Tax policy: Facebook responds

Ireland has been part of a chain which has seen large cash piles ending up in offshore tax havens

 

Facebook’s decision to change the way it accounts for revenues earned outside the US, booking many of them where the sales are made rather than at its international headquarters in Dublin, is an important pointer. The direction of international tax reform will oblige big multinationals to pay more tax in markets where they sell most. Facebook is clearly trying to get ahead of the game, though how much additional tax it will end up paying overall remains to be seen.

Ireland has been part of a chain used by big international companies which has seen large cash piles resulting from profits earned outside the US ending up in offshore tax havens. Under US tax rules this cash is generally not liable to US corporate taxation until it is repatriated to America.

This international tax planning is now being threatened in two directions. Proposed US tax legislation will start to tax these offshore cash piles and also include new incentives to get US companies to invest at home. Meanwhile, international tax reforms led by the OECD, and particularly the EU, threaten to levy more tax in big markets where sales are made, as well as discouraging the use of tax havens.

There is mixed news here for Ireland. On the plus side, some big companies moved assets, especially related to intellectual property, out of tax havens to Ireland, deepening their presence here. On the flip side, Ireland could lose as more tax is paid where sales are made, and is particularly at risk if longer-term EU moves to create a common EU corporate tax base proceed.

Tax reform in the US and internationally also brings new challenges in attracting foreign direct investment to Ireland. Major US companies will still want to set up headquarters internationally, but if the big US tax reform package is enacted, the push to leave the US will diminish a bit. There are considerable difficulties for Ireland too in arguing our position at the OECD and EU tax forums and also responding to complex changes in tax law which will inevitably influence trends in mobile international investment.

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