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Rockstar

Video Games Tax Relief costs five times as much as forecast

27th January 2023 by Alex Dunnagan

Video Games Tax Relief (VGTR) cost a record £197m last year, more than five times as much as it was anticipated to cost when it was introduced.1 A total of £830m in subsidy to the video games industry has been paid since the relief was introduced, with numbers increasing every year as the following chart reveals:2


Amount of video games tax relief paid (£ million, receipts basis) 2014-15 to 2021-22

Despite being billed as a relief set up to help independent developers produce culturally British games, it is large firms that benefit, as revealed by HMRC’s commentary on statistics for VGTR in the creative industry:

“In the year ending March 2022, the majority of claims tend to be for smaller amounts, with 49% of all claims being for £50,000 or less; however, these claims are only responsible for 1% of the total amount paid out. Claims over £500,000 account for 88% of the total amount paid out.”4

Worse still, is the fact much of the tax relief has been taken by large multi-national companies, for here there is a huge risk they will game the system and ‘offshore’ the subsidised intellectual property, resulting in the profits, and tax on them, being collected elsewhere. This point was made by TaxWatch’s Acting Director when he gave evidence about Video Games Tax Relief in front of the Treasury Select Committee on Monday 19th December 2022.

Rockstar Games illustrates this risk. The Edinburgh-based company developed Grand Theft Auto V which is thought to have generated revenues of over $5bn, only to then sell the intellectual property to their US-based parent company Take-Two Interactive at more or less cost price.5 Take-Two Interactive distributed, and continues to distribute, the game globally, and ultimately makes the (taxable) profits.

In order to receive VGTR, a game has to be accredited as “Culturally British” by the BFI. Since the introduction of the relief in 2014 through to 31 March 2022, 1,500 games received this certification.3 Of these, only two were published by Rockstar, with Grand Theft Auto V receiving the accreditation in 2015, and Red Dead Redemption 2 in 2019.

Rockstar’s latest accounts reveal it obtained £79.8m in VGTR in 2021-2022, a sum that is more than twice the value of the original costing of this tax relief to the whole industry and 41% of all of the VGTR paid out last year. The amount obtained by Rockstar has risen each year, taking the total the US-owned company has claimed to a staggering £285m – or 31% of this tax relief over the years.

2016 2017 2018 2019 2020 2021 2022 Total
Operating Profit £3,515,268 £3,745,345 £8,242,790 £8,715,917 £9,519,819 £9,399,572 £11,789,662 £54,928,373
Tax on profit £33,416,310 £13,121,157 £26,915,315 £40,035,440 £65,155,510 £64,359,515 £81,036,506 £324,039,753
VGTR £11,278,530 £11,918,339 £19,116,178 £37,607,824 £56,684,144 £68,376,369 £79,837,384 £284,818,768
Profit after tax £36,931,578 £16,884,972 £35,216,097 £48,773,567 £74,783,921 £73,831,443 £93,170,605 £379,592,183
Dividends £0 £12,500,000 £15,000,000 £0 £40,000,000 £0 £0 £67,500,000

Together these show it is time for the UK Government to review the effectiveness of this corporate subsidy, and it is not just TaxWatch who is asking pertinent questions for during the Treasury Select Committee session Danny Kruger MP (Conservative) asked the CEO of UK Interactive Entertainment, the trade body for the games industry:

“…wouldn’t it be nice if some of the profits, which are the ultimate purpose of a commercial enterprise, were taxed in the UK? Do you not think that there would be some value in that?”6

We agree.

1Creative industries statistics commentary: August 2022, HMRC, 18 August 2022, https://www.gov.uk/government/statistics/creative-industries-statistics-august-2022/creative-industries-statistics-commentary-august-2022
“It is estimated that this generous new corporation tax relief will provide around £35 million of support per year to the sector.”, Video games companies to begin claiming tax relief, HM Treasury, 19 August 2014, https://www.gov.uk/government/news/video-games-companies-to-begin-claiming-tax-relief

2Creative industries statistics commentary: August 2022, HMRC, 18 August 2022, https://www.gov.uk/government/statistics/creative-industries-statistics-august-2022/creative-industries-statistics-commentary-august-2022

3This number has since increased, however, we are only looking at Creative Industries data up until the end of March 2022 as this is the most recent reporting period for Rockstar. Data available at – Video Games Certified as British through the cultural test for video games, BFI, https://www.bfi.org.uk/apply-british-certification-tax-relief/cultural-test-video-games
For more on this ‘cultural’ accreditation, and how a game set in the US about gangland crime can be classed as ‘culturally British’, see – Swedish goats, Japanese hedgehogs and Batman: the £324 million tax bung to the ‘culturally British’ gaming industry, TaxWatch, 20 November 2019, http://13.40.187.124/cultural_test_tax_relief/

