Valuing Intellectual Capital

Gio Wiederhold
Stanford University (Emeritus CS)

Intellectual capital is the major contribution to corporate income. It is consists of the combination of the competence of the human workforce and its intellectual property (IP) that they create and exploit. In computing the product design, the circuit layouts, the chip masks, and the software hold the IP. Most the creators are unaware of their value to a business. In a commercial setting the IP property can be protected by trade secret, patents, and copyright. Humans can no longer be property, although employment contracts and stock options provide some protection. The topic of this talk is the value and its transfers of intellectual capital, not protection or risks of misappropriation.

In general, the value of any asset is the value of the future benefits, in business terms revenues, it generates. The value of intellectual capital and its components can be assessed similarly if the future income can be estimated and allocations can be made. Since rights to intellectual property, being intangible, can be easily transferred, transfer of such rights is a major means to shift income among companies around the globe. Tax havens are often the destination for such rights holdings.

Misvaluation is rife, and profitable for the tax haven entities, who can derive much income from intellectual rights received at an undervalued price. I will present 10 components of common misvaluations, that in combination reduce prices paid for rights to collect income to less than 10% of their actual value. I will show how revenues generated from the use of intellectual capital are typically allocated.

The use of misvalued holdings in tax havens allows companies that rely on intellectual capital for their income to pay taxes at a rate that is less than 10% of what one would expect based on their reported revenues. That in turn has allowed high-technology companies to accumulate financial capital in tax havens, amounting according to a recent estimate to $2 trillion. That offshore, untaxed capital leads to imbalances in investment and job creation that some of the public and their politicians yell about.

Addressing the issue constructively is more complex than closing loopholes. An unexpected result from my work is that abolishing corporate taxation and not having reduced rates on dividend and capital gains income is the only technically feasible solution, no matter how distasteful this might be to individual taxpayers.

Slides:

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About the speaker:

Gio Wiederhold is an emeritus professor at Stanford University. He obtained his PhD from the University of California in San Francisco and received an honorary DSc from the National University of Ireland. During his career and later academic life he consulted for a wide variety of companies and agencies, but shortly after his retirement he has consulted exclusively for the IRS on valuing exports of intellectual property rights. The result of that experience has been published as Gio Wiederhold: Valuing Intellectual Capital, Multinationals and Taxhavens; series Management for Professionals, Springer Verlag, New York, August 2013. His home page is at http://i.stanford.edu/~gio/ . References for the many issues touched upon are collected in http://i.stanford.edu/VIC/allVICcitations.pdf .

Contact information:

Gio Wiederhold, Professor Emeritus
Stanford University