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News : Irish Economy Last Updated: Jan 27, 2014 - 7:32 AM

Corporate Tax: Kenny reassures Facebook but Ireland's rate is too high
By Michael Hennigan, Finfacts founder and editor
Jan 24, 2014 - 6:26 AM

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José Manuel Barroso, European Commission president, and Enda Kenny, Irish taoiseach, at a session of the World Economic Forum's annual meeting, Davos, Switzerland, Jan 23, 2014.

Corporate Tax: Enda Kenny, taoiseach, on Thursday met Sheryl Sandberg, chief operating officer of Facebook, at the World Economic Forum annual meeting in Davos, Switzerland, and he said later that he had reassured her that Ireland's headline corporation tax rate will not change. However, Sandberg isn't concerned about the headline rate which is too high for the social media giant.

"I confirmed to Sheryl Sandberg that Ireland's corporation tax of 12.5% would not be moving, not be moving up, not be moving down," Kenny told reporters. "Investors like certainty and clarity in this regard have to say that Ms Sandberg expressed herself very satisfied with the engagement of Ireland in terms of regulations and in terms of the model that Ireland has put in place as being a model that can stand for all other countries. For Facebook, for Sheryl Sandberg - - she has been a very strong proponent of Ireland, she sees the IDA model of investment in the country as being spectacular, that is evidenced by their decision to move to a new 120,000sq ft unit later this year," Kenny added.

Facebook's foreign corporate tax liability in 2012 was at $22m and Ireland got $2.35m (€1.9mn) while booking almost all its ex-US revenues in Dublin, which amounted to 48% of total revenues. The $22m in foreign tax compared with $8m in 2011 and $1m in 2010 while the social network reported foreign losses of ($568m) in 2012, compared with ($124m) in 2011 and ($19m) in 2010. Facebook's total revenues in 2012 amounted to $5.09bn split between US at $2.58bn and Rest of World at $2.51bn (49.3% of total) - - so most of the Rest of the World revenues are diverted to Dublin. US net income was $1.06bn giving a net income ratio of 41%. The average USD/EUR rate in 2012 was 1.236 according to the Internal Revenue Service. Facebook Ireland's revenues grew from €737m in 2011 to €1.78bn -- giving Ireland a magic gift of €1bn in additional services exports in the year. The company posted a pre-tax loss of €626,000.

Based on a normal net income, Facebook's foreign tax rate would be just above 3% compared with Google's rate of 4% in 2012 and Apple's 3.6% rate in the year ended September 2013 - -  Apple says: "If the company’s effective tax rates were to increase, particularly in the US or Ireland, or if the ultimate determination of the company’s taxes owed is for an amount in excess of amounts previously accrued, the company’s operating results, cash flows, and financial condition could be adversely affected."

So ignoring Kenny's piece of theatre, Sandberg's interest is not the headline rate but the “Double Irish Dutch Sandwich” tax dodge, which is explained here by the IMF.

The lobbying action by the tech giants is being done in Paris rather than Davos and they are of course very serious about keeping their ex-US corporate tax rate in low single digits.

The Organisation for Economic Co-operation and Development (OECD) has been tasked by the G-20 group of leading developed and emerging nations to propose new international corporate tax rules, and it has published submissions from various groups including the Digital Economy Group (DEG), a lobbying group for the US tech giants (there is no transparency on members and it says it includes non-US firms).

“We’d better have strong and robust rules which do not give ground” and allow companies to avoid paying taxes anywhere, Pascal Saint-Amans, director of the Paris-based organization’s tax policy and administration center, said during a webcast Thursday, according to Bloomberg News.

Baker McKenzie, a law firm in Palo Alto, in Silicon Valley, has presented the lobbying arguments on behalf of the DEG to the OECD - - to shield individual firms from public attention - - secrecy in the digital age, when it's convenient!

In the US, lobbyists representing wealthy clients have a useful tool available in regulators' expectations that they could have the prospect of a big jump in earnings via a job with the regulated, the prospect of a consultancy fee or even a job in the lobbying firm.

In 2011, two tax expert colleagues of Saint-Amans in the OECD, were given jobs by Baker McKenzie and one of them was termed "the most visible thought-leader in her field."

Somebody in Silicon Valley has surely asked: What would Pascal Saint-Amans' sale price be?

The DEG says: "We believe that enterprises operating long-standing business models, subject to established international tax rules, should not become subject to altered rules on the basis that they have adopted more efficient means of operation."

There is a spiel on the development of international e-commerce and the large number of international firms engaged in it; Dutch-Irish sandwiches are avoided and proposed EU VAT (value added tax) rules are used to illustrate how difficult it is to track cross-border activity.

The sales of Google Australia being booked in Dublin wouldn't even be an anomaly.

Enterprises that employ digital communications models do not organize their business operations differently as a legal or tax matter. As a legal matter, digital economy enterprises seek to limit liability through the incorporation of separate legal entities to house different operating units, and seek to protect their IP through license and employee confidentiality agreements. Emerging enterprises generally use legal entities rather than branches when establishing physical presences outside their home jurisdictions. Mature digital economy enterprises generally establish local taxable affiliates in most major market jurisdictions.

That being said, enterprises adopting digital communications models frequently exhibit business process modifications that can have an effect on the enterprises' legal and tax structure. Communications technology allows virtually any major enterprise to centralize functions and automate business processes. As a result, major enterprises are more readily able to centralize sales, service, customer support, finance, management, legal, and other similar functions in a single geographic location. Centralizing these functions in a single location improves efficiency by eliminating duplicative personnel, premises, travel and related costs. Centralizing functions also improves the efficiency of the functions themselves by streamlining interdepartmental communication and cooperation.

Enterprises typically do not track the medium through which the cross-border supply of digital services in B2C transactions takes place. As a result, under the proposed EU regulations, enterprises typically lack the information required to determine the consumer location for purposes of the forthcoming VAT rules. Enterprises that engage in the crossborder supply of digital services must either bear the administrative, financial, and technological burdens of first developing or acquiring and then implementing tools to identify the consumer location for purposes of these rules or treat VAT as a nonrecoverable cost of supplying the services. In either case, under the proposed EU regulations, the forthcoming VAT rules impose a significant burden on enterprises that engage in the cross-border supply of digital services in B2C transactions."

For more background on corporate tax avoidance, check Finfacts reports:

G-20 Australian presidency focuses on tax "leaking bucket"; Ireland still in denial?

Huge corporate cash holdings of $2.8tn put recovery at risk; Top five own hoard of almost $400bn

Davos 2014: Richest 85 people worth as much as 3.5bn poorest; Few poor countries by 2035

Google's Dutch-Irish-Dutch sandwich grew to €8.8bn in 2012 with that amount transferred from Ireland via the Netherlands to an Irish company in Bermuda with a physical presence on the island that amounts to a letter box in the offices of an offshore services company. Here are the  Google Netherlands 2012 accounts

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