From the TJN blog (borrowed, with thanks, it's been a busy morning)
This is an extraordinary story, from the UK's Daily Mail:
The average salary package paid to each member of Facebook staff in the UK last year was more than the entire amount the internet giant paid the Treasury in corporation tax.
Facebook paid just £238,000 to Her Majesty's Revenue and Customs during 2011 despite annual revenues for its UK arm being estimated at £175million.
In comparison, the average staff remuneration package was £270,000 during the year.
This involved a transfer pricing game, using Ireland as the offshore bolthole. It illustrates among other things that when people talk about Ireland's headline corporation tax rate of 12.5%, this is easy to misunderstanding. What Ireland is selling, much more than that, is its willingness to help multinational corporations exclude whole chunks of their income from the tax net altogether. TJN's Richard Murphy is quoted:
"Tax accountant Richard Murphy said the accounts were ‘meaningless' because so much of the revenue was channelled through Ireland.
He added: ‘These accounts show that Facebook is recording expenses through the UK to claim tax relief on them, but recording costs through Ireland to benefit from its low rate of tax. It's the same old story of we pay the price and they get the benefit.'
This company is taking the benefits from Britain - its roads, rule of law, regulated markets, educated workforce, universities, and so on - and then using the offshore system to get out of paying for any of these privileges. Facebook (presumably) hasn't actually broken the law. But this sort of thing is, to use an expression, simply criminal.
Read more about transfer pricing here. Read a fascinating tale about how Ireland created a swamp of financial and tax abuse and crime, here.
There's also more on this story in the Guardian.
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What is interesting with these US multinational companies is how they are happy to use transfer pricing to avoid taxes on their European income but is is noticeable when you look at their accounts more closely they are no where near as aggressive in avoiding US taxes. Interesting how in the land of the free and Tea Party nutters the tax authorities are rather tougher in defending tax revenues.
Could you explain something to a layperson please? Many people are saying that FB made a £13.9million loss over the year and that ‘revenue’ is not the same as ‘profit’ and that corp tax is paid on profit (if a company has become the world’s largest of its kind with 1billion users, it would seem to me that it is stretching itself a bit too much if it has made a loss…) Are FB using the CFC rules whereby companies can offset losses made overseas? That seems to me a way of allowing multi-nationals to get away with all manner of bad business decisions and overexpansion.
FB made a profit of !.5 million before costs of paying share options to staff of £15.4 million meaning a loss of £13.9 million.
As the options have not been exercised yet that cost was on paper only and not tax allowable so actually there was a profit.
The current tax charge in the year was £185,000 – 12.5% rate.
The sales were £20.4 million but that’s just commission on the value of sales organised for FB Ireland – believed to be £175 million.
If all the £175 million sales were recorded in the UK then the UK profit would likely be very much higher.
RThat’s the point here.
CFC does not come into this – FB UK is the controlled company and CFC only applies to parents – but not to Irish ones who have no such rules
Thanks Richard. Off to fire the ammo at the Telegraph brigade…
There is an interesting paragraph towards the end of the Guardian article which says “In a statement it added: “The information does not necessarily present a full account of overall global financial performance so it would be a mistake to draw any conclusions from these filings.”” I would not expect the UK accounts to reflect the global financial results because they are just for the UK business but it was interesting that they did not say the accounts show a true and fair view of the UK business. A question for the auditors.
The problem here is not UK tax laws per se, but EU rules that allow freedom of establishment and for EU companies to sell into other EU countries without having their profits attributed to those countries. Laws that were designed to protect manufacturers from tax on their intr-EU sales are now being used to shelter tax on massively scalable and mobile services (i.e. Internet advertising) by American firms such as Google and Facebook. It is hard to see how the general principle can be changed without hitting other bona fide exporters of goods and services within the EU.
Let’s take the risk, shall we?
That damned imaginary Laffer Curve!
To echo Bernard (#4) the arrangement is as far as I’m aware, perfectly legal under EU law. Which leaves three options:
1/ Ireland raises its rate of Corporation Tax to the UK level. Given the state of the Irish economy, I doubt this is likely to be a move undertaken by the Irish government
2/ The UK lowers its corporation tax to the Irish level, which given the state of our finances is unlikely either.
3/ The EU takes steps toward adopting a common rate of Corporation taxes across the EU. I believe there are groups in the European Parliament agitating for this but unless it goes through under QMV, I cannt see it happening.
Which means, whilst their conduct is highly unethical, it is perfectly legal and as things stand, unlikely to alter unless the UK government goes with Option 2. How am I doing so far?
I am quite sure that we’ll see an EU CCCTB soon, just as we’ll have an EU FTT soon, and some will stay outside
The world will not stand by and watch the cheats destroy it
It’ll be interesting to see what happens, certainly. The EU CCCTB has been in the offing since 2004′, so I’m sceptical whether it is coming. As you say, at the minute, the unethical are in the ascendancy. Whether there is enough will to change it is doubtful. Things might have to get much worse before action is taken.
The one problem with understanding the tax issues around a company like facebook is the intellectual property (IP) issue. There is no doubt that facebook has a lot of IP built up through significant amounts of R&D spending in the US. To my mind, that IP is the entireity of what generates facebooks profits and the only real contribution to value in the UK is the actions of the sales staff that sell that IP into the UK market (and for which they receive a commission). So I fail to see why any large amount of profit should be attributable in the UK.
To turn the example around, lets look at Imagination Technologies that design the graphics IP for Apple smartphone chips. That IP is sold to Apple in the US and used in a fab in Texas to make the chips. All the R&D has been incurred in the UK,. So should the profitablilty from those sales to Apple be taxed in the US or the UK? The US is adding no value other than the sales process to Apple.
I do not ignore IP – I say it should be ignored
Customers generate the value in IP
They’re here
That’s why tax should be paid here
That’s why unitary tax ignores it – and rightly too. It’s an artifice to avoid tax, and no more when used in the ways these companies abuse it
“Customers generate the value in IP”
But that is like saying that customers generate the value in manurfacturing a product, so all manufacturing profits should be taxed where the customer is.
So it seems you believe under the Imagination Tech example I gave, that the tax should be paid in the US, despite years of tax deductable r&d expenses that have been incurred in the UK? Which makes the whole idea of a ‘knowledge based’ economy nonsense?
I understand of course that the transfer pricing of IP can be abused, but not ignore it entirely seems ridiculous/
Under unitary tax that follows….yes