Facebook tax havens

Facebook’s branch in London is the quintessence of a thriving digital company, marking out its territory in Europe’s most advanced internet economy. Yet, if you were HM Revenue & Customs, you might be forgiven for thinking that the Silicon Valley company’s British wing was veering dangerously off course. It plunged £28.5m into the red last year — the steepest loss since it set up here eight years ago.

The widening losses depressed Facebook’s corporation tax bill. Its £4,327 contribution to HMRC was more than £1,000 short of the tax paid by the average UK worker, on a salary of £26,500.

The revelation — in The Sunday Times last week — has reignited the uproar over the opaque corporate structures created by Facebook and other American tech giants to dodge taxes. Last week the head of the Commons public accounts committee, Meg Hillier, said she was considering ordering Facebook to give evidence to MPs about its tax arrangements. The hope is that it will empower tax collectors in their battle to extract more from multinationals.

Chief executive Mark Zuckerberg likes to rhapsodise about Facebook’s role in revolutionising how people communicate since he founded the company in his Harvard dorm room 11 years ago. And in his mission statement, Zuckerberg set the company a higher goal than merely “maximising profit”.

Yet behind these new-age pieties lies a ruthless money-making machine deliberately constructed to funnel profits out of large economies, such as Britain, to Caribbean tax havens. Last year Facebook minimised its tax bill in this country by handing out salary and bonus packages worth an average of £210,000, which pushed the subsidiary deep into the red. That, however, is just the start of Facebook’s legal but contentious tax-avoidance strategy.

In Britain it employs more than 100 sales staff, whose task it to drum up advertising deals here. But advertisers do not sign a contract with Facebook in London. Instead, the customer buys ad slots from Facebook’s international HQ in Dublin.

As a reward for bringing in the business, Ireland pays sales commission to Facebook UK, thought to be about 10% or 15% of the value of each deal. These fees amounted to £105m last year.

Thanks to this manoeuvre, Facebook is able to report a small proportion of the revenue it generates from British clients — and shield the profits derived from them from the taxman. But Facebook pays little tax in Ireland either. Its main subsidiary there collects cash from Britain and many other territories. It then pays hundreds of millions of dollars in licensing fees to another Irish subsidiary registered in the Cayman Islands, where Facebook has placed a large chunk of its intellectual property.

Through this device — the “double Irish” — the digital giant avoids paying tax on most of its profits outside America.

These structures have come under attack in Europe and beyond. Earlier this month the OECD club of developed economies proposed a welter of reforms aimed at closing off the loopholes exploited by Facebook and other multinationals.The hope is that they will create a more level playing field in the game of cat and mouse between tax authorities and profit-hungry businesses.

IN JUNE, a letter with a Strasbourg watermark arrived at Facebook’s headquarters in California. It invited Mark Zuckerberg to appear before a special European parliament committee set up to investigate tax avoidance. The tech chief declined to appear — or even send a representative.

The snub enraged EU lawmakers. “We get lobbied all the time by these companies, and the first time we ask for their co-operation, they say no. MEPs were furious,” said a committee spokesman.

The Facebook founder could perhaps be forgiven for fighting shy. Europe’s mood towards the American tech industry has changed significantly recently. Earlier this month, the European Court of Justice tore up a transatlantic data pact that allowed Google and the like to send to America personal information about European users. (The decision came in the wake of the Edward Snowden revelations about mass data collection by US security agencies.) Also, Google has been accused of abusing its dominant position in internet search.

Tax is the bugbear, however, for both austerity-weary Europeans and their governments. The European Commission is investigating four multinationals over alleged sweetheart deals with state tax authorities. Just one of the four is European. This week the commission is expected to issue its verdict on Starbucks and Fiat. It is thought they will be found to have benefited from illegal tax deals with the Netherlands and Luxembourg, respectively. Sources said it would be several months before inquiries into Apple and Amazon’s agreements with Ireland and Luxembourg conclude.

