From 2018, Facebook will pay taxes in the country where a sale was made, instead of siphoning the cash through Ireland.
The social media giant has faced increasing pressure from American and European tax authorities to change its tax structure. A post by David Wehner, Facebook’s CFO, explained the company would transition to a “local selling structure”.
“In simple terms,” Wehner wrote, “this means that advertising revenue supported by our local teams will no longer be recorded by our international headquarters in Dublin, but will instead be recorded by our local company in that country.”
Wehner’s carefully worded statement offered an oblique acknowledgement of the political pressure Facebook has faced. Moving to a local selling structure would give greater visibility and transparency “to governments and policy makers”.
This move follows last year’s decision to stop routing its UK sales through Ireland after a public outcry over news that Facebook paid only £4,327 in UK taxes in 2014. The picture in the US isn’t rosy, either: the company is embroiled in a titanic lawsuit with the American revenue service which could cost it more than $5bn.
The taxation of multinational digital businesses is a hot button political issue at the moment. In the EU, figuring out an effective way to tax the likes of Amazon, Facebook and Apple has been a key objective of the European Commission.
Facebook’s local selling structure could be a look into how corporate taxation will be handled in future. Taxing the destination or sales end point is a popular suggestion for how to handle the taxation of the digital economy. The European Commission has stated it's an option that it will be considering.
If this all sounds familiar to many AccountingWEB readers, it’s because a local selling structure has a lot of overlap with how Europe handles VAT for digital services at present.
Facebook’s decision will appease political authorities across the world. With all the speculation around Mark Zuckerberg’s future political ambitions, it’s perhaps unsurprising that the company is eager to be seen as a cooperative entity.
A more cynical perspective would suggest the restructuring comes with a view towards 2020 when the ‘double Irish’ tax loophole will be closed. And besides the political capital gained, the change is unlikely to cost the Californian behemoth a fortune.
When the company stopped funneling its UK ad sales through Ireland, its tax bill amounted to £5.1m. A relatively meagre sum when you consider the company’s UK ad revenues had quadrupled to over £800m.
Determining the profits of businesses like Facebook is notoriously tricky. digital businesses have often resorted to intra-group management fees, royalty fees, and profit sharing.
About Francois Badenhorst
I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter.