George Osborne used to be a friend of Facebook. Four years ago, the chancellor cut the ribbon on the social network’s new London office — its first engineering centre outside Silicon Valley.
The investment, Osborne declared, was the fruit of his “determined” effort to bring the biggest tech companies to London. Britain would continue to ensure “you can find the talented people you need”, he pledged at the opening.
Since then, he has been as good as his word. Despite austerity cuts, British taxpayers have poured billions into universities to maintain the flow of smart, tech-savvy graduates craved by the giants of Silicon Valley.
Facebook, however, led by billionaire founder Mark Zuckerberg, has shown scant enthusiasm for contributing tax payments of its own. Although Britain is now its largest market outside America — worth an estimated £1.25bn in sales last year — Facebook pays next to no corporation tax to HM Revenue & Customs. In 2014, The Sunday Times revealed that the Silicon Valley colossus had handed over just £4,327, engulfing the company in a political maelstrom.
All that could soon change. After a recent overhaul of the international tax code, Facebook last week said it would put less of its British revenue through the complicated corporate structure it has erected to shunt profits to a Caribbean tax haven.
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Starting next month, Facebook will book sales from large UK advertisers in Britain, not Ireland.
“On Monday, we will start notifying large UK customers that from the start of April they will receive invoices from Facebook UK and not Facebook Ireland,” said the company in an email to staff.
Replacing the word “Ireland” with “UK” on ad deals may look like a minor legal change. But it cuts to the heart of the legitimate but controversial accounting manoeuvres Facebook has used to avoid tax in Britain and other countries.
The climbdown by the social network, which boasts a billion daily users, comes just months after the OECD club of rich nations agreed reforms to close tax loopholes. Last year Osborne enacted his so-called “Google tax”, a 25% charge on profits deemed to have been artificially diverted offshore. The standard corporation tax rate is 20%.
These radical moves are understood to have forced Facebook’s hand. The company, however, insisted it was changing its contracts so they “would provide transparency to Facebook’s operations in the UK”. It employs 850 people in London, including more than 100 sales staff.
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Under current arrangements, UK-based company advertisers buy ad slots from Facebook Ireland. The Irish company pays Facebook UK a sales commission, thought to be 10%-15% of each deal. These fees amounted to £105m in 2014. Thanks to this manoeuvre, Facebook reports just a tiny fraction of the revenue generated from UK clients, lowering its reported profits in Britain and its tax bill.
The rest of the cash derived from UK clients is paid out in licensing fees to another Irish subsidiary, registered in the Cayman Islands, where Facebook has placed a large chunk of its intellectual property.
Funnelling the bulk of revenues from Britain and other overseas markets through Ireland to the Caribbean means Facebook pays very little tax on its soaring foreign profits. Last year it paid just $123m (£87m) in foreign corporation tax on $3.4bn of profits outside America.
Under the new deal, large British companies that buy advertising on the social media site through its London sales staff will sign contracts with Facebook UK. Sales representatives will be deemed to have “added value” to advertising transactions, bringing more profit generated from British clients into HMRC’s grasp.
However, revenues from smaller businesses that buy Facebook ads through its online sales engine — without interacting with a Facebook worker — will continue to be routed through Ireland.
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Experts said that Facebook could begin to start paying substantial corporation tax in Britain from next year, when the changes will come into full effect.
However, the new framework raises more questions than answers. It is unclear what proportion of its revenue Facebook generates through its automated online sales engine. This will determine how much revenue is ultimately booked in the UK, and the size of the company’s corporation tax bill. Moreover, Facebook may exploit other loopholes to minimise its UK profits — and tax bill — such as paying out licensing fees for the use of the company’s intellectual property.
“The continuing lack of transparency over Facebook’s actual UK revenues makes it difficult to know whether these changes will [result] in them paying a fair share of tax,” said Crawford Spence, a professor of accounting at Warwick Business School.
The bigger question is whether Google, which has a similar corporate structure to Facebook, will also have to book more of its UK sales through its British division. The internet search giant’s contentious £130m back-tax settlement with HMRC appears to have left it free to continue siphoning British profits offshore.
Facebook is a big fish to have landed. But Google is the whale that tax collectors across Europe are desperate to hook. Having named a new tax in its honour, it would be odd if HMRC did not to pursue the bigger target.