These cases involve specific tax breaks allegedly handed to the companies in return for inward investment, but they all hinge on racy interpretations of the “transfer pricing” rules that determine how much profit a multinational reports in each territory in which it operates.

This rule book traces its origins to the 1920s, when the League of Nations established the framework for taxing inter–national trade, which had begun to flourish. Back then, the system was easier to police as the global economy was dominated by physical goods. Profits were reported and corporation tax levied in the country where value was deemed to have been created. It was a relatively straightforward judgment to make when the Ford Model T was the acme of hi-tech consumer goods.

Today, value creation is a “terribly vague concept”, according to Michael Devereux, professor of business taxation at Oxford. Much of a product’s value is bound up in patents and brands created by workers across many jurisdictions. “I can’t even answer the question [of where value is created] conceptually, so it’s impossible to answer it in practice,” said Devereux.

Take Facebook, which says it complies with the tax laws in Britain and elsewhere. The bulk of its intellectual property is created in Silicon Valley. However, it describes London as a “hub of innovation” and an “ideal location for talented engineers, marketers and designers [to] design products” for its 1.5bn global users. It is looking to hire software engineers in London. To justify their high salaries and bonuses, the recruits will, presumably, be expected to “add value” to the social network.

OVER the coming months, governments around the world will enact the first big overhaul of the rules on taxing company profits since the League of Nations era.

The OECD reforms are the fruit of two years’ work by more than 60 governments; their goal is to improve transparency, close loopholes and severely restrict the use of tax havens. If all goes to plan, an extra $250bn in taxes will be collected annually. Artificial structures to divert profits to low-tax jurisdictions will be penalised, and multinationals will be forced to disclose how much revenue and profit they generate, country by country.

“The OECD has picked its battles well,” said Jason Lester, UK and Ireland head of tax at auditing giant EY. “By focusing on greater transparency, their aim is to influence the behaviour of multinationals. There will be much more scrutiny on allocating profits to where value is created.”

The “biggest challenge”, he said, will be to ensure the reforms are “implemented in the same way, at the same pace across multiple jurisdictions”.

Anything less would see new loopholes created in the patchwork of treaties and bilateral agreements that underpin the global tax system. Tax competition be–tween nations is unlikely to be eradicated. Though the notorious “double Irish” is being phased out, Dublin has introduced a 6.25% tax break for intellectual property created in the country.

Some economists believe that corporation tax, already a diminishing part of the total tax take, will ultimately disappear. This is because big businesses are destined to remain several steps ahead of regulators.

It is not clear how governments would replace the lost revenue. According to Devereux, tax authorities could extract more from “immobile” targets, such as consumers and shareholders.

As custodians of investors’ investment, bosses of multinationals will always look for ways to slash bills — from the taxman and elsewhere. Nothing, it seems, is certain, but death and tax avoidance.

Grab your whip, taxman, and tame unruly Silicon Valley, in Comment

Minister in the know

Joanna Shields, chief executive officer of the Tech City Investment Organisation (Getty)

As the government prepares to close off business tax loopholes, it can call on the minister for internet safety and security for inside knowledge.

Baroness (Joanna) Shields, who was appointed after the general election, was managing director of Facebook’s Europe, Middle East and Africa operation between 2009 and 2012.

The social network was already shunting UK revenues to the Cayman Islands before American-born Shields arrived. In an interview with The Sunday Times last year, the 53-year-old said she had resisted Facebook’s use of tax havens to shield profits from HM Revenue & Customs. “I remember fighting it when I was there,” she said.

Shields, below, went on to lay bare the dilemmas faced by companies over their tax planning.

“[Tax avoidance] is institutionalised in the American system,” she said. “It’s the best way to deliver a return for your shareholders and that’s how people are judged and what you are paid to do.”

Before joining Facebook , Shields held top jobs at Google, Bebo and AOL.