Is Facebook’s decision to pay more tax in the UK a victory for the government’s diverted profits tax?

Source: Getty

Chas Roy-Chowdhury, head of taxation at ACCA, says Yes.

It looks as though the Diverted Profits Tax is starting to have the desired effect, as the threat of its higher rate is shepherding multinational corporations back into the corporation tax fold in the UK. But that isn’t working in isolation. The impacts of the OECD’s Base Erosion and Profit Shifting programme, which George Osborne has been a prime mover in, are clear to see here too. It’s not just the UK structures which are being adjusted, but the whole international shape of these multinational corporations is starting to change. We should bear in mind, however, that it may not be that great a windfall for the UK. Facebook has brought forward losses here which it may be able to use to offset any future profits booked locally, and we cannot yet know just how much it will invoice or what costs it will set against them. The challenges of the digital economy have certainly not all been overcome yet.

Tim Worstall, senior fellow of the Adam Smith Institute, says No.

Facebook overhauls its tax structure but, no, this does not mean that George Osborne’s Google Tax has worked. Facebook is starting to sell to large UK advertising accounts using UK-based and paid salespeople. This constitutes a “permanent establishment” under the usual international tax laws and the profits from this activity will be taxable in 2017, when Facebook starts doing this, would have been taxable last year if it had done it then, would have been taxable 50 years ago if the company had existed. So, no, something that would have been taxable before Osborne’s birth is not taxable due to Osborne’s new law. What is interesting is that those same normal tax rules mean that Facebook UK will now have to (yes, have to) start paying a royalty to Facebook Ireland, something it has not done up to now. The net effect of these two changes is uncertain: it’s not immediately obvious that the UK tax bill will rise very much, if at all, as a result of the disparate impacts.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

Related articles