UK lawmakers say Facebook may have broken tax rules

  • TECH
  • Monday, 07 Mar 2016

Growing momentum: Labour MP Nick Smith said the UK tax authority, Her Majesty's Revenue and Customs (HMRC), should have challenged Facebook's arrangement before now.

LONDON: Facebook said it would ditch a corporate structure that helps minimise its UK tax bill, prompting lawmakers and campaigners to ask whether the arrangement had ever complied with UK tax rules. 

Facebook said on March 4 it would stop booking sales to major UK clients via an Irish subsidiary and in future report sales agreed by UK staff in Britain. 

"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 company said in a statement. The change follows the British government's introduction last year of a new tax on profits shifted offshore. 

"From the start of April ... UK sales made directly by our UK team will be booked in the UK, not Ireland," Facebook added. 

The California-based company declined to say if it currently booked sales made by UK-based staff, to UK clients, in Dublin. 

If it did, this would break UK and international tax rules, which require companies to book sales where they are made. 

Caroline Flint, member of parliament (MP) with the opposition Labour party, said the statement "raises more questions than it answers". 

"Facebook are trying to improve their corporate reputation but, in so doing, they appear to have confirmed that UK-based staff were conducting UK sales in the UK, but artificially diverting that income as though it was generated by Facebook Ireland," she said. 

Labour MP Nick Smith said the UK tax authority, Her Majesty's Revenue and Customs (HMRC), should have challenged Facebook's arrangement before now. 

"Both HMRC and Facebook need to be brought to book over this," he said. 

“HMRC should not just give Facebook a wrap over the knuckles over this,” he added. 

A Facebook spokesman said "we are compliant with UK tax law". 

A spokesman for the tax authority said "HMRC ensures that all multinationals pay the tax due under UK law". 

Echo of Google 

In 2013, the parliamentary public accounts committee (PAC) investigated Google over the way it reported revenues from UK clients in Ireland, following a Reuters investigation which showed Google employed dozens of UK salespeople, despite denying staff in Britain made sales to UK clients. 

Google said then and now that UK customers transacted directly with the company’s Irish staff. 

A PAC report said in 2013 that Google’s structure was "contrived" and criticised HMRC for being too lenient on big businesses. Google says it complied with all tax rules and HMRC said it treated all taxpayers equally. 

Google, now part of holding group Alphabet, in January agreed to pay £130mil (RM756.27mil) in UK back taxes and interest and said it would also start to report more revenue in Britain. 

Crawford Spence, Professor of Accounting at Warwick Business School, said Facebook’s new arrangements lacked sufficient transparency to tell if they would result in the company paying a “fair share” of tax. 

Prem Sikka, Professor of Accounting at Essex University, said Facebook could easily use alternative arrangements, such as inter-group charges to shift profits out of Britain as effectively under the new arrangement as it does under the current system. 

HMRC has previously downplayed the potential that increased reporting of revenue in Britain would lead to higher tax bills. 

The tax authority says it assesses how much value a multinational creates in the UK and assesses its tax bill on that basis, rather than simply following the company’s own accounts of where profits are generated. 

Facebook's main UK subsidiary said it had a £28mil (RM162.78mil) loss in 2014, the most recent year for which accounts are available, and a tax charge of just £4,327 (RM25,156). The group does not report UK revenue but analysts said it was likely to run to hundreds of millions of pounds. 

The company declined to answer questions about its potential future UK tax bills. 

A spokeswoman for Prime Minister for David Cameron said on Friday the government was "committed to making sure that multinationals pay their fair share of tax". 

Facebook declined to say whether it planned to change its structure in other European countries. 

Unlike Google, which shifts non-US profits to Bermuda, a territory with no corporate income tax, Facebook moves profits from overseas back to the United States which has the highest corporate income tax rate in the world. 

However, this does not lead to big tax payments since it has billion of dollars in tax losses related to investments from earlier years, a Reuters analysis of its filings shows. — Reuters

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