4Creative industries statistics commentary: August 2022, HMRC, 18 August 2022, https://www.gov.uk/government/statistics/creative-industries-statistics-august-2022/creative-industries-statistics-commentary-august-2022

5The corporate structure of Rockstar is explained in our report Gaming The Tax System which we published in April 2019, http://13.40.187.124/reports/gaming-the-tax-system/

6Oral Evidence: Tax Reliefs, HC 723, House of Commons Treasury Committee, 19 December 2022, https://committees.parliament.uk/oralevidence/12468/pdf/

Another record year for Rockstar Games Tax Relief (RGTR)

9th May 2022 by Alex Dunnagan

Rockstar Games has revealed that they claimed £68.4m in Video Games Tax Relief (VGTR) in 2020-2021, equivalent to 38% of the entire amount of VGTR paid out that year. The amount Rockstar are claiming is rising every year, taking the total the US-owned company has claimed to a staggering £205m.

Video Games Tax Relief was estimated to cost just £35m a year when it was introduced. [1]“It is estimated that this generous new corporation tax relief will provide around £35 million of support per year to the sector.”, Video games companies to begin claiming tax relief, HM … Continue reading We now have one company claiming almost double that in a single year.

The 2020-2021 accounts of Rockstar Games UK Limited (previously Rockstar North) were published last week, just three months late, after the 2019-2020 accounts were published over a year late in January.

2016

2017

2018

2019

2020

2021

Total

Operating Profit

£3,515,268

£3,745,345

£8,242,790

£8,715,917

£9,519,819

£9,399,572

£43,138,711

Tax on profit

£33,416,310

£13,121,157

£26,915,315

£40,035,440

£65,155,510

£64,359,515

£243,003,247

VGTR

£11,278,530

£11,918,339

£19,116,178

£37,607,824

£56,684,144

£68,376,369

£204,981,384

Profit after tax

£36,931,578

£16,884,972

£35,216,097

£48,773,567

£74,783,921

£73,831,443

£286,421,578

Dividends

£0

£12,500,000

£15,000,000

£0

£40,000,000

£0

£67,500,000

While the Edinburgh-based company is responsible for developing some of the most profitable games of all time, its corporate structure ensures that it sees almost none of that profit returned to the UK. [2]The corporate structure of Rockstar is explained in our report Gaming The Tax System which we published in April 2019, http://13.40.187.124/reports/gaming-the-tax-system/

Not content with hundreds of millions of pounds in VGTR, Rockstar’s latest accounts reveal the extent of Research and Development Expenditure Credits the company is claiming – £304k in 2020-2021, £1.46m in 2019-2020, and £970k in 2018-2019, for a total of £2.73m over the past the three years. The previous years show how much expenditure they classed as R&D, but no figures are given for the actual amount of relief claimed.

Rockstar’s latest figures provide just another example of how Video Games Tax Relief has gotten out of hand, becoming a large corporates subsidy worth hundreds of millions of pounds a year.

HMRC’s creative industry statistics commentary for the 2020-2021 year states:

In the year ending March 2021, the majority of claims tend to be for smaller amounts, with 47% of all claims being for £50,000 or less; however, these claims are only responsible for 2% of the total amount paid out. Claims over £500,000 account for 87% of the total amount paid out. This proportion has increased from the previous year.

In order to receive VGTR, a game has to be accredited as “Culturally British” by the BFI. Since the introduction of the relief in 2014 through to 31 March 2021, 1,239 games received this certification. [3]This number has since increased, however, we are only looking at Creative Industries data up until the end of March 2021 as this is the most recent reporting period for Rockstar. Data available at … Continue reading [4]For more on this ‘cultural’ accreditation, and how a game set in the US about gangland crime can be classed as ‘culturally British’, see – Swedish goats, Japanese hedgehogs and Batman: the … Continue reading Of these, only two were published by Rockstar, with Grand Theft Auto V receiving the accreditation in 2015, and Red Dead Redemption 2 in 2019.

A total of £624m for all VGTR claims had been paid by March 2021, with £205m of it going to Rockstar. The result is that Rockstar has managed to claim a third of the total amount paid out whilst only being responsible for 0.16% of the games receiving the relief.

It’s worth bearing in mind that when this relief was introduced, the intent was to provide targeted support for games that were “culturally British”, and to help smaller publishers create games that might not be economically viable without the relief.

