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 US Falling Behind on 5G Infrastructure: Lack of Funding and Slow Unified Policy Response?

Deloitte Consulting has released an informative report titled, “5G: The Chance to Lead for aDecade.” [Report]  The Report describes how the United States is falling behind in investing in 5G “both [in] relative and absolute terms” to other countries, and specifically China.  For example, the Report states:

Since 2015, China outspent the United States by approximately $24 billion in wireless communications infrastructure and built 350,000 new sites, while the United States built fewer than 30,000. Looking forward, China’s five-year economic plan specifies $400 billion in 5G-related investment. Consequently, China and other countries may be creating a 5G tsunami, making it near impossible to catch up.

The Report also describes the importance of the number of towers and small cells needed for the 5G network to operate well.  While advocating for a “light touch policy framework,” the Report notes that,

[T]his light-touch regulatory framework does not absolve policy makers of responsibility to inspire US leadership in 5G. Policy makers at the state, local, and federal levels can help reduce the friction associated with deploying next generations of communication infrastructure. Specifically, reducing the cost and deployment cycle times for small cells will help remove a major obstacle to network densification and allow carriers to add desperately needed low-cost capacity to our nation’s wireless networks.

…

Many cities continue to use the same approval standards and processes for small cell equipment deployed at the top of an existing city lamp post as they would for deployment of a new 70-foot macro tower in the public right of way; an unsustainable solution if the United States aims to keep pace with other countries’ 5G deployment. (emphasis added).

Notably, the Report also discusses the benefits of a “light touch policy framework:”

First, the United States should consider establishing a light-touch policy framework to address 5G’s inherent externalities that limit the value created by infrastructure investment from accruing to the carriers. Other countries may consider subsidizing, nationalizing, or otherwise regulating aspects of a nation’s communications infrastructure to speed 5G deployment. However, such interventions in the United States could risk disrupting a communications and technology ecosystem that has proven symbiotic and resilient over the past decade. Policy intervention in the same ecosystem of carriers, suppliers, Internet innovators, and consumers that enabled LTE leadership could inflict unintended consequences on competition and innovation. 

Instead, carriers and their ecosystem partners can address the potential pitfalls of externalities by negotiating efficient solutions. Negotiated contracts between carriers and Internet content and applications providers more effectively attribute profits to those making infrastructure investments on behalf of the users.

We have already seen examples of such negotiated solutions with LTE. Unlimited usage of video streaming applications come with service-level conditions that help curtail network congestion. In some cases, content providers agreed to reduce video resolution and steaming speeds in return for carriers granting unlimited access to that content for their subscribers. These conditions, negotiated between commercial entities, can offer a win-win-win for carriers, content providers, and consumers. Consumers receive access to as much content as they want without overage fees. Content providers get unlimited access to their viewer base. In turn, carriers can better plan for and/or avoid traffic increases that necessitate costly upgrades.

The Trump Administration released a plan to develop and rehabilitate infrastructure throughout the United States, and the Washington Post recently published an interesting article describing a recent study concerning long term prosperity in Europe and the path of Roman roads.  What about 5G (at least for a decade and not falling behind what’s next)?