Latest accounts show Facebook’s UK arm paid corporation tax of just £4,327 for 2014. Many ordinary British workers earning £33,000 a year or higher were outraged that they were paying more income tax than the social network.
Is Facebook not doing very well in the UK?
Facebook does not disclose how much revenue it takes from UK advertisers, but we know Europe-wide sales jumped 50% in 2014, reaching $3.4bn (£2.4bn). Much of that will have come from Britain. Last year, European revenues leapt again, totalling $4.46bn.
If Facebook is doing so well, why does it pay so little UK tax?
Facebook’s booming sales from British advertisers are all currently routed through a company in Dublin called Facebook Ireland Limited (FIL). Under rules set down in the British-Irish tax treaty, it doesn’t matter that FIL does a lot of business with UK advertisers, the firm simply doesn’t qualify as a taxable company in Britain. Many tax fairness campaigners point out that tax treaty rules are looking increasingly out of date as multinationals dream up more and more aggressive tax avoidance strategies.
If all sales from British advertisers are booked through Ireland, what does Facebook UK do?
The group’s British arm, Facebook UK Limited, charged sister companies within the Facebook group £105m for “support”. That sum, tax fairness campaigners suggest, is only a small fraction of the revenues that would arise in Britain if Facebook UK allowed UK sales to be booked in a UK company.
Is that going to change?
Yes. Well, in part. Facebook has said it will now divide the revenues it makes from UK advertisers into two. Sales to large advertisers, such as Tesco, will from now on be treated in a more conventional manner. They will appear as income on the tax return of Facebook UK Limited, and any resulting profits will be subject to tax by HMRC. The remaining revenues – that is, ad sales income from smaller UK advertisers – will continue to be routed through Ireland as before.
Will the change mean Facebook UK pays millions more in UK tax?
Don’t hold your breath. Billions of euros in sales from UK advertisers currently end up with Facebook Ireland Limited, but FIL pays very little tax in Ireland. For 2014, the Irish company reported tax of just €3.4m despite making sales of €4.84bn. The reason for this that FIL’s taxable income is all but wiped out by huge royalty fees it must pay for the right to use Facebook’s brand and technology. Those fees are sent to a Facebook firm in the Cayman Islands. If revenues from big UK advertisers are transferred to Facebook UK, a slice of those heavy royalty costs will be too.
How radical are the changes Facebook is planning?
As mentioned, the changes only affect sales from large advertisers, and Facebook isn’t saying how much business comes from these big clients. Facebook has 2.5m active advertisers worldwide, and more than 50m small businesses have set up dedicated Facebook pages. However, if Facebook has a similar advertising profile to Google, big advertisers could generate around 60% of total ad sales revenue.
Can’t HMRC block Facebook from charging royalties to its UK arm?
It’s worth taking a closer look at the existing royalty costs in Facebook’s Irish business. Currently, FIL sends billions in royalties to a company called Facebook Ireland Holdings (FIH). FIH is technically an Irish-registered company, but it is tax resident in the Cayman Islands. Tax avoidance specialists call this arrangement the “Double Irish”. It is a loophole that allows royalties to be spirited away into a zero-tax haven. Most governments in most countries work hard to block loopholes like that. Whether HMRC can remains to be seen.
Do other online multinationals continue to book their UK sales through companies overseas?
This kind of tax planning has been widespread across Europe. But a string of recent tax reforms – from Ireland, the UK and, most significantly, the Organisation for Economic and Cooperation and Development (OECD) – have attempted to call time on the most egregious avoidance wheezes. Responding to public anger, political pressure and policy reform, some multinationals have reverted to more orthodox tax arrangements. Amazon, for example, no longer routes sales from UK shoppers through Luxembourg. Google is continuing with its European sales hub in Ireland. Others, such as LinkedIn, have yet to show their hand.
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