It is ten years since Facebook opened its website to anyone over 13. It is eight since the company opened an international headquarters in Dublin. Last year it earned nearly $18 billion worldwide and signed a lease on a new British base big enough for 2,000 employees. Yesterday it told staff that it would soon be paying UK corporation tax on many, if not most, of its UK transactions.
About time too. Facebook’s new stance on tax follows outrage over Google’s agreement in January to pay a desultory £130 million in back taxes for the past ten years. The move precedes looming deadlines for tech companies’ first payments due under a new tax designed to punish them for moving British profits offshore. Facebook denies that these developments are linked. Even so there can be little doubt that it has acted now to avoid punishment and opprobrium rather than because of a sudden urge to do the right thing.
Sources say that Facebook will henceforth pay substantially more UK tax than it has so far. This won’t be hard — last year it paid a total of £4,327 — and it is unclear how much more it will pay, or when. The company claims the changes will bring transparency to its tax arrangements, but there is much about them that is still opaque.
At first blush Facebook’s new accommodation with Her Majesty’s Revenue and Customs is a better deal for Britain than Google’s. Unfortunately, both betray a lamentable failure by HMRC to set the terms of critically important negotiations on stopping industrial-scale tax avoidance.
Elsewhere in Europe, the starting point for such negotiations has been that national tax laws must apply to Silicon Valley giants as they do to everyone else. Bending or breaking them is assumed to be a criminal offence. In London the taxman has opted to haggle, and Big Tech is laughing all the way to the bank.
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Facebook’s UK tax figures for 2014 were a shareholder’s dream but a public relations disaster. A tax bill lower than that for an individual on an average wage was incurred after reported UK sales of £105 million and global revenues of $12.5 billion. The derisory sum was arrived at thanks to an accounting loss of £28.5 million produced by booking all the company’s British sales in Ireland.
That will now change. Ad sales and other transactions with big clients involving “added value” from UK-based staff will be booked in the UK. This is progress, and a small political win for George Osborne, whose deferred profits tax is clearly forcing a change in corporate behaviour. Yet Downing Street was notably subdued in welcoming the Facebook news yesterday, and no wonder. Small transactions will continue to be recorded by the company’s low-tax Irish operation. Exactly what constitutes British added value remains to be seen. Facebook is thought still to have large “deferred tax assets” to offset against future taxes, and its British revenues and profits will remain a matter of speculation for the foreseeable future. It has no obligation to report them separately until they account for more than 10 per cent of the company’s worldwide earnings even as those race towards $6 billion a quarter.
The worst aspect of Facebook’s announcement from the government’s point of view is that it casts the Google tax deal in a more unflattering light than ever. Unlike Facebook, Google will continue to funnel all its UK revenues through Dublin and to deny that its large and growing London base constitutes a permanent presence for tax purposes. It is good for UK plc when the world’s largest companies set up shop in London, but unacceptable when they play fast and loose with British tax laws. When a British business pays money to Google, Facebook, Apple, Amazon or any of their competitors the assumption should be that this is a British transaction subject to British tax. It is that simple.