zondag 20 november 2011

Printing tax money for free: the license

Gifts to a charity are deductible from your business tax. Whoever prints a software license on paper can deduct the full software license list price as well. Read on and shiver ...

In many countries donations to charities and other good causes may be tax deductible. In the Netherlands such donations need to be made to so-called ANBI credited organisations (Algemeen Nut Beogende Instelling or Public Welfare Organisation). For financial gifts the calculus is simple: the value of the gift can be deducted from the tax (up to a maximum).

For gifts in kind (= non-financial) you may deduct the fair value: "the value in economic transactions" as defined by the tax office. This seems fair insofar as the fair value comes close to the production value or -cost. Think of a truck or TV or a washing machine or a PC.

But how do you value the production cost of software? (Not being the development cost). These costs come close to zero.

This leads to a most remarkable situation.

Suppose I am a software producer. Nearly everybody uses my software, because everybody else does and that is Main Rule #1. My software licenses are expensive - too expensive in fact for non-profit and NGOs. That sector holds little market value for me: the amount of licenses I will sell there is limited. Some organisations resort to illegal copies but the perpetrators are not happy with this as well. They start to look at free, producer-unbound software (freeware and open source software).

I am not happy with that prospect because others might come to the same conclusion and that threatens my whole market (see Main Rule #1). Counting the cash I have little to loose in this market while there is a lot to gain in keeping my market share.

To calculate an example we take fifty public welfare organisations. Each one may order twenty software sets with a license. Such a license is 'the right to use', usually a note printed on a piece of paper. The fair value (recommended list price) for this license is, let's say, one thousand Euro (€ 1.000,=). This is not the cost for the software itself; that is copied onto a medium, a DVD for example. I sell these disks to the welfare organisation for, say, thirty Euro each. We call these "administrative costs".

Let's calculate the result of my charity:
  • Fifty times reproduction cost of a DVD - at about 30c/piece - makes about fifteen Euro. Each charity may then install the software, on up to twenty PCs.
On the income side we find:
  • fifty times thirty Euro administration cost, about fifteen-hundred Euro in all;
  • tax deduction for fifty Public Welfare Organisations, each twenty licenses, times one thousand Euro/license adds up to one-million Euro, which comes close to two hundred and fifty thousand Euro net tax savings (€ 250.000,=!);
  • public relations value: I give money to charity;
  • enforcement of Main Rule #1: even organisations that cannot afford my software still use it!

Count your luck: this is Free Money! Paid for by the taxpayer.

Maybe more important for me is the market protection; competitors have no chance! Providers of less expensive or free alternatives are out-competed, just because their software is free from the start and they do not have the tax deduction advantage. Which is why I also provide education institutes with (nearly) free licenses for my software.

A remedy? On the short term it would be proper if the tax office does not compute the economic value in relation to the list price but to the production costs. Unsold products do exist, but unsold licenses do not. It will probably save any country's tax office several million Euro per year.

It is a bizarre situation that companies give away nothing and get a tax advantage in return.

(The original concept was prepared together with Valentijn Sessink)

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