Facebook is going to pay more tax in the UK – others to follow?

SUMMARY:

Social networking giant Facebook has decided to change its financial structures and pay millions more in UK tax, as pressure mounts on global tech firms to pay their fair share.

Facebook moneyIn 2014 Facebook paid just £4,327 in UK tax, despite the UK being one of its biggest markets outside of the United States. Whilst it’s unclear how much profit Facebook makes in the UK, it reports approximately £1 billion profit globally every quarter.

It’s also worth noting that in 2015 HMRC, the UK government’s tax body, paid Facebook £27,000 for adverts placed on its site to remind people to pay their taxes. That’s more than five times the amount Facebook paid in tax the previous year.

You can see where I’m going with this. There has been mounting pressure on global technology firms, including Facebook, Apple and Google, to pay their fair share of tax within the regions that they operate.

Up until now, Facebook has been routing most of its UK sales through Ireland and benefiting from a significantly reduced tax rate. However, this is set to change for its largest UK sales, according to the BBC, and the social network is set to pay “millions” more in corporation tax to the UK government.

This means that whilst for smaller online sales the social network makes, where there is little interaction with anyone at Facebook, will still be routed through Ireland, large deals with the likes of Tesco, Sainsbury’s and Unilever will recognised as being carried out in the UK under UK tax law.

It is thought that this will mean that Facebook will account for significantly larger revenues in the UK and as a result pay larger taxes on its profits.

Corporation tax in the UK is currently set at 20%, but because Facebook doesn’t declare the size of its UK business at present, it’s difficult to estimate how much profit will actually be paid. The changes at the social network will come into effect in April and the company’s new higher tax bill will be paid in April 2017.

The BBC states that the move comes as a direct result of the increasing global pressures that Facebook is facing. An internal post at the company states:

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.

What this means in practice is that UK sales made directly by our UK team will be booked in the UK, not Ireland. Facebook UK will then record the revenue from these sales.

In light of changes to tax law in the UK, we felt this change would provide transparency to Facebook’s operations in the UK.

The new structure is easier to understand and clearly recognises the value our UK organisation adds to our sales through our highly skilled and growing UK sales team.

Domino effect?

Facebook’s announcement will appease politicians and regulators in the UK, who have been very vocal about the need to reform global tax structures.

Less than a couple of months ago an OECD deal was struck to boost transparency regarding the tax arrangements of multinational enterprises. It was hailed as an “important milestone” in increasing cross-border cooperation on tax affairs.

The deal indicates how local territories are becoming increasingly frustrated with how global tech firms operate their tax structures and has sent a signal to companies that there is likely to be further reforms and a clamp down on those seemingly going out of their way to pay a disproportionately low level of tax – no matter how legal it is.

Shortly before the OECD announcement, the UK’s chancellor of the exchequer George Osborne hailed a new tax deal with Google that will see it pay £130 million in back-dated taxes for the past ten years.

However, the deal was labelled “derisory” by experts that argued that the amount still only totalled a measly 2.7% of the estimated £7.2 billion worth of UK profits over the period.

So are we likely to see others follow in Facebook’s footsteps and be proactive in changing their internal finance structures?

It’s a possibility. The UK government, for example, has set up a 25% tax rate, 5% above the standard corporate tax rate, for those companies that use “contrived” structures to move profits out of the region.

Whilst unlikely to make a huge impact on any global business with a huge accounting team wise to the nuances in tax law, it’s still a clear indicator that the UK government is becoming less patient with such practices.

Equally, there is likely to be an element of PR competition at play here. Facebook announcing it is goingHMRC_2293694b to pay a fairer amount of tax, whilst Google and Apple engage in lengthy negotiations with the tax office, isn’t going to do much good for the latter companies’ brand or reputation. This is more likely to prompt a change than anything else.

My take

Good news for the UK. And good for Facebook for making the change – even if it has been encouraged under some duress. But it’s the tax bill in April 2017 that will be very telling as to whether the changes are significant or not.

Let’s see if others follow suit…