Social media giants Facebook are reported, by the Sunday Times, to have paid just £4,327 in corporation tax to the UK government in 2014.
The average UK worker, who receives a salary of £26,500, will pay £5,392.90 in income tax and national insurance. Yes you read that correctly; the multi-national corporation with global profits of over £1.4 billion pay less tax to the UK government than the average UK working citizen.
How do they get away with this?
The answer is simple; Facebook has done nothing (legally) wrong.
A Facebook spokesman has released a statement saying “We are compliant with UK tax law, and in fact in all countries where we have operations and offices. We continue to grow our business activities in the UK”.
In the UK, firms that make over £300,000 a year must pay 21% on all profits made. However, Facebook announced a pre-tax loss of £28.5 million and thus only paid a few thousand in corporation tax. However, Facebook gave £35 million to its 362 staff in the UK in a share bonus scheme. That’s an average bonus of £96,000. Without the bonuses Facebook would have made a profit in the UK of around £6.5million and thus would have been taxed a higher amount. A Facebook spokesman was quick to add that the staff paid income tax on these bonuses, which is a good thing of course, but it’s a shame the company itself only paid £4,327 despite its UK revenue being over £100 million.
These corporations use tax avoidance schemes, which by definition are minimising tax liability within the law. A popular scheme used by tech companies is the ‘Double Irish Arrangement’. This arrangement allows corporations to shift profits from high tax countries, such as the US at 35% top rate corporation tax, to tax havens such as Bermuda. The arrangement takes advantage of the US and Irelands differing definitions of corporate residency: Ireland taxes corporations if they are controlled and managed within its borders, whereas America’s definition is where the company is registered.
“taxes should be paid where profits are made”
Companies, in this case Facebook, put their intellectual property into an Irish registered subsidiary in a tax haven. The US considers the company should be taxed in Ireland, while Ireland considers it to be tax resident in the haven and thus the company avoids paying tax.
Although this particular arrangement is slowly being shut down by the Irish government, schemes like it will, no doubt, be continually used by multinational corporations.
George Osborne, Chancellor of the Exchequer, recently tweeted from an annual IMF event that “taxes should be paid where profits are made”.
This mirrored the recent pledge for a “google tax” laid out in the 2015 Budget. The tax aims to prevent Silicon Valley firms from minimizing their tax liabilities in the UK.
Google made £3.4billion in revenues in the UK last year and paid just £20.4million in corporation tax, according to a Guardian article. Google, similar to Facebook, collects its profits in Ireland where it is able to shift it on to ‘Google Ireland Holdings’, an Irish subsidiary firm located in Bermuda, where (you guessed it) it pays no tax.
Can Facebook or Google be blamed for their actions? True, it is unethical (on the part of the corporations) but it could be argued that the blame lies with the government. Is it not the government’s slowness in reacting to billions in tax avoidance coupled with an inability to make a clear and concise corporation tax law that has facilitated this problem?