The staggering amounts paid out to Rockstar Games was raised by Lord Prem Sikka in February of this year, speaking during a debate on the Finance (No. 2) Bill, he said:

“According to its accounts, it has claimed £136.6 million in total in tax relief over the years. It has paid no corporation tax at all but has paid £67.5 million in dividends. Where exactly did those dividends come from? They came from picking the pockets of the British taxpayer. There is no other explanation for this. It does not seem to me that these kinds of tax reliefs are monitored. No evidence is provided by any government department to show what exactly the benefit to the UK economy is of this American company receiving all these tax reliefs.” [5]The figures used by Lord Sikka are to 31 March 2020. The full text from the debate is available on Hansard here; … Continue reading

Amount of video games tax relief paid (£ million, receipts basis) 2014-15 to 2020-21

The amount of relief paid out to video game developers in 2020-2021 increased by 48% compared with the previous year.

Despite the odd dissenting voice, there is very little scrutiny of this corporate subsidy that is spiralling out of control. To the best of our knowledge, the government has no plans to review this relief. Expect the next batch of statistics to reveal even more money paid out, and for Rockstar’s 2022 accounts to reveal yet another increase in the amount they are claiming.

References[+]

References
↑1 “It is estimated that this generous new corporation tax relief will provide around £35 million of support per year to the sector.”, Video games companies to begin claiming tax relief, HM Treasury, 19 August 2014, https://www.gov.uk/government/news/video-games-companies-to-begin-claiming-tax-relief
↑2 The corporate structure of Rockstar is explained in our report Gaming The Tax System which we published in April 2019, http://13.40.187.124/reports/gaming-the-tax-system/
↑3 This number has since increased, however, we are only looking at Creative Industries data up until the end of March 2021 as this is the most recent reporting period for Rockstar. Data available at – Video Games Certified as British through the cultural test for video games, BFI, https://www.bfi.org.uk/apply-british-certification-tax-relief/cultural-test-video-games
↑4 For more on this ‘cultural’ accreditation, and how a game set in the US about gangland crime can be classed as ‘culturally British’, see – Swedish goats, Japanese hedgehogs and Batman: the £324 million tax bung to the ‘culturally British’ gaming industry, TaxWatch, 20 November 2019, http://13.40.187.124/cultural_test_tax_relief/
↑5 The figures used by Lord Sikka are to 31 March 2020. The full text from the debate is available on Hansard here; https://hansard.parliament.uk/Lords/2022-02-22/debates/03EF4CEF-04DE-4374-BE48-BADAF2F06D4C/Finance(No2)

The gift that keeps on giving

19th January 2022 by Alex Dunnagan

Rockstar Games UK Limited (previously Rockstar North) has finally published it’s 2020 accounts, more than one year late. In fact, the publication of Rockstar’s accounts are so late that the company’s 2021 accounts are already overdue. The recently filed 2020 accounts reveal that the video game developer was entitled to £56.6m in Video Game Tax Relief (VGTR) in the 12 months to 31 March 2020. This large sum was almost half of the total VGTR paid out that year. The total amount of claims for VGTR is going up ever year, as is the amount paid out, but despite this, Rockstar appear to be capturing more and more of this relief.

The Edinburgh based games studio, which is owned by American video game giant Take-Two Interactive Software, is responsible for the development of the multi billion dollar Grand Theft Auto (GTA) series. As we wrote in Gaming The Tax System, while the UK based company develops the games, they don’t publish them, with a structure set up to ensure that the UK company turns very little profit, and therefore has little to no corporation tax liability.

VGTR – What is it?

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. The idea at the time being that only smaller publishers would be interested in producing games aimed solely at the British market.

The relief works by adding notional costs to the video games producer’s accounts, reducing the taxable profit or increasing losses. Developers can deduct an extra 25% of qualifying expenditure from their taxable profit. If the game’s production company is loss-making then the developer can claim a cash credit from HMRC.

Rockstar Returns

After filing their annual return nine months late with Companies House, Rockstar’s annual accounts are finally publicly available.

Before looking at the state of Rockstar’s 2020 finances, it’s worth noting that there is a large restatement for their 2019 accounts. It was previously reported that in the year end 31 March 2019, Rockstar’s turnover was £119m and the cost of sales was £56m. These numbers have now been adjusted to show that they were actually £231m and £167m. The reason given is that there was an error in the way that staff incentive payments were accounted for, and that “in the prior period these costs have been netted off in error against intercompany rechage income”, when in fact they should have been recorded. This is quite a significant accounting error. The impact it has on VGTR claims, if any, is not known.

Turning back to the 2020 figures, Rockstar turned a pre-tax profit of £9.63m over the reporting period, but once taxation is taken into account, that number increases by £65.16m to £74.78m. The vast majority of this increase is made up by the effect of VGTR, with the remainder coming from the effects of things such as deferred taxation and changes in valuation allowance. As a result of VGTR, Rockstar was able to pay out £40m in dividends over the year.

