I have a posting on the Guardian's Comment is Free site under the above title tonight.
I will be doing an more in-depth analysis here tomorrow if all goes according to plan (and sometimes it does not).
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In your article, you say:
“…they will say Facebook made a loss of £28m in the year. But the problem is, this figure is almost certainly not true. Payments of £35m in shares to employees have supposedly been made and the company has, I note, not recognised these sums as due on its balance sheet, where it implies it actually made a profit of £7m in the year, which is much more likely to be the correct figure. It’s absurd that two such differing views can be included in one set of accounts.”
But RSUs are invariably issued by the parent company, not the employing company. There is no reason why you might expect the share issues to be recorded on the balance sheet.
If you look at note 15 you’ll see a reserve credit for the amount of the RSU cost. So what has happened is that:
– shares have been issued to the company’s employees
– there has been a P&L charge, as required under GAAP
– the P&L impact has been reversed in reserves, as the company is not actually bearing the cost
– a tax deduction has been taken, as required by UK tax law
Or, in simple terms:
– The US parent has issued shares to UK individuals
– The UK company has therefore received a UK tax deduction, 80% of which is worthless to it, but the remainder of which saves it about £1.4m of corporation tax
– The UK company will have had to pay out about £4.8m in secondary NI
– The UK employees will have had to pay out £15m or more in PAYE and NI
– The cost is borne by the US parent (or its shareholders, if you prefer to think of it like that)
So if there had been no RSUs, we would have UK tax receipts of £1.4m.
Because of the RSUs, we have UK tax and NI receipts of about £20m, and about £20m of shares in the hands of UK individuals. The cost is borne by Facebook (£35m in the US, £5m in the UK).
To me, this seems like a good deal for the UK. It’s a massive transfer of value from the US to the UK, half of it going directly to the Treasury 🙂
And you think having two figures for the results for the year is a true and fair view?
Which two figures do you mean?
If you mean having an accounting figure for the profits and a separate figure for taxable profits, then yes: that seems entirely true and fair to me.
If you’re looking only at the accounting figures we have a slight complication, in that there is an underlying profit, the RSU charge, and the reimbursement of that charge. This means that it’s useful to look at the figures both including and excluding the RSU charge. So once again: yes, I think that it is fair to show them both.
What would you prefer to have shown in the accounts?
I think there is a slightly odd situation here, in that the cost of the RSUs seems to be borne by the parent company, although accounting principles (and indeed common sense) would suggest that it should normally be pushed down to the employing entity. On that basis it is the figure of £7m profit that is the anomaly, and the loss of £28m is the better. That might explain why the £28m is more prominent in the accounts.
Of course, if you take the view that the RSU charge is not really a cost to either company then you might prefer the £7m. But that leaves open the question of who it is a cost to. Certainly the UK employees (and the Treasury) have benefited, so there must be a cost somewhere.
I personally think that the existing shareholders ultimately bear the cost, but that it seems reasonable to recognize it in the parent company at least; and I can see there is a good deal of logic in pushing the cost down to the operating company.
The P & L shows a loss of £28 million
The balance sheet shows a positive reserve movement of £7 million
That is two very different figures for profit
Now, which one is right?
Incidentally, what is your view of the way that the interest has been taxed even though (or, if you prefer: assuming for the sake of argument that) the company has substantial losses?
The schedular system is clearly kicking in to the company’s disadvantage here.
£4,327?
In £104 million
You really are sweating the small stuff if that is what is worrying you
If you look in the reserves, the difference is neatly explained: there is a figure of £35m relating to the RSUs which comes in to the reserves without going through P&L.
With the £4k tax on interest, I’m not particularly interested in the amount, but more the principle that the tax rules deliberately manipulate loss relief such that the company can’t use its losses against profits. From your response, I take it you’re OK with that?
The accounting is a big issue
The profit offset is not
I am all in favour of taxing the returns on capital and that is what the system is designed to do
I am all in favour of taxing the value generated by a business.
In this case, because of the RSU scheme the value has all arisen in the hands of the employees, not of the company.
So the employees are getting taxed, and the company is not.
Seems perfectly fair and reasonable to me 🙂
Except as ever you entirely miss the pint of the whole discussion Andrew
That’s because you keep moving the point every time you realise your argument is falling apart 🙂
Not once
Not ever
Just as not once, not ever, have you ever got a point
Your point seems to be that you can’t tell from Facebook UK’s accounts what the proper UK tax charge is.
You started off by saying that you couldn’t tell because it was impossible to interpret the figures disclosed.
After I’ve interpreted them, you’ve changed to say that you couldn’t tell because you have no way of knowing that the figures disclosed are correct.
I’ll skip over the fact that the auditors and HMRC both get to see the supporting figures, as I assume that you would regard them both as ineffectual.
What I would ask is: what sort of disclosure would you believe?
If the accounts showed £104m of UK income, and £3bn of sales by related companies to UK customers (I’m not sure why company A’s accounts should show company B’s sales, but again let’s let that pass) then I would expect you to argue that:
a) The £3bn should be Facebook UK’s sales, as all sales *to* a country should be taxed as if made *in* that country;
b) The £3bn could be £4bn or £5bn, so you still can’t tell if the correct tax has been paid;
c) Even if the £3bn should stay outside the UK tax net, the £104m is far too low as a proportion of that number;
d) Deductions for RSUs, interest, intellectual property etc should not be given; and
e) the UK tax charge is therefore probably too low but you can’t tell from the accounts how much too low it is.
