Monday, September 12, 2011

Tax planning by video game developers

Interesting NY Times article about how video game developers such as Electronic Arts have combined aggressive tax planning with equally aggressive lobbying to pay no U.S. tax on $1.2 billion of global earnings, which I would guess were as a fundamental economic matter nearly all generated by talented employees who were living and working in the U.S.

One supplementary fact, not included in the article (reflecting that the information would be hard to find), but of interest substantively, is what taxes were paid on the owner level, given that one of the main tax provisions employed by Electronic Acts (according to the article) was deductions for employee stock options.

Still, even looking at both levels of tax, I rather suspect that Electronic Arts did pretty well.

The article spends quite a lot of time discussing the "architect" of Electronic Arts' strategies in recent years, "Glen A. Kohl, a tax lawyer colorful enough to publicly compare himself to Bruce Springsteen and to joke in the pages of The Wall Street Journal that his dog, Rubin, shared the name of the Treasury secretary under whom he served (Robert E. Rubin).

"After working in the Treasury Department during the Clinton administration, Mr. Kohl entered the private sector and became head of E.A.’s tax department in 2004, leading the company as it aggressively lobbied for a federal tax break on domestic production and set up a matrix of offshore subsidiaries, many in low-tax countries."

Kohl appears not to have been interviewed on the record for the article, but he is also discussed at length later on. It mentions that, before joining Electronic Arts in 2004, he "co-authored a widely-cited proposal urging the federal government to crack down on corporate tax avoidance, warning that 'the tax shelter problem is simply too detrimental to the tax system not to act.' As head of tax at Electronic Arts, he became a noted expert in using foreign subsidiaries to legally, and sharply, cut a corporation’s United States tax bill. As a co-chairman of the Silicon Valley Tax Directors Group, he also moderated a seminar in 2010 that showed technology companies how to use offshore subsidiaries to reassign the licensing of their intellectual property and, in some cases, reduce their effective federal tax rate substantially from 35 percent."

So it's a classic praise / pan, in some ways making him look great (smart, important, influential, creative, effective) but also no doubt prompting invidious musings from many readers about what might underlie the change in persona that appears to have taken hold around 2004 or so.

I should put my own cards on the table here and note that Glen and I are old law school classmates, and that I consider him a friend (hopefully, notwithstanding my topic choice here). Few if any in my law school class were so charismatic, energetic, or widely known and liked. For that matter, he was (and no doubt remains) far less self-important than Bruce Springsteen. Closer in intellectual outlook to Stephen Malkmus minus the diffidence, and coming from me that's high praise.

But the story of his evolution pre-2004 versus post-2003 certainly reflects the sort of incentives people face in the tax and business world - not just financially, although that's obviously very important, but in other ways as well. There are only so many ways to hit the really big leagues, develop and showcase your professional talents, and express your intellectual creativity, especially if you don't choose (or it isn't quite your thing) to toil in the obscure groves of academe, laboring to develop what you consider insights that maybe 300 people will download and 40 or so truly appreciate. And there may be unfortunate social byproducts to how talent thus ends up being directed.

Call it a cautionary tale, with an individually but not socially happy ending.

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