2016

2017

2018

2019

2020

Total

Operating Profit

£3,515,268

£3,745,345

£8,242,790

£8,715,917

£9,519,819

£33,739,139

Tax on profit

£33,416,310

£13,121,157

£26,915,315

£40,035,440

£65,155,510

£178,643,732

Of which VGTR

£11,278,530

£11,918,339

£19,116,178

£37,607,824

£56,684,144

£136,605,015

Profit after tax

£36,931,578

£16,884,972

£35,216,097

£48,773,567

£74,783,921

£212,590,135

Dividends

£0

£12,500,000

£15,000,000

£0

£40,000,000

£67,500,000

The last year for which Rockstar listed taxation as a liability was 2015, when the tax was listed as a cost of -£718k. In the first five years since the introduction of the relief, Rockstar’s accounts show the company accruing £136.61m in VGTR, with total taxation for the period actually showing £178.64m in credit.

Despite only having an operating profit of £33.74m over this five year period, Rockstar was able to pay out twice that (£67.5m) in dividends to shareholders due to the subsidy the company receives from the British Government.

By the end of March 2020, 1,000 games had received “Culturally British” accreditation, [1]This number has since increased, and statistics are available for the year up until end of March 2021. However, we are only looking at Creative Industries data up until the end of March 2020 as this … Continue reading a pre-requisite for VGTR.[2]For more on this ‘cultural’ accreditation, and how a game set in the US about gangland crime can be classed as ‘culturally British’, see – Swedish goats, Japanese hedgehogs and Batman: the … Continue reading Of these, two were published by Rockstar, with Grand Theft Auto V receiving the accreditation in 2015, and Red Dead Redemption 2 in 2019.

Studios are able to make interim claims before a game is completed, with the relief related to the production spend. The large claims from Rockstar for the 2019/2020 financial year are likely to be related at least in part to Red Dead Redemption 2, and possibly to the production costs of new games such as a future instalment of the GTA franchise, and potentially updates to GTA Online and Red Dead Online, although there may be other games in the works that we are unaware of. With Rockstar accounting for £136.6m of VGTR by March 2020, a company with fewer than 1% of the games qualifying for VGTR is set to capture over 30% of the total subsidy.

In 2018-19, 535 video games made 345 claims and received £103 million,[3]A claim may cover several games. with Rockstar accounting for some 37% of this.[4]We wrote about this at the time with our blog post Rockstar Takes The Pot, with TaxWatch analysis featuring in the Sunday Telegraph. Just as we thought the amount of VGTR hoovered up by a single multinational couldn’t increase, in 2019-20, 605 games made 350 claims and received £121m, with Rockstar accounting for some 47% of this. – despite having not released a game since October 2018.

Video Games Tax Relief was estimated to cost just £35m a year when it was introduced.[5]“It is estimated that this generous new corporation tax relief will provide around £35 million of support per year to the sector.”, Video games companies to begin claiming tax relief, HM … Continue reading However, we are now seeing just one company claim alone claiming more than that.

In October last year we said:

“Seven years from the introduction of VGTR, questions need to be asked as to whether this is achieving its initial aim, creating culturally significant games and helping British developers, or is it a scheme gone awry, with hundreds of millions in taxpayer cash subsidising successful multinational enterprises?”[6]Video Games Tax Relief – 2021 Update, TaxWatch, 14 October 2021, http://13.40.187.124/video_games_tax_relief_2021/

Rockstar’s recent accounts show how it’s more necessary than ever for the UK Government to review the effectiveness of this relief. For this US owned company, VGTR is the gift that keeps on giving.

References[+]

References
↑1 This number has since increased, and statistics are available for the year up until end of March 2021. However, we are only looking at Creative Industries data up until the end of March 2020 as this is the most recent reporting period for Rockstar. Data available at – Video Games Certified as British through the cultural test for video games, BFI, https://www.bfi.org.uk/apply-british-certification-tax-relief/cultural-test-video-games
↑2 For more on this ‘cultural’ accreditation, and how a game set in the US about gangland crime can be classed as ‘culturally British’, see – Swedish goats, Japanese hedgehogs and Batman: the £324 million tax bung to the ‘culturally British’ gaming industry, TaxWatch, 20 November 2019, http://13.40.187.124/cultural_test_tax_relief/
↑3 A claim may cover several games.
↑4 We wrote about this at the time with our blog post Rockstar Takes The Pot, with TaxWatch analysis featuring in the Sunday Telegraph.
↑5 “It is estimated that this generous new corporation tax relief will provide around £35 million of support per year to the sector.”, Video games companies to begin claiming tax relief, HM Treasury, 19 August 2014, https://www.gov.uk/government/news/video-games-companies-to-begin-claiming-tax-relief
↑6 Video Games Tax Relief – 2021 Update, TaxWatch, 14 October 2021, http://13.40.187.124/video_games_tax_relief_2021/

Video Games Tax Relief – 2021 Update

14th October 2021 by Alex Dunnagan

Key facts and figures:

  • £180m paid out in VGTR last year

  • 48% increase in VGTR on the previous year

  • 55 claims for over £500,000 represent 87% of the total value of payments

Video Games Tax Relief (VGTR), a form of subsidy to the UK videogames industry, has seen a 48% increase in the past year. Originally forecast to cost £35m a year, VGTR cost £180m in the 12 months to March 2021.

