December 23, 2012 8:15 pm

Facebook under tax spotlight

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Facebook became the latest company to see its tax affairs scrutinised after The Sunday Times newspaper reported that the royalties paid by its international headquarters in Ireland increased more than fivefold to £441m in 2011.

Facebook Ireland, which had Europe-wide sales of £858m, says in its accounts that it made the payment for “the right and licence to utilise the Facebook platform” to a subsidiary indirectly owned by two Cayman Islands companies.

The social networking giant, which makes most of its revenue from advertisements on its website, said: “Facebook complies with all relevant corporate regulations including those related to filing company reports and taxation.

“We have our international headquarters in Ireland that employs over 400 people and a series of smaller local offices providing support services all over Europe. Dublin was selected as the best location to hire staff with the right skills to run a multilingual high-tech operation serving the whole of Europe.”

US technology companies commonly use tax-haven subsidiaries to own their non-US intellectual property, as they are allowed to defer US tax on their foreign earnings. The structure can result in very low tax rates. Facebook has told investors it expects the rate to fall to that of similar US high-tech companies over several years.

Facebook, which reported a net loss of $11m for the nine months to September, said its effective tax rate of zero “exceeded the US statutory rate” because of non-deductible share-based compensation and losses, due to initial start-up costs, in countries where it did not receive a tax benefit.

Facebook UK had a current tax charge of £238,317 in 2011 on sales of services to the Facebook group of £20.4m.

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