How to Pay tax like facebook

Today we see the news that Facebook has only paid £4,327 corporation tax in the UK for 2014 despite UK revenues being £105 million and reporting an accounting loss of £28.5 million.

No doubt Mr. Zuckerberg “likes” this situation and of course, the usual uproar has ensued in the press with several questioning what the government is doing about clamping down tax reduction loopholes for businesses after Chancellor George Osborne said in the April budget that firms practising this style of accounting would be subject to a “diverted profits tax” (or “Google Tax” as coined at the time).

Whether it’s fair or not and why it happens we are not going to debate – we are, however going to elaborate on how this kind of thing is done.

The reality is for international companies this is not that uncommon at all and, whilst shocking to many, it isn’t actually illegal if set up correctly. Whilst in this instance it’s claimed Facebook use it’s Irish based offices to pull a “double Irish” to funnel funds through to a “notorious tax haven” the Cayman Islands, there are many means and places with which companies and individuals can set up structures to reduce tax liabilities. All of which are technically legal.

Corporate Tax Reduction Structures – A Rough Guide

**DISCLAIMER!!** This is not advice and should not be construed as such – we are not tax advisers nor qualified to recommend tax reduction structures – this article is for demonstrative purposes only. Tax evasion is a criminal offence in most countries, tax efficiency and tax reductions schemes are technically not – but you can still get into a lot of trouble if you don’t know what you are doing!

Rather than attempt to explain how Facebook specifically set up their company accounting structures – the following demonstrates a theoretical structure not based on any specific company, entity or person.

If you have or are about to start an international company with offices in several different countries the basics for setting up a structure that reduces tax liabilities significantly run along the following lines.

In the first instance – incorporate a company shell in one of the following types of jurisdiction:

  • A zero tax jurisdiction or “offshore” (i.e. the Bahamas, Caymans etc)
  • A freezone jurisdiction (Dubai currently, there are talks in the Netherlands about the possibility of freezones being created in the next few years)
  • Or, a jurisdiction that has lower corporation tax rate than where your business is located (Hong Kong is 16.5% currently – there are many other lower tax jurisdictions)

Most countries allow corporations to open up “branches” for their company offices in their country – this allows the company to legally exist, own and rent premises, employ and pay staff and run a company locally. Any turnover processed through branch accounts needs to be reported and is liable for taxation at the relevant rates in that country.

So at this point you have your main company in say a Dubai Freezone – let’s call it “SocialNetworkInc”, and it has a branch office in the UK “SocialNetworkUK” and one in Spain “SocialNetworkSpain”.

With the branch offices in place in the UK and Spain – you have established a legal and tax reporting presence in both countries, you can rent offices, employ staff and run your business the same as you would any other time.

If your branch offices were to be in the business of selling advertising for example – this can be done in almost the same way it is now – but payments are made to the parent company SocialNetworkInc in the freezone.

At the same time, the branch offices still have to pay their staff and office rents and so on – but with no sales revenue coming through the door (because it’s going directly to the freezone company) the branches have to find the money from somewhere. This is not as complicated as you might think – all the branch has to do is invoice the parent company for it’s running costs and overheads – and the parent company simply transfers the money into the local branch account.

Now, the costs and overheads to run the branch will be fairly stable if the company is running smoothly – rents and wages are easily calculated each month, any end of year bonuses can be added on and included if needs be and the parent company effectively picks up the tab by sending the branch the money.

The parent company – which has been collecting all the revenue from all the sources is not required to pay any corporation tax, nor VAT (there is an exception with Dubai freezone companies – businesses that are involved in oil production or exploration are subject to taxation).

If the branches are only invoicing the parent company for their costs and some petty cash – this is the only revenue they need to declare because it’s the only revenue they are seen to receive (remember – all the income generated from sales from all branches is going directly to the freezone parent company).

Is this tax diversion? Well yes and no – if your branches are simply sending out sales invoices on behalf of the parent company then no, not really. In the eyes of the general taxpayer and the press, then yes, it is.

Bottom line is simple – you too can pay as little tax as facebook if you want. That said, this type of accounting service is not usually readily offered by your local accountant, nor recommended by the majority of lawyers – partly due to ethics in most countries, and more often due to the fact that most lawyers and accountants are usually only prepared to advise on practices and law only within jurisdictions that they are located.

The costs to set up a tax efficient structure like this?

Although initially most people will wince at the idea of spending thousands on company and accounting structures viewing it as “dead money” when you think about the savings you might make if you are able to reduce your taxable revenue to virtually zero.

Setting up a freezone company in Dubai for example can be done for less than USD$15,000 – the only ongoing requirements are yearly account audits which can be done for a few hundred dollars, and company license renewal which is around USD$5,400 annually.

Of course there are still some tax liabilities for the branch companies – but only with respect to turnover declared within their jurisdiction – in certain cases it’s plausible to show a loss by under-invoicing the parent company for its expenses.

In theory – if you have a UK company showing profits of say £100,000 of which £20,000 would need to be paid in tax – the initial set up costs and maintenance is small change compared to the gains to be made in year 1 alone.

Why doesn’t everyone do this?

Upfront costs are a bit of a sticking point for most small businesses. The larger barriers are (believe it or not) accountants and lawyers – as stated earlier – ethics and jurisdictional conflicts prevent most from offering it as a service or advice on how to go about it alone.

Needless to say – it’s not impossible or especially difficult but it does require attention to detail and very careful planning.

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