Facebook accused of creative accounting to minimize UK taxes

facebook accused of creative accounting to minimize uk taxesClearly, 2012 isn’t Facebook’s year. In addition to its public fall from grace in the wake of the company going public – with share prices plummeting immediately afterwards, and accusations about whether or not the company was overpriced at launch starting almost immediately – the social media giant is now being accused of failing to pay the correct amount of taxes due in the United Kingdom, and dramatically under-reporting its earnings for 2011.

According to reports, the British subsidiary of the company paid just £195,890 in tax to the British Government last year, despite paying its 90 employees an average of £275,000 each for the same period; the company also reported British revenue of £20.4m, a figure dramatically – and, it has to be said, somewhat suspiciously – below the £175m that analysts had estimated for the year. So what, exactly, is going on? The answer appears to be some creative accounting, and knowing where best to put the money to keep it safest (Hint: Not in the United Kingdom).

A large part of the puzzle may be that Facebook’s international headquarters are placed in Dublin, which means that they can take advantage of far lower corporate taxation rates; Richard Murphy, a chartered accountant with Tax Research UK, estimates that only around 11 percent of the company’s UK sales are being reported in its British returns, with the remainder being included in the Irish returns from the international HQ. He says that “Facebook is taking standard practice for these IT companies to a new high, or low, depending on how you look at it,” adding that in his opinion, the United Kingdom is “being taken for a ride” by the company.

To make matters more confusing, Facebook UK reports that it charged £15.4m to its 2011 accounts, essentially putting that amount towards future tax bills, despite only reporting £20.4m in revenue. As Murphy points out, “That makes no sense. The options must, of course, be based on the value of sales recorded in Ireland but the UK is bearing the cost of the tax relief on paying those options.”

Facebook UK was estimated to have made somewhere in the region of £175m last year, but actually reported a £10.2m loss. Embarrassingly, the company admitted that these numbers may not have actually told the whole story as to how the company was actually performing, releasing a statement to accompany the report of the loss that read “The information does not necessarily present a full account of overall global financial performance so it would be a mistake to draw any conclusions from these filings.” An admission, perhaps, of the kind of accounting sleight of hand that the company is accused of?

When asked about the choice of Dublin as international headquarters, a company spokeswoman told the Guardian newspaper that the location “was selected as the best location to hire staff with the right skills to run a multilingual hi-tech operation serving the whole of Europe.” Clearly, the low tax rate was just an accidental benefit.