Category Archives: OpenSpending

Candy Crush, King Digital Entertainment, Offshoring and Tax

Sifting through the King Entertainment F-1 filing with the SEC for their IPO (Feb 18 2014) I noticed the following in their risk section:

The intended tax benefits of our corporate structure and intercompany arrangements may not be realized, which could result in an increase to our worldwide effective tax rate and cause us to change the way we operate our business. Our corporate structure and intercompany arrangements, including the manner in which we develop and use our intellectual property and the transfer pricing of our intercompany transactions, are intended to provide us worldwide tax efficiencies [ed: for this I read – significantly reduce our tax-rate by moving our profits to low-tax jurisdictions …]. The application of the tax laws of various jurisdictions to our international business activities is subject to interpretation and also depends on our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for valuing developed technology or intercompany arrangements, including our transfer pricing, or determine that the manner in which we operate our business does not achieve the intended tax consequences, which could increase our worldwide effective tax rate and adversely affect our financial position and results of operations.

It is also interesting how they have set up their corporate structure going “offshore” first to Malta and then to Ireland (from the “Our Corporate Information and Structure” section):

We were originally incorporated as Midasplayer.com Limited in September 2002, a company organized under the laws of England and Wales. In December 2006, we established Midasplayer International Holding Company Limited, a limited liability company organized under the laws of Malta, which became the holding company of Midasplayer.com Limited and our other wholly-owned subsidiaries. The status of Midasplayer International Holding Company Limited changed to a public limited liability company in November 2013 and its name changed to Midasplayer International Holding Company p.l.c. Prior to completion of this offering, King Digital Entertainment plc, a company incorporated under the laws of Ireland and created for the purpose of facilitating the public offering contemplated hereby, will become our current holding company by way of a share-for-share exchange in which the existing shareholders of Midasplayer International Holding Company p.l.c. will exchange their shares in Midasplayer International Holding Company p.l.c. for shares having substantially the same rights in King Digital Entertainment plc. See “Corporate Structure.”

Here’s their corporate structure diagram from the “Corporate Structure” section (unfortunately barely readable in the original as well …). As I count it there are 19 different entities with a chain of length 6 or 7 from base entities to primary holding company.

State Budget Crisis Task Force Report

The State Budget Crisis Task Force was convened in June 2011 and issued its report in July 2012.

The top line quote from the main site states:

State finances are not transparent and often include hidden liabilities as well as rapidly growing responsibilities which are difficult to control. While state revenues are gradually recovering from the drastic decline of the Great Recession, they are not growing sufficiently to keep pace with the spending required by Medicaid costs, pensions, and other responsibilities and obligations. This has resulted in persistent and growing structural deficits in many states which threaten their fiscal sustainability. [emphasis added]

Full report (pdf)

Debt Does Not Equal Revenue Except in California

Striking quote on inability to understand that debt != revenue:

California is also confused about the meaning of the term “revenues”. Asked at a 2008 budget conference whether Schwarzenegger would consider raising revenues to balance the budget, Thomas Sheehy, deputy director of the Department of Finance, replied that the governor’s budget, in fact, already included new revenues: $3.3 billion from the sale of deficit bonds! A corporate executive who reports borrowed dollars as sales is angling for for a bunk in federal prison. It doesn’t take much financial sophistication to understand that a cash advance on your credit card isn’t revenue. It is debt.

California Crack-up, p.95

The authors follow this with this comment which I think is of striking relevance to Open Spending:

The first, crucial step towards responsible and democratic budgeting is to present the state’s fiscal information to Californians honestly and clearly.

It also reminds me of Niall Ferguson’s statement quoted in a previous post:

The present system is, to put it bluntly, fraudulent. There are no regularly published and accurate official balance sheets. Huge liabilities are simply hidden from view.

Not even the current income and expenditure statements can be relied upon in some countries. No legitimate business could possible carry on in this fashion.

Public Debt, Public Finances and OpenSpending

Excerpts and commentary on Niall Ferguson’s first Reith Lecture. All emphasis added.

In reading this piece I thought constantly of the Open Spending project where we are endeavouring to collect together government (and other public) financial information from around the world and present it in an understandable way. In particular, it made me wonder whether we should try to do more beyond collection and presentation of the data to provide additional (necessarily somewhat speculative computations) such as proper financial balance sheets.

Fraudulent and inaccurate public finances

The present system is, to put it bluntly, fraudulent. There are no regularly published and accurate official balance sheets. Huge liabilities are simply hidden from view.

Not even the current income and expenditure statements can be relied upon in some countries. No legitimate business could possible carry on in this fashion.

The last corporation to publish financial statements this misleading was Enron.

There is, in fact, a better way. Public sector balance sheets can – and should be – drawn up so that the liabilities of governments can be compared with their assets.

That would help clarify the difference between deficits to finance investment and deficits to finance current consumption. Governments should also follow the lead of business and adopt the Generally Accepted Accounting Principles.

And, above all, generational accounts should be prepared on a regular basis to make absolutely clear the inter-generational implications of current policy.

US liabilities

The most recent estimate for the difference between the net present value of federal government liabilities and the net present value of future federal revenues is $200 trillion, nearly thirteen times the debt as stated by the U.S. Treasury.

Notice that these figures, too, are incomplete, since they omit the unfunded liabilities of state and local governments, which are estimated to be around $38 trillion.

These mind-boggling numbers represent nothing less than a vast claim by the generation currently retired or about to retire on their children and grandchildren, who are obligated by current law to find the money in the future, by submitting either to substantial increases in taxation or to drastic cuts in other forms of public expenditure.

Scape-goating

As our economic difficulties have worsened, we voters have struggled to find the appropriate scapegoat.

We blame the politicians whose hard lot it is to bring public finances under control, but we also like to blame bankers and financial markets, as if their reckless lending was to blame for our reckless borrowing. [ed: but bankers often engaged in efforts to enable and prolong reckless borrowing, and this included heavy lobbying to prevent effective regulation, after all one of the roles of the State is to help its citizens avoid bad decisions]

We bay for tougher regulation, though not of ourselves.