THEY’RE legal, but the social network’s tax arrangements are bad form, argues Peter Jones
Anyone wondering why the political world seems to have gone potty need look no further than the multi-billion dollar company Facebook and its UK corporation tax bill for 2014 of just £4,327. Rage against this gross insult to British taxpayers is what gets people like Jeremy Corbyn elected to lead the Labour party. And then you might, over a double Irish and a Dutch sandwich (company tax dodges I’ll explain later) ponder the many delicious ironies in all this.
One is that this bill is actually slightly more than a third bigger than what it paid in 2013, which was £3,169. We should be so grateful.
All right, I hear corporate tax-dodging apologists saying, why don’t you look at the big picture here – that this is an immensely successful company, employing thousands of people, including about 360 in Britain, all extremely well-paid and paying pretty big income tax bills. What’s wrong with that?
Sure, I like successful companies. I like those that pay their employees well even more. But I don’t like companies ignoring that they benefit from the rule of law which protects them against crime and fraud, from numerous state agencies that benefits the company, its executives, and its employees, by providing them with, for example, highly subsidised education and a free health service.
They don’t just ignore that fact; they thumb their noses at it by avoiding paying tax and thus a share of the cost of those benefits. I dislike even more companies that use their vast size to avoid taxes which start-up and smaller rivals cannot avoid and thereby give themselves an unfair competitive advantage, preventing others from being equally, or perhaps even more, successful.
In other words, while companies like Facebook pay lip service to the virtues of free enterprise, they are in fact engaged in highly unfair enterprise that is damaging to both the economy and society. That unfairness nurtures the resentments and prejudices on which political extremism feeds.
The raw financial data disclosed by Facebook is certainly as impressive as a North Korean military parade. In 2014, it had global sales revenues of $12.47 billion, six times what they were four years previously. After deducting the cost of goods used and depreciation of assets such as ageing computer systems, its gross income was $10.28bn.
It spent a further $2.65bn on sales and administration (how much on accountants devising tax dodges, I wonder) and a very impressive $2.67bn on research and development, nearly 20 times its R&D spend in 2000. Any company spending a quarter of its gross income on R&D clearly aims to get much, much bigger still.
That leaves a pre-tax profit of $4.91bn. On this, it paid corporate income taxes of $1.97bn, of which $1bn was paid to the US government, leaving just $96 million paid to other governments, including ours.
Nevertheless, the US tax bill, which is just over a fifth of its net income, says that Facebook is not entirely constructed to avoid paying taxes. It just doesn’t pay corporate income taxes to other governments, including ours, which means that other British taxpayers (you and me) have to pay more to support the services from which Facebook benefits.
How much should it be paying? Facebook claims that its 2014 UK sales amount to £105m, only 1.3 per cent of its global earnings. Analysts think this improbably low since in 2013 the UK’s 24 million daily users were 3 per cent of the firm’s world-wide daily users.
So it is reasonable to think that UK revenues are perhaps £250m, and maybe twice that given that the UK is a rich country with which advertisers (from whom Facebook gets most of its revenues) will pay handsomely to communicate.
If it wasn’t, and the earnings and the profits were as dismal as Facebook’s numbers ostensibly say, then surely they would not be paying these grossly unproductive employees very much, and thinking of sacking them all to use the money more profitably elsewhere.
But no, Facebook paid its 360 British workers an average of £210,500 last year, the kind of money rivalled only by investment banking. Now, I am all in favour of employees getting a fair share of the profits they help to generate. But paying out £78.2m from total revenue of £105m? Come on, it leaves hardly anything to pay all the other bills.
Actually, this is also a tax dodge. It benefits Facebook’s employees because, on previous disclosures, about a third of the payments’ value is in company shares which attract tax only when they are sold, and then at rates of 18 per cent for gains of up to £35,000 and 28 per cent thereafter, a lot preferable to paying 45 per cent on earned income of more than £150,000.
But why does there appear to be a whole lot of missing UK revenue? The answer, I think, is in a scheme which Facebook and a whole lot of other big multinational companies appear to use and is called the double Irish.
Basically, if you use a couple of Irish subsidiary companies (Facebook has its European headquarters in Dublin) and another in a tax haven, say the Cayman Islands, you can use various mechanisms, all perfectly legal, to minimise the tax payable on earnings. Ireland’s corporate tax rate is 12.5 per cent compared to the UK’s 21 per cent, but this is only a bit of a very complex story.
A variant of the double Irish involves a subsidiary in the Netherlands (where corporate tax regimes are also lenient) and is called the Dutch sandwich. They both add up money-shuffling schemes which add no value to a company’s product, but swell the firm’s bank accounts by minimising tax.
The greatest irony here is that all the activist political movements which aim to end social injustice, rein in capitalist excesses, etc – from the SNP to the Corbynites – have succeeded through adroit use of social media such as Facebook.
How about that, comrade socialists and nationalists? The more you pursue your cyberactivism, the more you enrich a capitalist instrument oppressing the poor by making them pay more taxes and receive less benefits.