Tax Analysts Blog

Should Anyone Care Whether Facebook Pays U.K. Taxes?

Posted on Oct 31, 2014

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.

Read Comments (2)

david brunoriNov 1, 2014

Robert, Great post. If Facebook is complying with British law, I do not care
that it arranges its affairs to minimize it tax burden. If folks don't like it,
they should change the law -- but this is not about Facebook.

peter wilsonNov 2, 2014

The question is not who the correct taxpayer is- its whether the structure set
up by the company is within the law as intended by Parliament and whether it
has been applied correctly by the company. Only time will give us the answers
to both questions.

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