Facebook is having an interesting couple of weeks. I'm not talking about CEO Mark Zuckerberg conducting interviews in Mandarin Chinese at Tsinghua University. Nor am I talking about Zuck donating $25 million to help fight the Ebola outbreak in West Africa.
No, the focus here is on profits, taxes, and public perception.
Facebook has a number of subsidiaries around the world, each one a distinct legal entity. One of these is at the center of a controversy because of recent disclosures. For the second year running, Facebook U.K. has paid no corporate tax. This news has sparked outrage in certain quarters, with some commentators renewing calls for greater social responsibility on the part of large corporations.
Before anyone grabs their pitchfork and joins the angry mob, it's worth putting the matter in perspective. Let's consider some facts:
- • Facebook U.K. is based in London, with a staff of roughly 370. Its latest financial filings reflect gross revenue of £49.8 million for 2013.
• The revenue is characterized as resulting from "marketing and engineering services." That is not to be confused with the firm's advertising revenue (much greater, at £371 million in 2013), which is attributable to a separate subsidiary in Ireland.
• Despite the earnings, Facebook U.K. reported a pretax loss of £11.6 million. The loss is explained by significant grants of restricted stock units to employees, which are deductible under applicable law.
Facebook's Irish subsidiary earned a lot of money. So what? Its California-based parent company is highly profitable. Again, so what? Neither of these facts have anything to do with how much tax it owes Britain.
The U.K. subsidiary achieved its pretax loss by issuing generous restricted stock units. But just as those stock grants were fully deductible to the firm, they were fully taxable in the hands of the grantees -- akin to a bonus. It's worth noting that the U.K. top marginal rate in 2013 for individuals (45 percent) was roughly double that for corporations (23 percent).
Income is being taxed, just not where one might expect it. Where is the tax dodge?
What we’re observing here is a shifting of the tax burden away from a commercial enterprise to its individual employees. There is no obvious harm in that, yet much of the public is troubled by the optics. We could remind people that Facebook U.K. is compliant with British tax laws, but it would do little to lessen their indignation. This episode reflects our outdated expectations of how commercial enterprises are taxed in a 21st-century economy.