Towards the end of 2016 it was reported Facebook enjoyed £11.3m in UK tax credit due to the share options it has awarded its UK employees. The amount was detailed in accounts now publicly available at Company House.
Read more: Apple takes on the European Commission over €13bn tax charge
In 2014, Facebook booked £105million in revenue but reported less in corporation tax than the average British worker foots in income tax.
Facebook isn't alone, though. Apple was slammed by the European Union last year for "illegal tax arrangements" in Ireland; the EU later demanded a record penalty of €13 billion (£11bn). The tech giant has a huge presence in Ireland, employing 5,500 people across the country, an increase of 30 per cent in the past 12 months. Apple’s major European hub, based on the outskirts of Cork, is currently being expanded and will employ an additional 1,000 people by 2017, and Apple is Cork’s largest private employer.
The EU ruling states that Dublin violated EU tax law by handing Apple an advantage not available to others. Apple and Ireland have continually denied any wrongdoing and, earlier this week, Apple lodged a total of 14 'pleas' against the European Commission in retaliation.
More recently, the tech giant was criticised for similar tax practices in New Zealand. A report in the New Zealand Herald claims Apple sold $4.2 billion (NZD) worth of products in the country, yet paid zero local tax. Instead, the company paid $37 million in income tax on its New Zealand sales to the Australian government, where the New Zealand sales team operates. This arrangement has been in place since 2007 and is legal.
Starbucks and Google have similarly been criticised in the past for the amount of tax they pay on their vast fortunes with Google being told to pay £130 million in back taxes in January 2016 for previous years' underpayments. A criminal investigation into Google's finances in Italy later saw Google paying €306m (£259m) to settle a tax dispute in Italy. The dispute revolved around Google not paying the full amount on its revenues in the country for more than a decade.
WIRED spoke to chartered accountant Richard Murphy of Tax Research UK - who has been partly funded by charitable trusts seeking a fairer tax system - about how this has gone on for so long, and what can be done about it.
Historically, the social network has rerouted income from UK advertisers through its Irish headquarters, where corporation tax is lower, arguing that its London offices are populated with sales support staff, while the sales are made in Ireland. Clients are billed in Ireland and when the social network opened its London offices, before engineering staff moved in, it was populated by advertising, sales, support and public affairs staff.
When Facebook released its 2014 accounts, it showed an accounting loss of £28.5m because of generous shares it paid out to staff. This was the same year earnings surpassed $10 billion.
It later transpired that the social network owed even less. According to Murphy, the £4,327 figure was an anomaly in the accounts - an estimate of what the social network would owe, that never materialised. “It didn’t make any profits and didn’t pay any tax,” Murphy tells WIRED. It’s doubtful it paid anything in 2013 either, he adds.
The reasoning behind this is indicative of everything wrong with tax rules today, Murphy says. “It's a farce,” he explains, it's a loophole based on the types of sales made abroad during the latter part of the 20th century.
A company in the UK could employ travelling salespeople who would sell wares door-to-door or to outlets. They would be paid to do this and get a commission on everything they sold in that country. They were not recognised as branches of the main company, but separate entities. “That was a perfectly logical concept with travelling salesman, but we have come to the digital age and a concept designed for a totally different era is being used to suggest a tech giant's office in London isn’t selling its own ads.”
Here begins a rabbit hole of ownership that ends with the Double Irish and Dutch Sandwich tactics.
We’re talking serious tax loopholes here. In the case of Facebook, they're a result of how the social network has structured itself and how it funnels tax through this structure.
Facebook UK advertising customers are billed via Facebook Ireland Ltd. Facebook Ireland Ltd pays little corporation tax, however, because after making payments to Facebook’s parent company in the US and royalty payments to Facebook Ireland Holdings - which owns the rights to use of the platform - it makes little profit. In summary, Facebook is paying Facebook to allow Facebook to use Facebook’s platform.
The argument that it’s the same as days of yore when an agent somewhere else is doing the sale for you, breaks down when it’s “between you and you”, says Murphy. “And yet we’ve let that happen, and allowed it to continue into the internet era.”
Facebook Ireland Holdings is based in Ireland but is not resident in Ireland, so does not have to file complete public accounts. It appears to instead be owned by multiple Facebook subsidiaries based in the the tax-free Cayman Islands. This is known as the Double Irish. If royalties are held by a third holding company in the Netherlands, it's known as a Dutch Sandwich. As an example of how this can impact UK corporation tax payments, in 2013 it was discovered the social network had moved £645m earned in the UK to the Caymans in this way.
While Facebook Ireland Ltd manages to keep its corporation tax rates low by paying out royalties to Facebook Ireland Holdings, the UK offices have kept tax payments low through share options to its employees. What’s important to remember is that the £11.3m tax credit is an estimate, based on how much of the shares Facebook thinks its employees will cash out, and how much those shares will be worth at that moment. If the share value goes up by the time employees cash out, the tax rebate will get even bigger, potentially cancelling out tax payments to the UK for years to come. There’s no way of knowing when employees will cash out, or whether Facebook has put a timeframe on that.
The so-called 'Irish inversion' tax loop has made the country a prime location for foreign companies to utilise lower tax rates by setting up a base on Irish soil.
The corporate tax rate in Ireland is set at 12.5 per cent, however, Apple's structuring allowed the tech company - ranked 8th in Forbes Global 2000 list - to pay a significantly reduced sum in the year that was under investigation by the EU. The arrangement dates to a 1991 tax ruling which was later replaced by a similar ruling in 2007.
