Wednesday, 17 December 2014

Is it Right to Criticize Facebook for Paying the Bare Minimum in UK Corporation Tax

For the last several years now, and about this time of the year too, giant multinational corporations such as Facebook usually come under fire from politicians and the general public for paying the bare minimum in corporation tax. In previous years it was Starbucks, Amazon and Google. Now Facebook has come under the spotlight. Giant multinationals seem to be an easy target, particularly in the run up to an election year.

Image by Minette Lontsie [CC BY-SA 4.0] from Wikimedia Commons

Margaret Hodge, Lanour MP and chairman of the Commons Public Accounts Committee, has accused Facebook of:

"Using elaborate corporate structures and artificial devices for no purpose other than to avoid tax" and adding that "it is clear from opinion polls that the overwhelming majority of British people do not regard this as morally acceptable. We have to take tough action to crack down on this behaviour, and the UK should be leading the way on this issue"

So what happened? It has been revealed in several news media that Facebook, for the second year running, paid no corporation tax in the UK, despite having more than 33 million British user accounts. Instead Facebook has funnelled nearly half its global sales operations through Ireland and only paid the equivalent of £1.8 million in Irish tax on pre-tax profits of approximately £5.76 billion.

Can it be as simple as that? Is that why the British politicians are in a bit of an uproar? When it comes to taxation and tax laws, nothing is simple as black and white. According to an issue briefing by Her Majesty’s Revenue and Customs (HMRC), corporation tax is only payable in the UK if a multinational company has a branch residing in the UK. Where a non-resident company generates profit in the UK, corporation tax is only liable in the country where the company resides. If you feel the need to read the whole HMRC briefing, it can be found here.

In essence what it means is that having sales and customers in the UK is not the same as having a branch in the UK. In other words, our tax laws allow Facebook and other multinational corporations to do this and according to HMRC, this is not tax avoidance.

So if this is perfectly legal why is there such an uproar about the amount of corporation tax that Facebook and other multinational corporations have paid? Some say that multinationals have a moral obligation to pay their “fair share” to society and with such huge profits they can most afford it. However, this goes against everything our capitalist society is built on.

Ask any business student and they will tell you that publicly listed companies have a moral obligation to one thing - keeping their shareholders happy! As an example, look at what's happened to retail giant Tesco when it announced its fifth profit warning this year which sent Tesco shares tumbling 16% and wiping £2 billion off its market value. In turn some of the other supermarkets also lost ground. So when shareholders are dissatisfied with the performance of a company they speak out with their feet and can change the fortunes of a company in minutes! In extreme circumstances the dumping of shares might even cause a company to collapse. Any wonder then that Facebook is very keen to keep their shareholders satisfied and will pursue all legal avenues to try and increase profit. And remember, what they did this year and the year before is not illegal.

So should we blame the greedy shareholders for turning Facebook and other multinationals into morally corrupt profiteers? Well, no! Without shareholders Facebook would not be as big as they are or as successful as they are. In turn Facebook can use its success to invest in other parts of society such philanthropic projects or research and development into new technology. This then creates jobs and opportunities for other people in our society.

Politicians need to stop stereotyping large multinationals as tax cheats because the reality is they are not! They have broken no laws and have contributed to society by providing jobs and investments in the countries they choose to operate in. You might not agree with the way they do business but everybody does it and that is how our taxation system works.

Author: Vin Coh