The reason given for the increase is “large payments for a small number of very high-budget games and underlying growth in the value of claims1”. The intent of the scheme is to promote British culture, and to foster innovation amongst small independent games developers through subsidies. The reality however is that this scheme is increasingly being captured by large, successful, multinationals.

In 2020-2021, 55 claims of more than £500,000 equated to 16% of all claims made. These claims were worth £156m, or 87% of the total amount paid out – again an increase from last year, where claims over half a million were worth 80% of the total.

While almost half of these claims were for under £50,000, these claims are only responsible for around 2% of the total amount paid out.

It would be unfair to say that the claims paid to multinationals has a negative effect on independent, British SMEs, as it appears that the pot of money available is effectively limitless, with costs increasing year on year.

Figure 1: Amount of video games tax relief paid (£ million, receipts basis) 2014-15 to 2020-21

In order to access VGTR games must pass a test and be certified as ‘Culturally British’ by the British Film Institute (BFI). Previous TaxWatch research has demonstrated how the ‘cultural test’ administered by the BFI is meaningless, as games are able to gain subsidies regardless of the subject matter, and even if they are produced overseas.2

The Guardian revealed in 2019 how four large multinationals – WarnerMedia, Sony, Sega, and Rockstar – had claimed close to half of all VGTR.3 In the past we have analysed the accounts of videogame multinationals, finding that regardless of whether or not they turn a pre-tax profit, the companies paid no corporation tax.4 VGTR is set up in a way whereby the scheme is almost bound to ensure that the UK games industry will not pay corporation tax.

Rockstar North, a UK based and American owned videogames developer responsible for the Grand Theft Auto Series, has in previous years been the largest beneficiary of VGTR. Their latest accounts, dated January 2020, revealed that the company claimed £37.6m in Video Games Tax Relief that year, taking its total to £80m since the scheme was introduced. Of the 1,110 VGTR claims made up until that point, Rockstar accounted for a quarter of all the relief, despite only making two games that qualify as ‘culturally British’.5

Companies House shows that Rockstar North’s accounts are over six months overdue, so we are unable to comment on how much money the American owned company has received in the most recent financial year.

Figure 2: Rockstar North accounts showing as overdue on Companies House. Image taken 13 October 2021.

So what?

The cost of this tax relief is increasing year on year, with just shy of 90% of the money going to games claiming over half a million. We have seen in the past how games such as Grand Theft Auto have claimed tens of millions.

In establishing the relief, the UK argued to the European Commission that British games were in decline, and that “culturally significant games may have production costs equal to global games but a significantly smaller market”.6 Seven years from the introduction of VGTR, questions need to be asked as to whether this is achieving its initial aim, creating culturally significant games and helping British developers, or is it a scheme gone awry, with hundreds of millions in taxpayer cash subsidising successful multinational enterprises?

 

1 The “growth in the value of claims” is likely regarding the fact that a company has two years to make or rectify a claim once a project is finished.

2Swedish goats, Japanese hedgehogs and Batman: the £324 million tax bung to the ‘culturally British’ gaming industry, TaxWatch, 18 November 2019, http://13.40.187.124/cultural_test_tax_relief/

3Revealed: global video games giants avoiding millions in UK tax, The Guardian, 02 October 2019, https://www.theguardian.com/games/2019/oct/02/revealed-global-video-games-giants-avoiding-millions-in-uk-tax-sony-sega

4Global Video Games Giants: Playing the system or paying their fair share?, TaxWatch, 20 November 2019, http://13.40.187.124/video_games_giants_tax_report/

5Rockstar takes the pot, TaxWatch, 19 January 2020, http://13.40.187.124/rockstar_2019_tax_relief/

6Commission Decision of 27.03.2015 on the state aid scheme SA.3619 (2013/C) (ex 2013/N) which the United Kingdom is planning to implement for video games, European Commission, 27 March 2014, https://ec.europa.eu/competition/state_aid/cases/248371/248371_1557990_171_2.pdf

Photo by Sigmund on Unsplash

Rockstar takes the pot – 2019 accounts show huge increase in Grand Theft Auto tax claim

19th January 2020 by Alex Dunnagan

Rockstar North, the Edinburgh based company behind the wildly successful Grand Theft Auto series, has published its latest accounts, revealing a huge increase in claims for Video Games Tax Relief.

