As with Apple, Facebook funnels its foreign profits into its Irish subsidiary. As the Guardian article explains:
Facebook is structured so that companies buying advertisements on the website in the UK, or anywhere outside of the US, have to pay Facebook Ireland.As a result, Facebook manages to slash its taxes in other countries, paying, for example, $380,800 in British tax on estimated 2011 UK profits of $280 million, or a little over 0.1%. What is shocking is that Facebook paid so much Irish tax since it managed to convert its $1.3 billion gross profit into a net loss of $24 million.
As you've no doubt figured out, it's that "Double Irish" ploy again. Facebook operates a second subsidiary that is incorporated in Ireland but controlled in the Cayman Islands. This subsidiary owns Facebook Ireland, but the setup allows the two companies to be considered as one for U.S. tax purposes, but separate for Irish tax purposes. The Caymans-operated subsidiary owns the rights to use Facebook's intellectual property outside the U.S., for which Facebook Ireland pays hefty royalties to use. This lets Facebook Ireland transfer the profits from low-tax Ireland to no-tax Cayman Islands. For more on the arcane mechanics, see Joseph Darby's article "International Tax Planning," downloadable at Wikipedia.
This makes no sense of course, but is, in David Cay Johnston's inimitable phrase, Perfectly Legal. But it shouldn't be. And in the UK, Chancellor of the Exchequer George Osborne has announced
a £154m [$246.4 million] blitz on tax avoidance and evasion, with HMRC [the British equivalent of the IRS] hiring an extra 2,500 tax inspectors to target high earners who aggressively exploit loopholes to avoid or evade tax.The U.S. should do the same.
* Dollar figures converted from pound sterling figures in the Guardian at an exchange rate of $1.60 per pound.