6 October 2017

Why Facebook isn’t a tax dodger


Facebook’s latest UK accounts are out and, naturally, people are losing their minds over the amount of tax not being paid. But why are we worrying about tax, when we should be thinking about value?

I may not think the NHS is perfect but I would insist it has value despite not paying any corporation tax at all. The value is in the health care services we get to consume as a result of its existence.

Facebook’s value is that it lets us send cat pictures to each other. Perhaps you don’t think that is of value. Possibly you think some callow youth shouldn’t be one of the richest people on the planet from having invented it, but there are two billion users out there who disagree with you. Something which neatly puts that idea to bed.

And regarding tax, Facebook is doing exactly what has been demanded of it. Formerly, the company sold to people in the UK from Ireland – so revenue was recorded in Ireland. Now, the large customers, those who have salesmen in Britain to hold their hands as they sign the cheques, are recorded as UK sales and are thus taxed here. As a result, UK revenues, with a boost from the company’s startling growth, have grown from £210.8 million to £842.4 million and pre-tax profits to £58.4 million.

The complaint is that the company only paid £2.58 million in corporation tax. This is all explained very simply by two points. First, the way we account for paying the staff. If people get salaries and wages, then these come off before pre-tax profits as a business cost. If they get share options (or more likely here, restricted stock units), then that’s still a cost of doing business, we just subtract it from that pre-tax profit before calculating the tax bill. Yes, it’s more complex that that, but it’s the general gist.

So, reason one for a low tax bill is that Facebook pays its staff a lot and the taxman then gets lots of lovely income tax and national insurance instead of corporation tax. At significantly higher rates, and thus much more cash, than lower pay and higher profits would have led to.

The second reason is the basic underlying principle of the international taxation system – tax should be paid where value is created. Intellectual property is an ever rising portion of value being created and when we come to things like software platforms it’s by far the majority.

Our cat picture value is being created by the engineers in California who wrote the platform, that value should, righteously, be taxed in California. Which is exactly how the system works. HMRC says yes, absolutely, you not only can but should be paying a royalty for that intellectual property.

EU tax law even says that it’s illegal for a state to try to tax such payments as long as they’re fairly calculated. Amazon’s little contretemps is about their royalty payments being too high in Luxembourg, not about the idea of having them. Starbuck’s lowered their royalty payments a few years back after a gentle “Ahem” from HMRC.

Facebook’s low tax bill in the UK is because they pay California, through some intermediary stages, for that IP. Facebook’s low overall tax bill is because the US tax system only taxes those payments when they arrive – which they haven’t done yet. But that’s a feature of the American tax system, not ours.

Just to prove that people really are losing minds over this, we have an insistence from a Professor of Practice that “I know that it will be claimed to be due to the intellectual property having been developed in the USA. But let’s be candid; IP is worthless without a customer and it is UK customers who create the value added in this country, and not the IP as such.”

It’s worth just savouring that. JK Rowling created considerable intellectual property with her books, but it’s the readers who provide it, so therefore JK must be paying tax everywhere else and not in the UK – or perhaps only in the UK on her UK sales. Or we could be using the standard international agreement that tax is paid where and by whom the economic value is created. JK in the UK under our rules and Facebook in the US under whatever their rules are.

Finally, the part that everyone forgets. For a US company, dodging around Caribbean islands only delays the presentation of a tax bill. Before that money can be paid to shareholders, the point of having a company in the first place, it must enter the US tax system and cough up.

Facebook’s paying every penny it owes to HMRC and eventually it will do so to Uncle Sam. Why the complaints?

Tim Worstall is senior fellow at the Adam Smith Institute