Facebook was accused of “refusing to listen to the voice of public opinion” on Friday as it emerged that the social network paid only €2.3m (£1.8m) of tax on almost €3bn (£2.37bn) of advert sales channelled through Ireland in order to avoid tax in the UK and other countries.
The details of Facebook’s efforts to avoid UK tax come days after the chancellor, George Osborne, introduced a fresh “Google tax” crackdown on the US multinationals’ use of “elaborate structures to avoid paying taxes”.
Facebook channelled €2.98bn, or 46%, of its annual global sales through Ireland – making a gross profit of €2.92bn. It was able to cut its tax bill massively by paying out €2.915bn in “administrative expenses” mostly in royalty payments to Facebook’s parent company.
The manoeuvre reduced Facebook Ireland’s taxable profit to €7.3m, on which it paid €2.3m of tax, according to accounts filed at Ireland’s Companies Registration Office. Facebook declined to comment.
By channelling its UK sales through Ireland, Facebook has been able to avoid paying any tax in the UK for the past two years despite Britain being one of its biggest markets, with 33 million people signing in at least once a month. Facebook’s UK accounts show the company made a loss of £11.6m last year.
Margaret Hodge, the chair of the influential Commons public accounts committee, who has repeatedly challenged US multinationals over their avoidance of UK tax, said Facebook appeared to be “using elaborate corporate structures and artificial devices for no purpose other than to avoid tax”.
“It is clear from opinion polls that the overwhelming majority of British people do not regard this as morally acceptable,” she said. “We have to take tough action to crack down on this behaviour, and the UK should be leading the way on this issue as well as participating in the multilateral process that is going on through the OECD and G20.
“It seems that Facebook, like Starbucks, which this week admitted it will pay no corporation tax in the UK for the next three years, is still refusing to listen to the voice of public opinion.”
The boss of Starbucks UK, which was revealed to have paid only £8.6m of tax on £3bn of UK sales since opening in Britain in 1998, would not start paying corporation tax for three years after making a £20m contribution to the exchequer following a public outcry. Google, which also channels profits via Ireland, paid £20m tax in the UK last year, while its actual British revenues were £5.6bn.
In his autumn statement this week, Osborne announced a tax designed to stop multinationals artificially shifting British profits overseas in order to avoid UK taxes.
“Some of the largest companies in the world, including those in the tech sector, use elaborate structures to avoid paying taxes,” Osborne said.
“That’s not fair to other British firms. It’s not fair to British people either. Today we’re putting a stop to it. My message is consistent and clear: low taxes, but low taxes that will be paid.”
He said the levy, dubbed the “Google tax”, which will impose a 25% tax on UK profits artificially shifted abroad, would raise more than £1bn over the next five years.
The Treasury was unable to say whether the crackdown would prevent Facebook from being able to avoid UK tax in the future. Details of the “diverted profits tax” will be published in draft legislation on Wednesday.
The “Google tax” rate is 5% higher than next year’s UK corporation tax rate of 20%, suggesting the chancellor hopes companies will choose to dismantle complex structures that divert profits to low-tax nations such as Luxembourg and Ireland, and choose to pay HM Revenue and Customs instead.
“The chancellor said this will raise a billion over five years, but ultimately this is a tiny proportion of the profits the multinationals he has in mind are generating,” said Toby Ryland, a partner at accountants HW Fisher & Company.
“In reality, many of the UK’s double-tax treaties with other countries dictate where profits can be taxed. Sweeping measures like this often come to nothing. The chancellor has made the right noises, but most multinationals will be able to sidestep these new rules without breaking into a sweat.”
Heather Self, a partner at law firm Pinsent Masons, said: “The big technical companies are not stupid. I find it very hard to believe that they will have a structure that fits the definition of being abusive.”