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In a statement issued this afternoon, the company’s chief financial officer Dave Wehner said Facebook will stop routing international sales through its Dublin office, and instead book them in the country where they occur. And pay tax in that country.
The unilateral move by one of the biggest names out there now puts pressure on the rest to follow. Google is now in the firing line. As is Apple, Amazon, Microsoft et al.
Facebook has an estimated one fifth share of global online advertising revenue. Add in Google, and that share rises to half. Guess who is under pressure now?
This is precisely what the French finance minister Bruno Le Maire wanted when he launched an initiative in Tallinn, Estonia in September to try and get the EU to pass a law requiring digital companies to pay a "turnover tax" in the countries where they actually make sales, not in a single jurisdiction of their choosing.
Although well supported by other EU states, the initiative would require unanimous agreement. And there is a group of states – including Ireland – that has opposed the measure, arguing that changes to international corporate tax law are best done by the OECD, as this would include the United States, home to most of the world’s online giants.
The French plan seems to have gone on the back burner for now, the OECD is planning to unveil its own plans in April, after a consultation in San Francisco early in the new year that will obviously include Silicone Valley’s finest.
It will also be seen as a vindication of European Commissioner Margaretha Vestager’s pursuit of countries the Commission alleges gave state aid in the form of tax rulings to, most notably Ireland in the Apple case. The rights or wrongs of the case will still be played out in the European Court of Justice in Luxembourg. But as a PR tool to up the pressure on the big digital companies, it has worked. Tax policy is an issue for consumers of Apple, Google, Facebook and Microsoft products. Those consumers have been squeezed in the recession, as governments everywhere raised taxes – but only on those who could not escape them through advanced (and costly) tax planning.
And then there was the rhetoric of US President Donald Trump, who has tried to bully US firms into investing in production in the United States, rather than overseas (especially when that production shift was driven by a plan to cut tax payments).
None of this political noise has changed any laws – and everything the multinational’s do is legal. But it has changed the climate in which these companies operate.
And now it seems Facebook is breaking ranks to try and get some first mover advantage – when faced with a demand for change that it appears to have judged is unstoppable.
The rising public anger about tax dodging – whether from the individuals using exotic schemes revealed in the Panama and Paradise Papers, or the perceived revenue hole in government accounts due to tax planning by multinational companies – means that companies face damage to their reputation, their brand image, and ultimately to their bottom line.
Companies have previously shown themselves to be sensitive to this. The big influx of Intellectual Property into Ireland in 2015 (which caused a growth spurt dubbed "Leprechaun Economics") was in part a response to the BEPS tax changes agreed by the OECD countries in 2014. But also in part it was driven by image-conscious countries trying to reduce the number of times their company name is associated with Caribbean Tax havens.
Transparency is now the watchword for big companies trying to fend off this wave of negative sentiment.
So is this the end for the Irish tax-driven model of economic development? Maybe not. The Facebook change only seems to apply to accounts – large and small - that deal directly with local offices in other countries. There are 30 of these offices around the globe. The remaining international (ie.e non-North American) business will continue to be routed through Facebook’s Dublin HQ.
Its also unlikely that the amount of money it pays to the Irish taxman will fall much, as multinationals try to pay the 12.5% rate only on sales actually made in Ireland. The rest (as we know from the Irish government’s defence in the Apple case), is supposed to be subject to the US corporate tax regime (which allows companies to defer their tax payments – hence the offshore cash pile of US multinationals).
Last year Facebook Ireland reported turnover of €12.6 billion. Out of this it declared a profit of €174 milion, and paid Irish tax of €30 million. It employs 2,000 at its Dublin office, which today’s statement from Dave Wehner says will remain it’s international headquarters. In a statement Gareth Lambe, Head of Facebook Ireland said:"Ireland will continue to be an important part of Facebook’s story as the home of our international headquarters supporting our global communities and advertisers. We are continuing to grow in Ireland and recently announced that hundreds more jobs will be created at Facebook Dublin in
2018 and the expansion of the data centre in Meath, further demonstrating our long-term investment and commitment here".