Question: Why is Mick Jagger one of the wealthiest entertainers on earth?
Answer: Talent? Longevity? Energy? Hard work? Qualifications? Intellect? Luck?
The Rolling Stones have created massive wealth as a result of their talent, effective management, energy, hard work, longevity and more importantly a well considered financial and tax strategy. The Rolling Stones are often labelled the ‘Billion Pound Band’, but that’s a massive understatement — since 1989 they’ve grossed twice that. Mick Jagger is worth £200 million, Keith Richards almost as much.
It’s not because of MJ’s academic history (or lack thereof) or business acumen but as a consequence of a simple yet effective structure and strategy created by manager Prince Rupert Loewenstein. It was in 1968 that Loewenstein first walked into Jagger’s house in Chelsea. The Stones were already a global phenomenon but, Loewenstein recalled: ‘There was no furniture in the house.’ Jagger admitted that the band, though working its socks off, had no money.
Recognizing that “The Stones” were financially better off using a company established in a country with a favorable tax regime he set up the new companies in the Netherlands. Loewenstein realised that with a top UK tax rate of 98 per cent at the time, a mountain of debt and years of litigation ahead, he simply had to get the Stones out of the country. Decisions on where to record, and where to tour, were made on the basis of tax benefits.
He recognized that the fundamental asset owned by “The Stones” was their Intellectual Property. An asset that has real value, is easily transportable and transferrable, has no borders or boundaries, is incredibly difficult to value at (Methods of defining and valuing Intellectual Property are more numerous and diverse than the hits produced by “The Stones”).
The value in Intellectual Property can be derived from ownership of the actual Intellectual Property and its associated revenue streams and ownership of rights with respect to the Intellectual property.
While the actual execution of the Stones strategy is complex and multi layered the basic premise is simple.
1. Well structured international ownership of Intellectual Property and the rights to the use of Intellectual Property
2. Appropriate and supportable valuation of the Intellectual Property
3. Well structured foundation agreements for the use of and rights to the Intellectual Property
4. Transparent accounting and pricing structures that are supportable and consistently applied
Revenue, via “a transfer pricing mechanism” is directed to the most appropriate entity to ensure maximum (after tax) profit is achieved, concurrently costs are also allocated to ensure maximum after tax profits are achieved (Globally). The companies in the Netherlands owned the rights to the intellectual property “The Stones” created. Any time the intellectual property was used either by a record company or a concert promoter a fee would be paid back to the Dutch companies.
The result of this pioneering 1960s tax strategy is that the Rolling Stones are to this day not only one of the highest grossing bands of all times, they have also saved hundreds of millions of dollars in taxation over the decades.
“The Stones” are not alone, every company, every entity, every person can and does have Intellectual Property. It is simply a matter of; Identification, Definition, Ownership and Valuation of Intellectual Property, an appropriate international business structure to achieve defined global objectives and the creation of foundation documents to maximise the advantage derived from the Intellectual Property.
The story of the Stones tax strategy illustrates one basic fact: Intellectual Property is a very powerful tax planning tool.
The increased focus on and access to the global market means a product may be designed in New Zealand, manufactured in China and sold in the United States. Intellectual Property has become the preferred method companies use to become tax efficient.
A global tax strategy can have an incredible impact on wealth creation (as much as any cost cutting or revenue growth strategies). Tax Planning is an essential component of global business strategy and wealth creation. Get it right and the benefits can be enormous. Get it wrong, the results will be catastrophic
Maximising international tax efficiency is a complex exercise. Strategy and structure must be developed pursuant to the current environment and in addition have the flexibility to adapt to future changes in that environment.
International tax planning involves a thorough understanding of the tax laws, regulations and case law of two or more individual countries. In addition, most countries will have a series of agreements or treaties between them that deal with cross border taxation. Any tax plan must consider not only the internal tax legislation and the reality of any internal complexity (State Vs Federal taxes) but must also comply with all international treaties and agreements between these jurisdictions. International tax planning must also be considered in the context of each jurisdiction’s corporate and commercial legislation. It is not an isolated, stand-alone exercise but requires a comprehensive review of all components of the business and its environment.
Practical and Functional
The resultant structure must not only be tax efficient but it must be designed to meet the functional objectives of the parties.
Compliance and contestability
The resultant tax structure must be compliant with all legislation. The assumption must be made that it will be tested. He (Loewenstein) was scrupulously honest and insisted on doing things by the book, …he saw it as a way of ensuring that the business would still be running next year and the year after that
Failure comes with enormous cost, both fiscally and in terms of time and resources and is unacceptable.
Historically the level of tax planning required has only been affordable by major international corporates. This is no longer the case, effective international tax planning can now be tailored to meet the specific needs and budget of each client.