Facebook could pay millions of pounds in UK tax after approving fundamental changes to its corporate structure in Europe.
Starting in April, the worldâ€™s largest social network will change its policy so that revenue generated from its largest advertisers displaying content on Facebook will be routed through the UK rather than Ireland. The change is expected to generate higher taxable profits in Britain and forms part of the US companyâ€™s plan to mitigate criticism of tax avoidance.
Facebook said: â€œOn 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.â€
The company added that the move had been planned for some time. Where Facebook UK deals with advertisers directly â€œadding valueâ€ to the transaction, advising companies and planning ads, it will invoice through the UK. Facebookâ€™s largest advertising customers in Britain include Tesco and Sainsburyâ€™s as well as major advertising buyer WPP.
Smaller businesses that use the social networkâ€™s online ad-buying tools will still be invoiced through Facebook Ireland, which will remain the companyâ€™s international headquarters handling all business outside of North America.
Facebook stated in its 28 January 2016 filing with the US securities and exchange commission that â€œthe majority of our marketers use our self-service ad platform to establish accounts and to launch and manage their advertising campaignsâ€.
But the company has more than 35 sales offices around the world, including the UK, while Facebook also works with traditional advertising agencies.
The change is expected to see Facebook UK generate significantly higher revenues and therefore pay a higher level of corporation tax, which is levied at 20%. Its first increased bill will arrive next year.
Meg Hillier MP, public accounts committee chair, said: â€œThe public accounts committee has long made the point that multinational companies are not passive subjects of international tax rules.
â€œThey choose how to structure their tax affairs and must acknowledge responsibility for those choices. In some cases this involves using complicated tax structures specifically designed to minimise their tax bills.â€
The UK represents less than 10% of Facebookâ€™s global revenue, but the company reiterated that its operations in the country, which include more than 850 staff, remained an important part of the business. The company is building a new headquarters in London, while the UK contributes to some of its most ambitious projects, including its solar-powered drone development.
Facebook said: â€œIn light of changes to tax law in the UK, we felt this change would provide transparency to Facebookâ€™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.â€
A Treasury spokesperson said: â€œThe chancellor introduced the worldâ€™s first diverted profits tax to ensure multinationals change their behaviour, rather than artificially shifting profits out of the UK. We can see it is already starting to have an impact.â€
But the shadow chancellor, John McDonnell, said the shift meant â€œlittle or no real substantive change at this timeâ€, while the Liberal Democratsâ€™ Baroness Kramer called for a â€œfundamental rethink of this discredited systemâ€ of corporation tax.
McDonnell said: â€œThis government must wake up to the scale of the corporate tax abuse scandal in the UK. Itâ€™s time George Osborne pushed ahead with full country-by-country reporting so that we can finally get to the bottom of what is owed to taxpayers.â€
The company faced criticism after it was revealed it paid just Â£4,327 in corporation tax in 2014, despite its UK staff taking home an average of Â£210,000 in the same period, receiving more than Â£35m in a share bonus scheme and pushing Facebook UK into an accounting loss of Â£28.5m.
Oxfamâ€™s head of inequality Nick Bryer said: â€œPaying tax shouldnâ€™t be a voluntary option. The worldâ€™s poorest nations are hardest hit by corporate tax dodging – losing at least $100bn every year that could pay for hospitals and schools. We need action to ensure all multinationals report their profits and taxes in every country where they operate.â€
Facebook did not disclose the sum of its ad revenue that would now be invoiced through the UK. Margaret Hodge, former Public Accounts Committee chair, said that an investigation into Googleâ€™s similar ad-sales arrangements showed that only 1% of its ads were sold offline, but that they accounted for approximately 60% of the companyâ€™s revenue in the UK.
Hillier said: â€œThe work of the public accounts committee and continuing high levels of public anger about the behaviour of some corporations have done much to move these issues up the political agenda. We will see the effects of Facebookâ€™s new arrangements in due course.â€
HMRC, which spent Â£27,000 on adverts with Facebook in the past year, would not comment on the particulars of the social networkâ€™s tax arrangements. A spokesperson said: â€œWe will closely examine any businessâ€™s structure on behalf of the British public to make absolutely sure they pay all the tax due to the UK. The new diverted profits tax will ensure the UK gets its fair share of tax from a multinationalâ€™s profits by making them restructure to stop shifting profits overseas.â€
Sir Martin Sorrell, chief executive of WPP, one of Facebookâ€™s biggest clients, described the social networkâ€™s change as â€œa good moveâ€.
The social network has just under 1.6 billion monthly active users, 83% of whom are based outside the US and Canada. According to data from Emarketer, there are approximately 32 million Facebook users in the UK.
Fellow US company Google has also been criticised for its tax arrangements. It agreed to pay Â£130m in back taxes in January, but the figure included a quarter of the sum related to Googleâ€™s company share options scheme.
Facebook and others have come under fire for suspected data protection law violations across Europe, most recently in Germany where the Federal Cartel Office launched an investigation into suspicions of abuse of market share and the national privacy law.
Originally published The Guardian, 5th March 2016
Sources tell me that Facebook moved after coming under increasing global pressure on its tax affairs and as a reaction to changing tax rules.
There was widespread controversy when it was revealed that Facebook paid Â£4,327 in corporation tax in the UK in 2014, despite Britain being one of the company’s biggest markets outside the US.
Globally, the company makes more than Â£1bn of profit every three months. It does not reveal figures for how much business it does in the UK.
The government’s new diverted profits tax was also likely to have a punitive effect on the business in Britain.
That tax is set at 25%, higher than the corporation tax rate, and is aimed at companies which use “contrived” structures to move profits out of the country.
Facebook executives will be told about the changes this morning.
“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,” the internal post, seen by the BBC, says.
“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.”
At this stage, it is not possible to say precisely how much tax Facebook will pay.
It is not under any regulatory obligation to reveal the size of its UK business until it reaches 10% of its global operations, which generate revenues of nearly $18bn (Â£12.7bn) a year.
But the importance of Britain to Facebook is revealed by the fact it employs 850 people in the UK and is building a new headquarters in London.
Facebook has now said that those staff are doing “value-added” work, a key issue in the setting of tax rates.
Before this new structure, Facebook’s UK revenues were based on a fee payment from Facebook Ireland, which meant that its actual sales here did not affect its tax bill.
That is a similar structure to Google UK, which is paid by its US parent firm for operations in Britain.
Google has also faced controversy over its tax affairs.
In January, the BBC revealed that the search giant would pay Â£130m in back taxes after an inquiry by the tax authority, Her Majesty’s Revenue and Customs.
Facebook sources insist that this move is not a reaction to the Google settlement and has been planned “for some time”.
There has been speculation that Facebook is also the subject of an inquiry by HMRC over its tax structure, but the social media giant has refused to confirm or deny there is any live process.
We are told the company’s new structure has been discussed with HMRC, although there is no formal “agreement” with the tax authority.