(Bloomberg) Facebook Inc. will stop routing advertising sales of its largest U.K. clients through Ireland, increasing its British tax bill by millions of pounds in a bid to improve transparency after facing criticism on tax avoidance.
Changes will be put in place in April, with the higher tax bill to be paid next year. Smaller business sales, where advertising is booked online with no staff intervention, will still be routed through the company’s Ireland offices, which will remain the firm’s international headquarters.
On Monday Facebook will inform its larger U.K. customers that from April they will receive invoices from Facebook U.K. and not Facebook Ireland, a spokesman for the company told Bloomberg in an e-mailed statement. It means U.K. sales made directly by the firm’s U.K. team will be booked in the U.K., not Ireland. Facebook U.K. will then record the revenue from these sales.
Facebook received widespread criticism in October after the social network giant was revealed to have paid only 4,327 pounds ($6,128) in taxes for 2014, less than the average U.K. worker. Google Inc. has also faced controversy over its U.K. tax affairs, settling a 130 million-pound payment in back taxes in January.
The overhaul of tax structure comes after increasing global pressure on its tax affairs and as a reaction to changing tax rules, the BBC, which first reported the news said, citing unidentified sources. Last year the U.K. implemented a new Diverted Profits Tax that assesses a 25 percent rate on the profits of companies found to have avoided U.K. tax due to "contrived" arrangements. The current top U.K. corporate tax rate is 20 percent, and it is set to fall to 18 percent by 2020.
Facebook does not break out how much revenue it earns from U.K. sales or what portion of those sales are supported by U.K.-based sales representatives rather than booked online without human support. The company employs 850 people in the U.K. and Facebook spokesman Chris Norton said sales booked by local sales people represented "a substantial" portion of its total sales to U.K. customers.
The new tax recognition structure will include customers such as food retailer Tesco Plc and advertising giant WPP Plc.
The British Treasury welcomed the additional revenue. “The government is committed to making sure multinationals pay their fair share of tax,” it said in a statement. “That’s why we’ve taken unprecedented action both domestically through introducing the diverted profits tax, and internationally through leading the world’s major economies to introduce new rules to tackle aggressive tax planning by multinationals.”
But Chancellor of the Exchequer George Osborne is unlikely to repeat the public welcome he gave Google’s announcement. After he publicly described that as a “victory,” he was pilloried by the opposition Labour Party, which argued the amount the company was paying was “derisory.”
Her Majesty’s Revenue & Customs, the U.K. tax agency, said it does not comment on individual taxpayers, but said in an e-mailed statement that it “ensures that all multinationals pay the tax due under U.K. law and we do not settle for a penny less. We will closely examine any business’s structure on behalf of the British public to make absolutely sure they pay all the tax due to the U.K. And the new Diverted Profits Tax will ensure the U.K. gets its fair share of tax from a multinational’s profits by making them restructure to stop shifting profits overseas."
The changes to Facebook’s tax structure apply only to the amount it will pay going forward and does not address past concerns. In its latest U.K. financial filings, Facebook revealed unspecified contingent tax liabilities for the years 2010 through 2014. The company said that it planned to defend any claims for back taxes and that it did not believe it "probable" that it would have to pay any back tax.
Facebook uses a "Double Irish" tax structure similar to that used by Google’s parent company Alphabet Inc., to book international revenues through an Irish subsidiary. This company then moves most of these revenues—in the form of licensing fees for intellectual property—to other Irish-registered companies that are physically located in the Cayman Islands and Bermuda, which have no corporate tax. By holding these funds outside the U.S., Facebook also avoids paying U.S. tax on its international profits.
Ireland closed the tax loophole that allowed the "Double Irish" in 2014 but companies already using the structure can keep it in place until 2020.
—With assistance from Robert Hutton.
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