How does Facebook avoid paying tax?
Updated: Feb 20, 2020
The big companies like Facebook, Google, Amazon and many other are using international tax avoidance tricks to pay less taxes in a legal way. Today we will examine the Facebook case study
Big players and large companies understood the importance of having a solid international tax structure to avoid paying heavy taxes on yearly revenues. Top players like Google, Amazon and Facebook for instance, look with extremely high interest at countries with an alternative and more advantageous tax structure. Today we will examine the Facebook case study.
Facebook case study
“Facebook saved more than 21 million per year in the last 5 years for a total of 105 million just using a great tax alternative structure”
How does Facebook currently avoid its UK taxes?
Like most US technology companies, it bases its international operations in Ireland, where corporate tax is 12.5 per cent compared with Britain’s 20 per cent. Until now, money made from sales to advertisers in the UK have been routed through Ireland.
So it must pay huge taxes in Ireland?
Far from it. While making revenues of €4.83bn last year, Facebook Ireland paid only €3.4m in corporate taxes. That is because corporate tax is based on profit, not revenue, and Facebook Ireland makes very little profit.
Why does Facebook Ireland make so little profit on all those billions of euros in sales?
Because it makes huge royalty payments for using Facebook’s technology to yet another Irish company called Facebook Holdings Limited. After paying all those royalties, Facebook Ireland is left making very little profit.
So, is the subsidiary selling Facebook Ireland the royalties paying huge taxes?
No. While the subsidiary holding the royalties is based in Ireland, its tax domicile is in the Cayman Islands, which is tax-free. This tax trick is known as the “Double Irish”. In some cases, the royalties are technically held by a third holding company in Holland but funded by the Cayman-Irish business. This is known as the “Dutch sandwich” because the Netherlands entity sits between two Irish firms.
“ Head of Facebook Ireland Gareth Lambe said: "As the home of our international headquarters, Ireland is an important part of Facebook's story and our growth in 2016 demonstrated that. ”
Like other multinational firms, Facebook organises its revenue reporting in a way to minimize its international tax bills.
Every public company has to deal with criticisms
and for that reason " Facebook has decided to move to a local selling structure in countries where we have an office to support sales to local advertisers,” said Dave Wehner, Facebook’s chief financial officer.
When fully implemented, the decision is likely to result in a huge slice of the international income routed through Ireland - €12.6 billion in 2016 - being diverted elsewhere. Facebook’s Irish tax bill - €29.5 million last year - is also likely to significantly shrink.
In practice, the change will only affect the revenues of large advertisers which have contact with a local sales office. Non -US revenues from SMEs and individuals who advertise on Facebook using its automated booking system will continue to be booked through Ireland.