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Facebook takes fire in the UK over 'disingenuous' accounting

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Just how much tax should Facebook pay in Europe? In 2011, the social network skated away with a tax bill of just €3.2 million (about $4.7 million) in Ireland despite garnering gross profits of $1.35 billion there — an effective rate of less than half a percent. UK Labour MP John Mann is calling the company’s actions "disingenuous" and "immoral," as the continent-wide debate about how to tax multinationals continues to build steam. Earlier this year, Mann had similar words for Google, which he said should be brought before the country’s Treasury Select Committee "to justify their failure to pay proper taxes." And that company, along with Amazon and Starbucks, ended up facing questions from UK legislators last month about their tax practices.

Despite gross profits of over $1.35 billion, Facebook Ireland actually recorded a $24 million loss

Forbes insists that the system is working just as politicians intended — the EU’s single market structure demands that multinationals set up shop in one location in order to do business across the whole continent, and it makes sense for them to set up where tax treatment is most favorable. But what’s actually happening isn’t so cut and dried. The accounting technique that Facebook and others are using is called "Double Irish" and it lets Facebook lower its tax bill by paying itself royalties that it can write off as business expenses. Here's how it works: Facebook sets up two Irish subsidiaries, the first of which owns the non-US rights to its intellectual property, but is a tax resident of the Cayman Islands, which charges no tax. This Cayman Islands-based Irish company then licenses its intellectual property to the second Irish company. These royalty payments are subtracted from the second (Irish Irish) company’s revenues before it gets its tax bill, letting it book much lower income than it would otherwise be able to. In Facebook’s case, The Guardian reports that it paid nearly $1.2 billion to itself in licensing and royalties. So despite bringing in gross profits of over $1.35 billion for the year, the impoverished Facebook Ireland actually recorded a $24 million loss.

The fact that companies are going to try to maximize profits and minimize expenses, including taxes, goes without saying, but recent evidence shows that public pressure can force them to pay their fair share. Starbucks agreed to voluntarily pay £20 million (about $32 million) in taxes in the UK over the next two years to avoid a country-wide boycott. The next question: is Europe ready for a boycott of Facebook? So far, the social network has been banking on a "no."