As the FT explains, under the Apple Sales International (ASI) subsidiary, profits on the sale of Apple products across Europe, Africa, the Middle East and India were routed through Ireland and the rulings meant that almost all this profit was allocated to a “head office” which had no employees or physical premises.
Margrethe Vestager, the EU's competition commissioner, claimed that "selective treatment allowed Apple to pay an effective corporate tax rate of 1 per cent on its European profits in 2003 down to 0.005 per cent in 2014." In opposition to the Commission's findings, Apple claims to pay a 26 per cent tax rate worldwide.
In short, no. But “that’s a very poor argument because we don’t have international tax law,” says Murphy. “And companies are deliberately making sure they don’t bring income near the UK. What they are saying is technically correct but it’s disingenuous. They are deliberately playing off one tax system against another.”
When news surfaced of Facebook’s low tax estimate in 2014, Conservative MP Mark Garnier said: "It's about the spirit of the law versus the letter of the law. At the end of the day, tax evasion is illegal when you're deliberately setting out to not pay your tax by hiding your money. Tax planning is what most people will be doing with their pensions. And tax avoidance is where you take the letter of the law, to get around the spirit of the law, where you're actively seeking a way of using the letters to not pay tax."
For its part, Facebook has repeatedly said: "We pay all the taxes that we are required to under UK law."
There finally is, and it's in no small part down to the scrutiny of US tech giants’ accounts over the past few years. Under pressure from the EU, G20, and the Organisation for Economic Cooperation and Development (OECD), Ireland announced that from the start of 2015 new companies registering in Ireland must also be a tax resident. Apple, Google and Facebook have until 2020 to comply. Companies can apply for an even lower corporation tax rate, however. “Whether it will close the whole loophole down, I don’t know,” commented Murphy.
Ireland has made itself incredibly attractive to huge multinationals and the tactics have drawn thousands of new jobs to the country. But why wouldn’t it want to take advantage of the profits now these huge companies are embedded there? Murphy has strong views about this point. “They are so lacking in confidence that someone would want to stay - they’ll sell their soul to the devil to keep the jobs there.”
Looking at the situation historically, though, he points out that huge multinationals were constantly shipping through Ireland - trans-Atlantic flights had to land there to refuel. So Ireland eventually took advantage of this by creating the Shannon free trade zone. “If they could get a small tax advantage anything was better than nothing, but it also created jobs, which was what Ireland was desperate for,” said Murphy. “That logic, that we will charge very little tax - has remained ever since.”
Murphy claims May’s grandstanding at last year's Tory party conference was related to accountants selling abusive tax schemes, and making those same accountants liable. This is something HMRC had already announced before the conference.
“I don’t believe she is going after tax avoiders in the UK in a big way; we can’t afford to upset the city heavily in regards to Brexit.” Murphy again, makes some pretty strong statements with regards to the status quo, claiming: “there is a conspiracy going on to prevent real change.”
He essentially believes the Big Four like the intensely complicated tax rules - naturally, it keeps them in business - so lobby hard to maintain the status quo. On the other side of the conspiracy are those who work in tax for the UK, who likely want to eventually go and work for a Big Four company.
Whether this is the height of paranoia on Murphy’s part, or common sense capitalism, is irrelevant. The controversies surrounding Google and alike the past few years have meant it cannot be ignored longer. In a world where transparency is becoming the norm - Google even has an annual transparency report related to government information requests, why not its own tax dealings? - it makes sense the kind of complex tax loopholes an elite group can afford to take advantage of, fall to the history books once they are laid bare.
Undoing decades of tax law, which differs from country to country, is never going to happen. What can help, Murphy believes, is a system of country-by-country reporting.
Forcing multinationals to make country-by-country reporting for corporation tax public is a move that has recently been proposed and debated in the European and UK Parliaments. As of September, an amendment to the Finance Bill 2016 has been agreed in Parliament, but no date for implementation has been set. The terms are rather vague, though, and it's not clear if the reporting will be made fully public or only to the Treasury.
Meg Hillier, MP and chair of the Public Accounts Committee that tabled the amendment, said :"Our Committee believes strongly that the tax affairs of multinational companies should be open to public scrutiny. Businesses use complex strategies to minimise their tax bills and the lack of transparency over these arrangements does nothing to build confidence that corporations are paying their fair share."
The OECD - which is made up of 35 countries including the UK and US - has been mounting the pressure on multinationals and pushing a new "Base erosion and profit shifting" (BEPS) Action Plan. BEPS, it explains: "refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. Under the inclusive framework, over 100 countries and jurisdictions are collaborating to implement the BEPS measures and tackle BEPS."
“The pressure is growing for this information to be published,” says Murphy. “Most people realise it’s only a matter of time before this data goes on public record - we will be able to see when profits are reported and where. It would take me less than an hour to deconstruct where a company has overstated or understated profits. If this data is published, it is something no company will want to be found out in.”
“What they are trying to do is get tax to fall through gaps in between countries - but everything has got to be somewhere. The pressure is there for it to be on public record and hold companies to account locally for the first time.”
For Facebook, things will change once we start seeing UK advertising revenue actually be processed through the UK. If plans to make country-by-country reporting an international standard come to fruition, big changes will be afoot as companies ensure transparency does not catch them out in an awkward truth. But this has been going on for a long time and although loopholes like the Double Irish are closing, there is a grace period which might allow companies to find an alternative route.
This article was originally published by WIRED UK
