How Facebook Saves Billions of Dollars with Facebook Ireland Limited

Facebook LogoSocial Network Facebook effectively saves Billions of Dollars every year using its subsidiary Facebook Ireland Limited. When you make any payment to Facebook, you come across this unique Clause in its terms and Conditions

 I understand that if I am resident or have my principal place of business in the US or Canada, I am contracting solely with Facebook, Inc. Otherwise I am contracting solely with Facebook Ireland Limited.

Why does a US based company like Facebook has to redirect outside payments through its Irish Subsidiary Facebook Ireland Limited?

A Report in The Irish Times suggest that Ireland is the only “material” jurisdiction outside the US scrutinising the tax affairs of Facebook. Facebook  has five subsidiaries in Ireland, three of which do not publish accounts.

It has its European headquarters in Dublin and is reported to be planning to more than double the amount of office space it rents here.

Other technology multinationals such as Google, Microsoft and Apple have also used Ireland to reduce the amount of corporation tax they pay.

They save billions of dollars every year from the use of a global tax strategy that has become known as the “double Irish” and which involves Irish subsidiaries and subsidiaries in offfshore locations such as the Cayman Islands.

The key role Ireland plays in Facebook’s drive to reduce its tax bill is made clear in the prospectus it submitted to the Securities and Exchange Commission in preparation for its flotation on the New York Stock Exchange. The flotation could raise $10 billion or more.

“The material jurisdictions in which we are subject to potential examination by taxing authorities include the United States and Ireland,” the corporation declared in its prospectus.

The Internal Revenue Service in the US is examining Facebook’s tax assessments for 2010 and 2011, while all tax years since 2008 remain subject to examination by the Irish tax authorities, according to the prospectus.

The taxation of multinationals has always been a difficult task because of the need to estimate the contribution made by particular activities in particular jurisdictions to a multinational’s overall annual profits. The task has been made much more complicated by technological changes over the past two decades and the increased sale of products and services over the internet.

In outlining the risks associated with its business in its prospectus, Facebook says its corporate tax obligations are “based on our corporate operating structure and intercompany arrangements, including the manner in which we develop, value and use our intellectual property and the valuations of intercompany transactions.”

Taxation authorities can challenge the methodologies used by Facebook “which could increase our worldwide effective tax rate and harm our financial position and [the] results of our operations.”

The company pointed out that its effective tax rate could be adversely affected if tax authorities successfully argued that a higher proportion of its earnings should be attributed to a jurisdiction where a high tax rate applies.

Ireland has a 12.5 per cent corporate tax rate; the rate in the US is 35 per cent. Google has reduced the effective tax rate on its global earnings to below 3 per cent.

The Facebook prospectus points to the risks associated with the fact that the Obama administration has publicly stated that international tax reform is one of its priorities.

It shows that the allocation in Facebook’s turnover between the US and the rest of the world has altered significantly in the past year. In the first quarter of 2011 the split was $427million/$304 million between the US and the rest of the world. The corresponding split for the first quarter of this year was $536 million/ $522 million.

There are five Facebook subsidiaries in Ireland: Facebook Ireland Ltd; Facebook Ireland Holdings; Facebook International Holdings I; Facebook International Holdings Ii; and Facebook Payments International Ltd. Only the two limited liability companies publish accounts. Unlimited companies are not obliged to do so. Facebook Ireland Holdings owns the two limited Irish Facebook firms. The three unlimited firms have the same three US-based directors.