Cantillon

Inside the world of business

The language of losses

The type of language a company chooses to describe its business can, at times, be an indicator of unease; it is hard not to feel that something of that nature is afoot with the latest accounts from Facebook Ireland Ltd. The company bills third-party customers for targeted advertisements on its website and the markets it covers includes such wealthy locations as Germany, Australia and France.

It also earns income from these markets from a games credits system it operates.

In its latest accounts, the company disclosed that revenue had jumped to more than €1 billion during 2011, from just €229 million in 2010, the kind of progress most companies don’t even dream about.

Despite this explosion in income, the poor dears at Facebook Ireland Ltd lost €18.37 million in 2011 – before taxation – having made €1.9 million the previous year when turnover was just a sliver of what it was to become.

How could they have made such a hames of it? “Administrative expenses”, according to the accounts. They increased to more than €1 billion, having been just €221 million the previous year. Talk about a failure in cost control!

Closer reading though of the Ernst Young audited accounts reveals that this surge in administrative expenses arose not just from the greatly increased headcount (an average of 287 in 2011 compared to 151 a year earlier), but also in the amount of money paid in royalties to its immediate parent.

The company paid €540 million in 2011 to its immediate parent, Facebook Ireland Holdings, for the right to utilise the Facebook platform, compared with just €98 million the previous year.

It also paid €373 million directly to its US parent, Facebook Inc, compared with €83 million the previous year. These payments were for management and data services.

Facebook Ireland Holdings is an unlimited company and so does not publish its accounts. We don’t know, therefore, how much corporation tax it pays, if any, in this State. (So the only corporation tax paid, as far as we know, on this €1 billion business, was €3.5 million, as per the Facebook Ireland Ltd accounts.)

Facebook Ireland Holdings is owned by Facebook companies in the Cayman Islands and it would be surprising if it does not make substantial payments to those companies, the express purpose of the whole system being to guide the flow of profits from markets around the world through Dublin, and onwards to the Caribbean tax haven, avoiding as much tax as possible on the way.