Call for corporation tax overhaul after Facebook 'transparency' vow

Tax justice campaigners have called for an overhaul of Britain's corporation tax system, after Facebook announced voluntary changes which are likely to lead to the social media giant paying millions of pounds more to HM Revenue and Customs.

From April, the company will end the practice of routing sales from major UK companies through Ireland, where they were liable to corporation tax at the lower rates charged in the Republic.

Facebook was widely criticised after paying just £4,327 in UK corporation tax in 2014, while more than doubling its UK staff share bonus pot to £35.4 million. Corporation tax is charged at 20% on taxable profits, but Facebook's accounts showed a loss of £28.5 million for the year in Britain, under an arrangement which treated the UK operations revenues as a payment from Facebook Ireland for services.

The total corporation tax bill for the company - which has global profits of more than £1 billion every three months - amounted to less than a worker on the average wage would pay in income tax and national insurance. And a Freedom of Information request from Channel 4 News showed that it was less than a sixth of the £27,000 paid by HMRC for ads on the site urging people to pay their taxes.

The Treasury said it was clear that the new 25% diverted profits tax introduced by Chancellor George Osborne was having an impact.

A Treasury spokesman said: "The Chancellor introduced the world's first diverted profits tax to ensure multinationals change their behaviour, rather than artificially shifting profits out of the UK. We can see it is already starting to have an impact."

The tax targets multinational enterprises which enter into "contrived" arrangements to avoid a taxable presence in the UK and is applicable to profits arising after April 1 2015. HMRC will shortly begin assessments of companies' liabilities for the first year of the tax, though it is not yet known whether any of Facebook's activities during the current tax year will be deemed to fall under its provisions.

Facebook played down suggestions that it was responding to public and political anger over its tax arrangements, insisting that the new set-up was designed to improve "transparency".

In a statement, a Facebook spokesman said: "On Monday we will start notifying large UK customers that from the start of April they will receive invoices from Facebook UK and not Facebook Ireland. What this means in practice is that UK sales made directly by our UK team will be booked in the UK, not Ireland. Facebook UK will then record the revenue from these sales.

"In light of changes to tax law in the UK, we felt this change would provide transparency to Facebook's operations in the UK. The new structure is easier to understand and clearly recognises the value our UK organisation adds to our sales through our highly skilled and growing UK sales team."

There was no guidance from Facebook on how much additional revenue from advertisers can be expected to be routed through the UK or how much more tax the company will pay to HM Revenue & Customs as a result of the move.

The scale of any additional payment will not become apparent until HMRC assesses its corporation tax liabilities in 2017. Smaller advertisers who book advertising space online will continue to receive invoices from the Republic.

Alex Cobham, director of research at the Tax Justice Network, said that Facebook's announcement "raises more questions than answers" and had simply confirmed that international corporation tax rules were "a mess".

"Facebook's decision to allocate UK sales to major advertisers to its UK operation for tax purposes suggests that HMRC is completely unable to enforce corporate tax on major multinationals," said Mr Cobham.

"Multinationals must be taxed on a unitary basis, recognising that they maximise profits at the global level and then apportioning those global profits between countries according to where the real economic activity takes place. Pretending that an entity like Facebook UK is operating independently from the rest of Facebook, maximising UK profit on its own, is absurd."

The chief executive of the TaxPayers' Alliance, Jonathan Isaby, said: "The fact that Facebook has taken a voluntary decision to change its structure so it pays more corporation tax just goes to show how absurd the system has become.

"The out-dated tax system is simply not suitable for the modern, global economy and leaves the tax liabilities of multinationals open to honest dispute. Instead of announcing another round of ineffectual 'clampdowns' at the Budget, the Chancellor should rethink corporation tax in its entirety."

Shadow chancellor John McDonnell said Facebook's announcement meant "little or no real substantive change at this time".

"This Government must wake up to the scale of the corporate tax abuse scandal in the UK," said Mr McDonnell. "The truth is that the Chancellor has allowed a situation where some companies feel they can pay what they want when they want.

"It's time George Osborne pushed ahead with full country-by-country reporting so that we can finally get to the bottom of what is owed to taxpayers."

Liberal Democrat economics spokeswoman Baroness Kramer called for a "fundamental rethink of this discredited system" of corporation tax.

A spokesman for HMRC said: "We do not comment on individual taxpayers. But HMRC ensures that all multinationals pay the tax due under UK law and we do not settle for a penny less.

"We will closely examine any business's structure on behalf of the British public to make absolutely sure they pay all the tax due to the UK and the new diverted profits tax will ensure the UK gets its fair share of tax from a multinational's profits by making them restructure to stop shifting profits overseas."