Surprise! Facebook Avoids its European Taxes
If you are as cynical as I am, I know you are not surprised that Facebook paid Irish taxes (via Tax Justice Network) of about $4.64 million on its entire non-US profits of $1.344 billion for 2011.* This 0.3% tax rate is a bit below the normal, already low, Irish corporate income tax of 12.5%.
As with Apple, Facebook funnels its foreign profits into its Irish subsidiary. As the Guardian article explains:
Facebook is structured so that companies buying advertisements on the website in the UK, or anywhere outside of the US, have to pay Facebook Ireland.
As a result, Facebook manages to slash its taxes in other countries, paying, for example, $380,800 in British tax on estimated 2011 UK profits of $280 million, or a little over 0.1%. What is shocking is that Facebook paid so much Irish tax since it managed to convert its $1.3 billion gross profit into a net loss of $24 million.
As you’ve no doubt figured out, it’s that “Double Irish” ploy again. Facebook operates a second subsidiary that is incorporated in Ireland but controlled in the Cayman Islands. This subsidiary owns Facebook Ireland, but the setup allows the two companies to be considered as one for U.S. tax purposes, but separate for Irish tax purposes. The Caymans-operated subsidiary owns the rights to use Facebook’s intellectual property outside the U.S., for which Facebook Ireland pays hefty royalties to use. This lets Facebook Ireland transfer the profits from low-tax Ireland to no-tax Cayman Islands. For more on the arcane mechanics, see Joseph Darby’s article “International Tax Planning,” downloadable at Wikipedia.
This makes no sense of course, but is, in David Cay Johnston’s inimitable phrase, Perfectly Legal. But it shouldn’t be. And in the UK, Chancellor of the Exchequer George Osborne has announced
a £154m [$246.4 million] blitz on tax avoidance and evasion, with HMRC [the British equivalent of the IRS] hiring an extra 2,500 tax inspectors to target high earners who aggressively exploit loopholes to avoid or evade tax.
The U.S. should do the same.
* Dollar figures converted from pound sterling figures in the Guardian at an exchange rate of $1.60 per pound.
Cross-posted from Middle Class Political Economist.
“As a result, Facebook manages to slash its taxes in other countries, paying, for example, $380,800 in British tax on estimated 2011 UK profits of $280 million, or a little over 0.1%.”
You’ve really got to stop believing the TJN.
Facebook didn’t make any profits at all in the UK. Because it didn’t have a “permanent establishment” in the UK. And that’s because EU law says that it’s a very good idea that companies treat the Single Market as, you know, a single market.
You need to have just one corporate base in one EU country in order to be able to sell to all other 26 EU countries. That’s just what the Single Market means. And yes, the law also goes on to say that you pay your corporation tax wherever that single base is, not in each of the 27 EU countries.
Therefore the TJN is wrong. The reason Facebook did not pay UK corporation tax is because it simply didn’t make a profit in the UK which was subject to corporation tax.
Worstall
i feel like i am hearing some legal weaseling coming from you. what worries me is that you seem to believe it.
which is to say that while what you say is undoubtedly “true”, it still looks to us poor ornry taxpayers like a clever tax dodge made possible by the folks who write tax laws all over the world.
i am not against dodging taxes in moral principle. but you have to look at countries in enormous debt because the people with the money don’t pay taxes, and the result is something like the collapse of civilization. or any civilization that humans would choose to live in if they had a choice.
Sad these big companies don’t help the local economies they’re serving. The politicians are sadly in the hands of them.