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The ‘Harry Kane theory of value’ and the flaws in the EU’s digital tax plans


Value creation is where the problems begin with digital tax. How can you decide where the value is created by the England captain’s World Cup strip? Michael Devereux explores whether it is Russia, England or Bangladesh.

The international debate on how to tax the online economy is based on key assumptions about tax and value creation. The idea of basing a tax regime on value creation was laid down as part of the OECD’s BEPS project, and the EU has since taken it up in its efforts to find a short-term fix to the problem of digital tax. Yet the idea of value creation has not been the basis of international tax law in the past.

Michael Devereux, director of the Oxford University Centre for Business Taxation (CBT), suggested that this is where the biggest problems begin with proposals to tax the digital economy. He made this point by running through how difficult it can be to pin down value to a source at the CBT summer conference.

“Nike pays its Bangladeshi workers 21p an hour to make England’s World Cup kit, yet it’s sold for £160,” he explained. “The UK minimum wage is £7.83 an hour, so Nike creates £7.62 an hour in value by not producing clothes in the UK, but by producing clothes in Bangladesh for 21p an hour.”

A key difference here is that Facebook users may help create values but they aren’t paid to do so. Users are not employees, so you wouldn’t tax them. It’s the company and the processes it puts in place to make use of the data that really amounts to value creation. After all, Nike bought the rights to produce the official shirt.

Devereux explained that the value of the shirts could rise or fall depending where they’re sold. An England shirt is unlikely to go for much in Berlin compared to Birmingham. So it’s not just the cost of labour that changes according to geography, the demand can change too.

“If England Captain Harry Kane scores, the value of England shirts rise, but where was the value created?” Devereux asked the audience at the conference. “And the obvious answer is Russia.”

“You could say that Harry Kane has been training in England for the last 20 years, so the value was really created in England,” he continued. “But we’re in a nightmare if we get into that kind of argument because Oxford has been training leaders for 800 years, and you could argue we’re responsible for all of that human capital.”

If this is the case, then it’s strange to suggest that the value can just be reduced to user participation alone. The user might just be pressing a button on their iPhone, but everything else (the website, servers, algorithms, etc.) is a part of an existing platform.

Not only is it difficult to pin down the source of value creation, it may be very difficult to quantify and reduce it to a trustworthy number. This is before getting into the difficult matter of how to tax the value and which jurisdiction gets taxing rights.

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