Business

Give Me a Crash Course In. . .Facebook’s Irish taxes

What direct effect will this week’s announcement have on the company’s Irish operation?

It was only a matter of time before the pressure told. Facebook is just the first to jump. Photograph: Niall Carson/PA Wire

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Mark Paul
Sat Dec 16 2017 - 07:32

Facebook made a major announcement this week about its tax arrangements and Ireland. What did it propose?

It will stop sending cash to Ireland to be taxed. Facebook currently records almost all non-US advertising revenues in its Dublin unit, which is also its international headquarters. If local sales staff in, say, France sell an ad to a business in Paris, the fee is ultimately sent to Ireland and the tax on the profit is paid here.

In 2016, Facebook diverted to Ireland more than €12.6 billion of non-US revenues. This massive flow of cash has, unsurprisingly, angered other governments who argue the revenues should be recorded – and tax paid – in the countries where ads are sold. They say Ireland is filching their tax base.

Last year, Facebook bowed to pressure from the UK and stopped sending revenues from larger British advertisers to Ireland, and instead agreed to record them in the UK to be taxed. On Tuesday, it announced that from January, it will do the same for up to 30 other countries.

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Does this mean Facebook will no longer book any international revenues in Ireland?

No, some international revenues will still be sent here. The new arrangement only applies to larger advertisers who have an account and are in direct contact with local sales staff abroad. The 30 or so countries are where Facebook has physically located an office to drum up sales.

Smaller businesses and individuals can still advertise using its automated online system for smaller transactions. They have no need to make contact with local sales staff. Facebook says that since they don’t interact with local staff, the ads are technically not “sold” in the individual countries. The revenues from these advertisers will still be sent to Ireland.

Facebook won’t say what proportion of its revenues come from smaller advertisers, so we cannot calculate exactly how much cash will still go to Ireland. But the bulk of it will stop.

What direct effect will all of this have on the company’s Irish operation?

Very little, it says. Facebook employs more than 2,000 staff in Dublin in a variety of back-office and technical roles, and last month it said it plans to hire “hundreds” more. It insists the changes will have no effect on its plans for.

So why is it being viewed as such bad news for Ireland?

First, there will be a direct cost to the Irish exchequer in lost tax. Facebook reduced its Irish tax bill even further by later sending some of its revenues to other exotic island tax havens. But it still paid more than €29 million in Irish tax last year. Depending on how much of the flow is staunched, that will reduce dramatically.

The financial effect will be multiplied if other digital giants such as Google and Yahoo, who also send much of their international revenues to Dublin, feel political pressure to follow suit. Google for example, paid €164 million of Irish tax last year, most from sales abroad.

But the biggest worry for Ireland is that Facebook’s move signifies a diminution in Ireland’s attractiveness as a location for investment by multinationals, who pay most of the corporation tax in the State and employ one in five workers here.

Why has Facebook made this change now?

It read the writing on the wall. The European Union, the European Commission, powerful governments such as France and Germany, and international bodies such as the OECD, have all been pushing for changes to international tax rules to end such practices. Facebook jumped before it and the others were forced to make the changes.

Are Ireland’s European neighbours gloating?

The European Commission could barely contain its glee and said Facebook’s move was proof that its tax agenda – code for pressure on the web giants and Ireland – is “having a real impact”.

While Facebook’s changes will take 18 months to implement, it is understood that among the first countries to benefit will be France and Germany, the loudest opponents of the current arrangement. That will certainly please Paris and Berlin.