Even if the accounts showed £3bn of sales in the UK customers, with a gross margin equivalent to the global margin and thus a hefty UK tax bill, then I would expect you to argue that:
a) The £3bn could be £4bn or £5bn, so you still can’t tell if the correct tax has been paid;
b) The gross margin in the UK should be higher than average, as more of the costs are in the US;
c) Deductions for RSUs, interest, intellectual property etc should not be given; and
d) the UK tax charge is therefore probably too low but you can’t tell from the accounts how much too low it is.
You are,bat last, beginning to realise that the auditors may be playing a game and HMRC are being fed unreliable data
Welcome to the real economy
And I do not want anything more than the data to ensure tax is paid once only in the right place, at the right rate and at the right time
The OECD seem to think that fair
Why don’t you?
Yes, fraud exists. That does not mean that everything is fraudulent.
But: if you are going to assume that accounts are potentially fraudulent, how can you possibly rely on anything that is in them? If you are going to doubt everything that a company publishes, how can you ever be satisfied that the declared tax charge is correct?
Even if they published their entire nominal ledger, you could suspect that entries have been falsified or omitted. You would need to look over the shoulder of every employee, all the time – and even then you might suspect that your overseers had been suborned.
What is the point of calling for disclosures if you’re just going to dismiss them as potentially fraudulent?
Have you heard of systemic fraud in the sense that the system has been undermined to the point of not being fit for purpose and that this can be deliberate?
I think that is what has happened in accounting
So… you want to sweep away the entire global accounting system? And replace it with what? How would you come up with a system which is completely immune to fraud?
The fraud in the global accounting starts at the top with the profession and its capture of the standard setting process, as I have made clear if you read what I wrote
That’s where the process of reform has to start
I am working on it
“Do these accounts allow us to really form a view on the right amount of tax Facebook should pay? The answer is glaringly obviously no, or the outrage would not have happened.”
Presumably HMRC have been supplied with all the information they need to form a view. And they know far more about tax than you.
The outrage has been whipped up by political campaigners using half-truths and falsehoods.
Is that a contribution to debate?
Or just abuse?
Oh come on Eileen, I swear what he means at this moment you mean everything
you said as the usual neoliberal fingers-in-the-ears compared to what normal people think.
“The P & L shows a loss of £28 million
The balance sheet shows a positive reserve movement of £7 million
That is two very different figures for profit
Now, which one is right?”
Seriously? You claim to be an accountant and you are confused because reserves have not moved in exactly the same way as the P&L profit?
They are, of course, both right. Andrew Jackson (above) has even explained what happened and how quite legally and properly both figures are correct and that the UK exchequer is comfortably better of because of what happened.
It is confusing only to those who don’t understand GAAP and RSU accounting.
And it’s noticeable that as soon as arguments get technical, your responses become shorter and shorter and deal less and less with the points made.
I understand that accounting
And I am absolutely clear: that accounting is nonsense and deeply misleading. What is very clear from the accounting is that the P&L does not, and cannot, represent the real return this company is earning
It does not need deep technical discussion to state that: it is, to be blunt, simply true
What you’re missing is that the company is earning a real return and promptly handing it (and more) over to its employees.
The value generated is being taxed where it ends up: in the hands of the employees, not those of the company.
No I am not missing that because that is simply not true
The reason he those employees are earning that return is not Ben g dsiclosed in teae accounts and so your claim is utterly unfounded
Wrong, to put it another way
I could be less subtle
If it’s not being disclosed in the accounts how is he able to show the numbers/impact from looking at the accounts?
Or are you arguing that the accounting treatment is wrong? which is an entirely different issue.
My arguments clear
What are you refusing to note in it?
Is the suggestion that Facebook UK has not paid the tax that it is required to pay in the UK?
Or that Facebook UK pays less tax in the UK than it would have to pay, if the tax system was changed to require it to pay more tax here?
How would unitary taxation work in this scenario: a profitable corporate group from state A wants to expand into state B, where the tax rate is higher. The operations in state B would initially be loss-making, as there are not enough sales to cover the costs of the new operation (staff, premises, etc) while the operations of the group as a whole remain profitable. Would the group be taxed in state B, at the relatively high tax rates there, on a proportion of its worldwide profit, even though its operations there are loss-making when considered separately?
Unitary would cleatly work better
But actually my argument is with the accounting which is deeply misleading
in my opinion
What, specifically, do you think is misleading about the accounting?
So far, your main issue seems to be that Facebook UK isn’t disclosing the UK sales made by other Facebook companies.
Andrew
Did you read a word of what I wrote?
I despair of you
Richard
I read every word of what you wrote: you wrote (in both your Comment is Free article and in you follow-up blog post) that you couldn’t get any useful information out of the accounts.
That is a long way from the accounts being deliberately misleading.
In fact you explicitly complained that Facebook were complying with their obligations but not giving any useful information.
In my book, to mislead someone you have to tell them something.
Now setting aside the fact that I and others *can* get useful information out of the accounts, how do you get from the accounts “provide no information” to “are misleading”?
Andrew
That is not even worth commenting upon
If you can only rely on selected and pedantic semantic sophistry to make a point you have nothing to say
Expect any response to be deleted
Richard
[Sorry, I am a different Andrew]
OK, so how would unitary taxation work in the scenario that I outlined above? Would the group expanding into a new territory be required to pay corporate income tax on a proportion of its worldwide profits there, even if its operations there are loss-making?
Yes
Because it is a group decision to be there
And the loss in any part of a group is likely to be arbitrary in reality