Facebook IP move highlights Irish corporation tax risks

Social-media giant liquidating three Irish holding companies and moving IP back to US

Some 43 per cent of all receipts were from 10 corporate groups in 2019 and 77 per cent of total receipts were from foreign-owned multinationals. Photograph: Josh Edelson/AFP via Getty Images

Some 43 per cent of all receipts were from 10 corporate groups in 2019 and 77 per cent of total receipts were from foreign-owned multinationals. Photograph: Josh Edelson/AFP via Getty Images

 

A move by Facebook to repatriate most of its intellectual property from the Republic back to the United States underscores risks to the State’s multinational-fuelled corporation tax haul as global tax-reform efforts move up a gear in 2021, according to economists.

The California-based social-media giant confirmed over the weekend that it is liquidating three Irish holding companies and has moved valuable intellectual property (IP) in them back to the US. The move follows the US Internal Revenue Service (IRS) taking Facebook to court earlier this year, claiming the company owed more than $9 billion (€7.4 billion) in tax after it shifted profits to Ireland in 2010.

Facebook employs about 5,000 people in the Republic, including staff and contract workers.

Irish corporation tax receipts were running 17.5 per cent ahead of Government forecasts, at €10.7 billion, for first 11 months of this year, even as the domestic economy contracted sharply amid Covid-19. This prompted the Irish Fiscal Advisory Council (IFAC) to reiterate a warning that the State is overly reliant on this form of revenue as risks mount.

Some 43 per cent of all receipts were from 10 corporate groups in 2019 and 77 per cent of total receipts were from foreign-owned multinationals, IFAC said in a report published earlier this month.

The Organisation for Economic Co-operation and Development (OECD) is poised to redouble its efforts after Joe Biden becomes US president next month to get almost 140 countries to reach an agreement by the middle of 2021 on overhauling international taxation in an increasingly digitalised global economy. Donald Trump’s administration baulked at the prospect of signing up to a deal before the presidential election this year.

European Union officials have said they will seek to press ahead with proposals for a digital tax on tech companies the OECD fails to secure a wider accord.

“The demise of the Trump presidency removes a key obstacle towards an international agreement on corporation tax reform, with OECD negotiations on digital taxes and minimum effective rates now more likely to progress in 2021,” said Conall Mac Coille, an economist with Davy.

Dermot O’Leary, an economist with Goodbody Stockbrokers, said: “Ireland will be impacted more than most by the rule changes, due to the large presence of FDI [foreign direct investment]. The specifics matter a lot. While it is expected that corporation tax revenues will be lost in the coming years, the key issue is whether Ireland will also lose some of its FDI competitive advantage due to the rule changes.”

The Minister for Finance, Paschal Donohoe, who has said he wants an accord at OECD level, has warned the State could lose up to €2 billion of corporate tax revenue under proposals to reform the global tax system, equating to about 20 per cent of last year’s corporate tax take.

Pillars

The OECD has been seeking to build consensus around two so-called pillars. Pillar one is to reach a unified approach on taxation of the digital economy, and pillar two is to achieve a global minimum tax rate that would redistribute tax revenues.

Facebook’s decision to wind up three Irish holding companies holding group IP was first reported by the Times, London, over the weekend.

It follows the IRS in the US taking Facebook to court in February in a case rooted in a series of so-called transfer-pricing arrangements between the tech giant’s US parent and its Irish hub, which were put in place prior to the technology company’s flotation on the stock market in 2012.

Under these arrangements, Facebook’s Irish hub paid royalties to its US parent for the use of the social media giant’s IP. The lower the value Facebook placed on the IP, the less royalties the Irish unit would have to pay to the US. This would leave more profits in the Irish unit where it would face lower taxes, and less in the US where it would have been taxed at 35 per cent.

In 2010, Facebook valued the IP at about $6.5 billion in filings with the IRS. US tax authorities have argued it may have been be worth more than triple that amount, which would hike the royalties due and results in more tax owed by the US parent.

The main Irish company in liquidation – Facebook International Holdings I Unlimited Company – recorded a $101 million tax charge on $15.2 billion of net profits in 2018, according to Companies Registration Office filings. The transfer of IP is set to reduce the Irish tax take.

A spokeswoman for Facebook Ireland said the corporate restructuring would have no impact on the group’s day-to-day operations in the Republic, the base of its international headquarters, and that it would continue to invest in its business in the State.