In these times of financial woe, people love to complain about all the big, nasty, faceless companies avoiding paying tax. They inevitably moan about it on Facebook, Google and Twitter (and sometimes even do something about it in the real, physical, world). But what about those companies themselves? The Web 2.0 behemoths are now some of the largest companies in the world, and they’ve decided – just like the evil old companies – that they don’t like paying all that tax. Don’t be evil… and don’t pay any tax if you can help it. But how do they do it?
An Irish Times newspaper article caught my eye the other day. It discusses the rapid growth of Facebook’s Dublin operation in 2010, whose accounts have just been published (as they must be by law, despite FB’s apparent reluctance). The headline figure is that:
[Revenue] is up from €15.2 million to €229.1 million
That’s a pretty significant increase! But that’s only revenue, how much of it was left over as profit?
Facebook Ireland generated a pretax profit of €1.9 million
What?! Where did the other €227 million go?
According to the article it mostly disappeared into a mysterious black hole known as “administrative expenses”:
Administrative expenses increased … to €221.6 million as a result of … royalties paid to other Facebook entities for services provided during the year.
How do they do that?
Is it me or does that sound suspicious? Well, it should do, because it is.
It turns out that Ireland’s significantly lower rate of corporation tax (12% vs 26% in the UK, and one of the lowest in the world) isn’t the only reason why companies like Facebook, Google et al move there. There’s also the very useful fact that, unlike most developed economies, Ireland chose not to introduce any legislation to prevent companies siphoning off their revenue to low-or-no-tax regimes like the Cayman islands or Bermuda.
So that’s where the “missing” €221 million has ended up: it’s been paid from the Irish part of the business to the tax-haven subsidiary, leaving only a small amount subject to corporation tax in Ireland. This practise is known in tax circles as the “double Irish”, and it (along with its Dutch equivalent) seems to be fairly widely used and well understood, even having its own wikipedia entry. Of course Facebook now funnels as much as possible of the revenue from the UK (its second biggest market) through the Ireland operation to get the most out of this arrangement. That explains the large increase in the numbers since last year.
There are many high-profile tech companies that have Dublin operations and may be avoiding tax in this way, including:
That’s quite a roll call.
The result of all these shenanigans for Facebook? It pays a ridiculously small effective tax rate of less than 1%, even better than Google’s 2.4% rate. And given Ireland’s current economic state I can’t imagine their government will be introducing more restrictive tax legislation any time soon in an attempt to crack down on it. They can’t risk these big companies abandoning their new homes in Dublin’s Silicon Dock.
Of course, you should feel free to ‘like’ this blog post on Facebook, after all, what will it cost you?
(* Disclaimer: These are solely my opinions, not those of my employer or anyone else).