As reported in today’s Sunday Telegraph, analysis by TaxWatch shows that the claim was by far the largest for Video Games Tax Relief granted by HMRC in 2018/19, accounting for 37% of all claims made by the UK video games industry in that year.

The claim means that for the fourth year running the company has paid no UK Corporation Tax, despite the Rockstar group racking up more than $6bn sales of Grand Theft Auto V since it was released in 2014.

The accounts for 2019 show that the company claimed £37.6m in Video Games Tax Relief, taking its total to £80m since the scheme was introduced. Of the 1,110 claims made since VGTR was launched, Rockstar have accounted for a quarter of all the relief claimed from the government, whilst publishing only two games that qualify for the relief.

The claim is believed to relate to the production of the next edition of GTA, rumoured to be scheduled for release soon. Rockstar North is the lead developer for the series, although Rockstar has also registered Red Dead Redemption 2 as being ‘Culturally British’, the pre-requisite required to qualify for the relief. Studios are able to make interim claims for VGTR before a game is completed, and the huge claims being put in by Rockstar are likely related to the production costs of GTA VI. As VGTR is related to production spend, the large claim indicates the scale of Rockstar’s spending on games development.

When VGTR was introduced, the government estimated that the new relief would cost in the region of £35m a year, and support smaller games developers. The scheme is now costing in excess of £100m a year, with close to half of all relief being claimed by just four companies.

Figures published by HMRC on all Video Games Tax Credit claims show just how large Rockstar’s share of the pot is. In 2018-19 there were 345 VGTR claims for a total of £103m.1 While these numbers may change, as companies have a period of one year to submit returns and another year to amend a claim, evidence from previous years suggest that the total claims are unlikely to change much from the published figures. The share of this pot going to Rockstar North, which was already significant, has increased from 18% in 2018 to 37% in 2019.

Of the 345 VGTR claims last year, 315 of them were for less than £1m, for a total of £30m. Rockstar North’s claim is worth more than the value of all of these 315 claims combined. There were 29 claims (excluding Rockstar) of over £1m, totalling £35.4m. And then there is Rockstar at £37.6m, which managed to claim more than 50% of the entire amount granted to games claiming more than £1m in relief. In fact, the stats tell us that Rockstar claimed at least five times the amount of its next biggest rival in 2019, making it by far the largest production in the UK that year.

We await to see whether any profit from this huge investment by the UK taxpayer makes its way back to the UK.

This research featured in Metro, The Sunday Telegraph, and was covered extensively in the video game press.

This article was amended on 20th January 2020 to reflect the fact that Rockstar had also gained certification of Red Dead Redemption 2 as being “culturally British”. 

Photo by Jenni Chen, license CC BY

1 Data taken from ‘Video Games Table 4.4’, from the August 2019 HMRC Publication ‘Creative Industries Statistics’, available here; https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/826824/August_2019_Commentary_Creative_Industries_Statistics.pdf

Unitary taxation – the new approach to corporate taxation and its critics

15th November 2019 by George Turner

There is widespread international consensus that the current system for taxing multinational companies is broken beyond repair. The OECD is currently negotiating a new system, with the organisation aiming to come to an agreement early in 2020. The current OECD proposals move away from the traditional approach of taxing (or attempting to tax) multinationals, and introduce an element of unitary taxation. The position of the UK government in the negotiations over the OECD proposal has become an election issue, with the Labour party announcing that it wants to go much further and introduce a fully unitary system, taking unilateral action to deliver it if necessary.

What is unitary taxation and how do the OECD’s proposals work? In this article we set out some of the issues confronting politicians as they seek a solution to the problem of tax dodging by multinational enterprises and why the OECD’s only partial adoption of the unitary principal is unlikely to solve the issue. The article then goes onto deal with some of the criticisms of the unitary approach, arguing that it is possible for the UK to take action on a unilateral basis which would move us towards a unitary system, even if international agreement on a fully comprehensive global reform was not reached.

A broken system

In 2016 Google made almost exactly 50% of its pre-tax profits in the United States and 50% in the rest of the world ($12bn and 12.1bn).1 On that profit, it paid $3.8bn in US federal and state taxes, and a further $966m was divided between every other government in the world where Google operates.

The reason for this extreme inequality is that in 2016 Google Ireland Holdings Unlimited, a company with an address in Dublin but tax resident in Bermuda, declared a profit of $8.9bn which was subject to a 0% corporation tax rate.2 As stated in the Google 10-K form, this was most of the profit that the company made outside of the United States (although the 10-K uses the term “substantially all”). Google Ireland Holdings Unlimited appears to have no employees, and all of its income derives from the ownership of intellectual property rights.

