Two things about Facebook’s announcement on changing its corporate and tax structure were interesting. The first was what they are doing – effectively agreeing to pay more tax where sales are made. The second was that they told us about it.
In the past, multinational tax structures have been shrouded in mystery.We began to discover why when the US congressional committee started to uncover details of Apple’s structure, in particular the fact that one of its key companies was incorporated in Ireland but tax resident nowhere.
Now being tax resident “in the cloud” may not have been any worse in practice than paying – or rather not paying – your tax via a brass-plate operation in an offshore tax haven.
But it was so ridiculous that I think we can now look back at Tim Cook’s appearance before the committee as one of the key turning points in this whole saga. But what may have looked clever when some tax accountant thought it up, looked darn stupid when it was made public.
Big companies are now being pushed towards transparency – by public opinion and by threatened or actual changes in international tax laws.
The big players are also being pushed towards paying a bit more in tax – and not before time. They now realise they are on the back foot, having pushed the tax planning game way too far, but how much of the change coming down the line is real and how much is PR will become clear only in time.
Impatient
In changing its structure, Facebook has moved ahead of where it believes the game is going. The OECD tax process – called BEPS, standing for base erosion and profit shifting – is looking at how and where tax should be paid.
Impatient with this process, the EU is now actively examining ways of imposing more tax on digital companies, including proposals for a temporary levy on sales, while more detailed plans are put together either at OECD or EU level. Ireland, having benefited from much Brexit goodwill, could yet come under diplomatic pressure here.
Facebook’s move is an important straw in the wind. It will book less revenue in Ireland and more in 28 countries worldwide previously served entirely from its Dublin base. What it pays – and where it pays it – will depend on the expenses it claims against its tax bill in each jurisdiction. Most of these expenses relate to its intellectual property (IP) – copyright, patents, trademarks and so on, mostly developed in the US.
Typically big digital players like Facebook have used expenses related to their IP to move money from their main markets in Europe, through European headquarters which was often in Dublin and on to offshore tax havens.
Facebook moved €12.6 billion through Ireland in 2016. Most of this money is not taxed here. Facebook paid €29.5 million in tax here in 2016, related to its activities in the Irish market.
Changes in EU – and US laws, where a major reform plan is close to approval – are now threatening to disrupt this kind of money chain, or at least make it less attractive. This will have impacts on national exchequers and on the fight to win FDI. We have gained in recent years as big players like Apple have moved IP assets out of zero-tax havens and brought them to Ireland. This is the "win" for Ireland from international tax reform.
Threats The potential “ loss” is made clear by the Facebook move. It is of some tax revenue moving from Ireland to big markets where sales are made. The initial impact of this may be limited enough – after all, not much tax was paid on these international earnings here anyway. But in the longer term there are threats, particularly if an EU plan to create a common corporate tax base come to pass.
Dramatic change is unlikely the short term. We are talking about tax, after all. But when a big company like Facebook can decide where it pays its tax, a small country like Ireland needs to sit up and take notice.
The importance of the Facebook move is not whether it will cost Ireland any lost tax revenues. It is the signal it sends about the direction which one of the world’s biggest players believes the wind is blowing.
And there are long term questions for our drive to attract FDI, too. The US tax moves , likely to be finally decided and enacted by year end, will make investing in the US a bit more attractive, particularly for key IP assets.
The tax playing field is being gradually levelled and we will have to rely more and more on other factors to attract investment here. The next few years will, it seems, not be all just about Brexit.
