual property rights could only be exploited through ownership of the original physical record.

* Micro Fusion did exploit the film under the DCA since the concept of exploitation did not exclude an outright disposal.

* whatever the position in respect of the master negative, under the DCA Micro Fusion had not made an outright disposal of the copyright and exploitation of the film was its trade or business within the meaning of section 42(1).

* the film was not actually "trading stock" because Micro Fusion retained the copyright in it, and the only disposals were a 21-year licence under the copyright and an option to buy it at the expiration of the term of the licence. Accordingly section 42 did not operate so as to preclude the deduction of expenditure from the profits of Micro Fusion's trade or business.

HMRC on the attack on image rights?

IP Finance thanks Angus Bujalski (Michael Simkins LLP) for the following post:

Amid the general outcry over Manchester United’s proposed £500 million bond issue, one of the many risk factors listed seems to have received undeservingly scant attention. The club noted that it was under investigation by Her Majesty's Revenue & Customs (HMRC) for payments made in relation to players’ image rights. These structures, common in top-flight football, typically involve a player assigning all rights in the exploitation of his image to a company, often offshore. Unlike most civil law jurisdictions, since there is no single concept of an “image right” in English law, the agreements typically include a broad assignment of all rights to use a player’s name, image, likeness, voice, even shirt number, and so on. The club then pays a licence fee to the company for the right to exploit these rights.

Crucially, the clubs argue that these payments should be viewed as capital sums, and therefore not taxed as income, since the payments are made under genuine arm’s length transactions under which the club gets real value for the money paid to the players. HMRC’s position, however, is quite the opposite, arguing that image right structures are artificial schemes designed to avoid tax. Specifically, payments made in this way are not subject to UK income tax or national insurance in the hands of the player, so the clubs can therefore incur less expense to ensure the player receives the same net amount as if the payments were paid as wages. Second, it means the club does not incur the National Insurance costs on the payments it would have to make, were the payments made as wages.

The legality of image rights structures has long been problematic even after the courts first ruled such payments legal in the cases involving Dennis Bergkamp and David Platt. It has been suggested that HMRC have been aching for the opportunity to bring a case to court as a means of overturning these decisions. Indeed, the fear of the courts reversing the Bergkamp decision is one reason why several Premier League clubs do not use these structures.

Now, with public finances stretched, it may be that HMRC are more actively pursuing this opportunity. Any judgment overturning the Bergkamp decision would have serious consequences for many Premier League clubs. The prospectus for Manchester United’s proposed bond issue suggests that the club could be liable for up to £5.3 million in past National Insurance contributions. Of greater concern to clubs, however, would be the increased wage costs, since there is little doubt that players would request their wages be grossed up to leave them in the same net position, particularly as they will be subject to the new higher rate income tax of 50%.

Coincidentally, it was reported last week that the annual profits of Beckham Brand Limited, the company set up to exploit the image rights of David and Victoria Beckham, grew 60% after his first season with the LA Galaxy. Beckham’s return to Manchester United with AC Milan in the Champions League will no doubt serve as a reminder of the real value of the rights to a high profile player’s image.

Ireland: no change ... so far

From Naoise Gaffney (Tomkins & Co, Dublin) comes some reassuring news. For those enjoying a favourable tax position as recipients of income from patent royalties and other IP-favourable tax-breaks in Ireland, the position after yesterday's Irish Budget Speech -- delivered by my old student Brian Lenihan -- is one of "no change so far".

You can check the full budget speech via the Irish Times here. On IP taxation in Ireland see IP Finance here and here.

IRS to take a closer look at US university income

Via Tech Transfer E-News comes news that the Internal Revenue Service (IRS) in the United States is to pay increased attention to the tax status of revenue-generating activities of universities -- including income from their IP licences. It appears that

"... the U.S. Internal Revenue Service is putting universities on notice that it is going to put their finances under a magnifying glass to root out any practices or revenue-generating activities that run afoul of the institutions’ tax-exempt status.

... the first step in this process is a lengthy compliance questionnaire in which about 400 universities are being asked by the IRS to answer questions related to such financial matters as executive compensation, endowments, student demographics, and handling of “unrelated business income.”

... most experts agree the questionnaire [available here] provides an opportunity to preview the IRS’s biggest concerns and clean up any sloppy accounting practices any full-scale audits begin. ... many experts are recommending that TTOs and their parent organizations work with in-house counsel to answer the questions even if they have not received them from the feds.

... Of particular interest to TTOs are questions about unrelated business income (UBI)”.

A detailed article on the IRS questionnaire, its implications for TTOs, and guidance on preparing for further scrutiny appears in the January issue of Technology Transfer Tactics.

California court gives favourable ruling on tax status of bundled software

A Pillsbury Client Alert for 15 October ("Client Alert—Bundled or Embedded Applicational Software Is Not Subject to Personal Property Taxation", by Richard E. Nielsen) records that California’s Fourth District Court of Appeal has held that application software is not subject to property taxation even if it comes “bundled” with computer hardware. This decision reverses the position taken by the trial court and Orange County Assessment Appeals Board.

This ruling turned on the legal status of the Pyxis MedStation 2000 system, which Cardinal Health 301 leased to hospitals. The system is a series of stand-up medicine storage cabinets (MedStations), each with a built-in computer that serves as a medicine tracking system and is programmed with patient and medication information. The software was provided together with each MedStation as a "bundle" rather than being separately priced.

Good news for IP taxation in the UK -- but is it too late?

In "Alistair Darling retreats from tax on offshore intellectual property", The Times Online, 19 May 2008, reported as follows:

"Alistair Darling [British Chancellor of the Exchequer] will signal another tax U-turn this week to prevent a threatened exodus from Britain of multinational companies.

... the Chancellor will sound the retreat over moves to tax intellectual property held offshore. The proposal was contained in a Treasury discussion paper on reforms to the way in which earnings from foreign subsidiaries are taxed. It led to a storm of protests from companies fearing that patents and brands held offshore were about to be brought within the reach of the British taxman.

Mr Darling is expected to offer an explicit assurance that the new regime will be revenue-neutral and will pose no specific threat to companies rich in intellectual property. A Treasury spokesman said that the final reform package would be unveiled late next month or in early July ...

Last month Jean-Pierre Garnier, the outgoing chief executive of GSK, who is a member of the Prime Minister’s International Business Advisory Council, issued a veiled warning to the Government over proposed changes to its tax regime.

Shire, Britain’s third-biggest pharmaceutical company, will incorporate its new holding company in Jersey and hold all board meetings in Dublin to limit its tax bills. ...".