For 8 years governments at the OECD have been trying to agree how to reshape the rules around international tax. A number of reforms have already been put in place under the BEPS process, but as the OECD itself accepts, these have failed to grasp the kinds of structures put in place by Google and others.

This is confirmed by our own research, which found that the effective tax rates in the UK of five of the largest tech corporations in the UK had barely changed following the last round of BEPS reforms.3

The choice facing governments

Governments are now facing a choice. Do they defend the individual entity principle, often called the arm’s-length principle, the current foundation of the international tax rules? This states that the hundreds of thousands of individual companies that make up multinational corporations should all be taxed as independent businesses. This approach has facilitated the current tax structures of multinational companies, which rely on trading between group companies to move profit from one jurisdiction (such as the UK) to another (such as Bermuda).

The alternative approach is unitary taxation, which treats multinational corporations as one single enterprise, dividing the right to tax their total global profits between the nations where they operate based on a formula. This formula could be based on sales and employees for example, ensuring that companies only face tax liabilities in countries where they have substantial operations. The system already exists in the US, where it is used to divide taxable profit between different state governments which levy their own corporation tax rates. The Labour party have announced they will implement a unitary system as part of their platform in the 2019 election.

As a matter of pure principle, the unitary principle must surely be the correct approach. As was set out long ago by Lord Carnwath LJ, tax statutes ‘draw their life-blood from real world transactions with real world economic effects’. In the real world, multinational groups are single businesses rather than a set of loosely affiliated, separate entities.

However, there are many who still cling to the individual entity myth. Why? We can only speculate. However, it cannot go unnoticed that the individual entity approach generates mountains of paperwork for each multinational corporation, as each individual subsidiary must file its own accounts and justify the transactions it makes with companies within the group. This creates large amounts of work for accountants and tax advisors, all of whom are paid hefty fees for their work. These firms of accountants are often the same people acting as the voice of business when it comes to international tax reform.

The OECD’s hybrid approach

The current proposals from the OECD manage to avoid taking a decisive position on the choice between the arm’s-length system and the unitary system. Instead of throwing out the individual entity approach, the OECD have proposed a hybrid system. The arm’s-length principal stays, but a new right to tax a “residual” profit is added to the international tax system. The residual is apportioned to countries on the basis of where a company makes sales. What comprises the “residual” is not made clear and is the subject of ongoing negotiations.

Whilst the willingness of the OECD to consider moving away from the current tangled mess created by the arm’s-length principle is to be commended, putting a unitary system on top of it will only add difficulties rather than solve them.

The first issue is who will be subject to the new tax. Under the OECD proposals, the new taxing right will not be targeted at all multinational businesses, only “consumer facing” businesses will be in scope.

A test which only included purely consumer facing businesses would exclude companies like Google and Facebook, who derive the majority of their revenues from advertising. Overwhelmingly the purchasers of advertising are other businesses and not consumers.

The OECD accepts this and talks about consumer facing elements, which would encompass online advertising businesses. To stretch the definition of consumer facing in this way could end up creating significant grey areas which could be open to exploitation. The private equity industry has demonstrated very well that the profits of almost any industry can be easily converted to finance income for example.

It is also the case that most big tech companies are no longer purely tech companies. Their sheer size is seeing them expand into driverless cars, banking, and other industries. Is the proposal to separate out the ‘digital consumer facing’ parts of these companies? Where and how will that line be drawn?

It would be better to broaden the unitary principle to a wider set of companies rather than simply seeking to place companies or parts of companies into an artificial consumer facing category.

The second question is what will be taxed?

In order to defend their maintenance of the arm’s-length approach within their proposed hybrid system, the OECD states that arm’s-length remains a good foundation for the division of taxing rights with regard to most transactions. The new unitary approach will only apply to the “residual”.

The evidence we have seen demonstrates that currently businesses are able to eliminate not just a residual but most if not all of their profit in market jurisdictions using the arm’s-length approach.

As demonstrated by the Google example given above, despite substantial marketing and research operations in the UK, the outcome of the arm’s-length approach is, by Google’s own admission, substantially all of their non-US profit being moved to tax havens. If the purpose of the new system is to plug the gaps in the current system, is it really credible that substantially all of the profits a company makes in Europe could be considered a ‘residual’?

TaxWatch has also studied the video games industry in the UK. Our work discovered that the makers of Grand Theft Auto have not declared any profit in the UK over the last ten years, despite producing the most popular entertainment product in history.4

This perverse outcome was achieved because Take-Two Interactive, the US headquartered multinational which publishes Grand Theft Auto, reimburses the UK based developer of the game at a rate which means that it does not make a taxable profit in the UK.

