Facebook is making an accounting change that will generate higher taxable profits in Britain but may ease criticism over its overseas tax arrangements.
Starting in April, the world’s largest social network will book revenues from its largest U.K. advertisers through its local subsidiary, rather than through low-tax Ireland. In 2014, the latest year for which records are available, Facebook paid only $6,100 in British corporation tax, or slightly less than the average British worker paid in income tax.
“U.K. sales made directly by our U.K. team will be booked in the U.K., not Ireland,” a Facebook spokeswoman said. “Facebook U.K. will then record the revenue from these sales.”
As the New York Times reports, the move “comes in the face of growing anger across Europe about American technology giants’ aggressive accounting practices.” The European Commission has been investigating whether Apple received a preferential — and potentially illegal — tax deal from the Irish authorities.
In Britain, corporation tax is levied at 20%, compared with 12.5% in Ireland. The British Treasury Department last year introduced a punitive 25% tax on profits on British revenue that the country’s tax authorities consider to be artificially moved overseas to avoid the British system.
“In light of changes to tax law in the U.K., we felt this change would provide transparency to Facebook’s operations in the U.K.,” Facebook said.
According to The Independent, the accounting change “will generate higher taxable profits in Britain potentially worth millions” to the United Kingdom, but the government “may have to wait for years to see a penny in extra corporation tax from Facebook because it is sitting on 21.4 million pounds in deferred tax relief which it could use to offset future bills.”
Royalties paid by Facebook’s subsidiaries to its parent company mean that its U.K. tax liability could amount to as little as 4 million pounds ($5.7 million) a year under the new structure. “There are lots of reasons why this might not turn into the big tax win it seems on first sight,” Tim Davies, head of tax at international accountants Mazars, told The Independent.
The United Kingdom represents less than 10% of Facebook’s global revenue, but the company is building a new headquarters in London.
Featured image: Thinkstock