Under the arm’s-length principle the contract between Take-Two and its own UK based developer, Rockstar North, should be the same as if Take-Two had commissioned an independent developer to do the work for them. It does not seem credible that an independent contractor would accept such a bad deal for creating such a cash cow for its employer. As we found, the real pay agreements entered into between Take-Two and senior staff at Rockstar confirm this. Under the agreements, senior staff at Rockstar Games received a bonus based on the profits made by the games they developed (on the basis of the profits made by the Rockstar group as a whole), an arrangement which was not available to the company they worked for. Many other companies operating in the UK have a similar structure, where employees are compensated on the basis of the performance of the entire multinational enterprise, but the company they work for is not.

Despite this, as far as we are aware, Take-Two’s business model has not been challenged under any existing rules.

Further evidence of how the arm’s-length principle is not working is provided by HMRC. In February 2019 the UK government announced a new Diverted Profits Tax Compliance Facility.5

The background note published alongside the facility noted:

“HMRC has found that some Multinational Enterprises (MNEs) have adopted cross border pricing arrangements which are based on an incorrect fact pattern and/or are not consistent with the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines (TPG)”

(TPGs set out how the arm’s length principal should be applied)

Although HMRC will not say how many companies they are targeting with this scheme, the fact that the UK government created a new compliance facility to deal with such MNEs suggests that the problem was significant, and not isolated to a few companies. It also suggests that even in cases where companies can be challenged under the existing rules, tax authorities are struggling to deal with the issue.

Again, it is not clear how the introduction of a unitary element will solve the inherent problems with the arm’s-length principle, or why it would not be better to subject the entire tax base of a multinational corporation to the unitary approach.

Can unitary taxation be introduced without international agreement?

Those that oppose the introduction of a unitary system claim that the solution is an overly simplistic answer to a complex problem.

In particular, they argue that such an approach conflicts with existing tax treaties, all of which would need to be renegotiated. To implement a unitary system would require global agreement, something which would be impossible to achieve.

Of course, the ideal outcome would be for governments to agree on a comprehensive solution. But that does not mean that nothing can be done until that happens. As has been set out in the recent paper by Professor Sol Picciotto (Taxing multinationals: a new approach), many tax treaties already in force already permit the use of a profit split methodology to determine taxable profit attributable to permanent establishments. This allows countries to attribute the global profits of a multinational to offices located in their jurisdiction on the basis of a formula. The OECD accepts that this could provide a ready made legal basis for countries adopting an apportionment method. In addition to this, there are new and long standing anti-avoidance initiatives which move towards a unitary approach. Full inclusion CFC rules are one example, as are the much newer US GILTI provisions.

It could also be argued that in order to stem the clearly abusive schemes that are commonplace today, more drastic action is required. It is possible for Parliament to legislate to unilaterally disapply the provisions of tax treaties. This last happened in the UK in 2008, when the government legislated to unilaterally override all of their tax treaties to close down a disguised remuneration scheme (FA 2008 ss 58 and 59, which amended ICTA 1988).

The action by the UK government was subsequently upheld by the European Court of Human Rights, which noted that double tax treaties should do no more than seek to relieve double taxation, and should not be permitted to become an instrument of avoidance.6

We have proposed that the UK government take this approach with regard to the taxation of royalty payments, a measure which would attack the current profit-shifting models of the tech companies and bring in a potential revenue of £8bn a year.

One of the drivers of the OECD talks has been the willingness of governments around the world to consider unilateral action such as new digital services taxes. It is thought by many that these new taxes are problematic under the current international tax rules. This is one reason why the UK only announced a DST as a backstop if the OECD talks fail.

In this context it makes sense for the UK to continue to make the argument that if the OECD cannot find agreement on how to end tax dodging, it will take action itself. This may not mean a global comprehensive system of unitary taxation, however, there are many tried and tested anti-avoidance mechanisms which could be brought introduced by any government under the rules that exist today. These would move us towards a unitary approach even if none was agreed at the OECD and would be an effective means of closing down avenues to profit shifting by multinational companies.

This article is partially based on TaxWatch’s submission to the OECD consultation on their proposed tax reforms. The full consultation response can be found here. The response to critics of unitary taxation was published in the Tax Journal here. This research was also featured in Funding Real Change, part of The Labour Party 2019 election manifesto (see page 32).
Photo by Sean Pollock on Unsplash

1 Google’s 10-K form states pre-tax earnings in the US and International divisions, the 2016 results are used as 2017 was an anomalous year due to one-off charges associated with the US tax reforms.

2 The annual report of Google Ireland Holdings Unlimited Company for 2017 is available from the Irish Corporate Records Office

3 http://13.40.187.124/corporate-tax-and-tech-companies-in-the-uk-2/

4 http://13.40.187.124/reports/gaming-the-tax-system/

5 https://www.gov.uk/government/publications/hmrc-profit-diversion-compliance-facility/profit-diversion-compliance-facility

6 Huitson vs United Kingdom


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