Stories
Last week, Facebook went on trial before the Tax Court in the US. The social media giant itself triggered the case by contesting the assessment of the US Internal Revenue Service (IRS) that the company had minimised its tax bills by undervaluing intellectual property based in offshore subsidiaries.
Court reports have now shown that Facebook had located the contentious intangible assets in Ireland. The trial will dissect a network of subsidiaries established by the group here to route tens of billions in revenues and profits over the past decade.
The IRS advised Facebook on July 27, 2016 that it had found issues in its Irish tax structure. The company disclosed at the time that it was on notice from the IRS over transfer pricing arrangements with its foreign subsidiaries: “While the Notice applies only to the 2010 tax year, the IRS states that it will also apply its position for tax years subsequent to 2010, which, if the IRS prevails in its position, could result in an additional federal tax liability of approximately $3.0 billion to $5.0 billion in excess of the originally filed US return, plus interest and any penalties asserted.”
In its latest annual accounts filed last month, the group’s ultimate parent Facebook, Inc updated the potential liability to $9 billion based on a pre-trial submission made by the IRS on January 15.
In addition, the company received a separate notice in 2018 indicating that the IRS was seeking another $680 million for the years 2011 to 2013, in relation to other transfer pricing arrangements with its foreign subsidiaries. Facebook has again challenged this before the US Tax Court. A trial in this second case was initially scheduled last September but has since been postponed.
What happened in 2010 that could make the US taxman chase $9 billion in back payments from Facebook? And how does the corporate structure designed at the time to anchor the social network’s global expansion in Dublin survive in the network of 16 companies currently maintained by the group at its Grand Canal Square international headquarters?
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At the start of 2010, Facebook Ireland Ltd was just over one year old. It had €5 million on its balance sheet and 64 employees. By the end of that year, those two figures had risen to €250 million and 151 respectively.
That was the time when Facebook – as yet not a listed company – implemented its plan to make Dublin its international headquarters. From then on, its business outside America would be based here. On September 1, 2010, Facebook Ireland Ltd began billing customers around the world for ads placed on the platform.
This limited company has always published detailed accounts and it is easy to follow the rise of Facebook sales out of Ireland through its books. The same cannot be said of the four layers of holding companies that sit above it, registered here to channel financial flows between trading companies in Ireland and elsewhere, and parent structures in the US and the Cayman Islands.
Click on the image below to enlarge the map.
The group’s top-level holding company registered in Ireland, Facebook International Holdings I Unltd, is tax resident in the Cayman Islands. Like many subsidiaries of multinationals used in the double Irish tax scheme, it published its first ever set of accounts for 2018 following changes to Irish legislation.
No data is available for 2010 from unlimited companies Facebook International Holdings I, II, or Facebook Ireland Holdings. Facebook International Operations Ltd, an additional intermediary holding, was added only in 2012.
Within the folds of this corporate structure, Facebook moved intellectual property to Ireland around the same time it started billing customers from this country. It has now emerged from the US Tax Court case that the company booked a $6.5 billion value for that asset transfer, while the IRS values it at $21 billion.
Under double Irish rules expiring this year, its Cayman tax-resident subsidiary was allowed to charge royalties to its trading entity, reducing taxable profits and storing the proceeds offshore.
During 2010, accounts for Facebook Ireland Ltd show that its payments to other group companies for royalties and management services increased by around €200 million, including €84 million to its ultimate parent in the US.
This offset nearly all the revenue generated by the Irish trading company’s new role as Facebook’s global sales centre outside America. Of €229 million in revenue, Facebook Ireland Ltd was left with a pre-tax profit of €1.5 million and an Irish corporate tax bill of €369,000 in 2010.
The US tax authorities appear to accuse Facebook of valuing Irish-based intangible property such as software and brand rights at the level that would minimise its tax bill in the US, rather than the real value of the business it was found to generate subsequently.
Facebook’s defence is that its valuation was fair because it didn’t know at the time that the intellectual property it was transferring to Ireland would generate so much profit in the following years.
And what a profit.
51 per cent pre-tax margin
Jumping to 2018 accounts, Facebook’s Irish operation has grown 100-fold. It employed 1,400 people here that year, nearly all of them at Facebook Ireland Ltd, which in turn charged other group companies for staffing. Their average annual salary was just under €104,000, which places the company in the middle of the league among tech multinationals – but each also got an average share-based payment of nearly €45,000, placing them ahead of their counterparts at Google or Microsoft.
Facebook Ireland Ltd sold €25.9 billion worth of targeted advertising in 2018. Out of this, the company generated a paltry €361 million in net profit. This is primarily because it paid €24.4 billion in administrative expenses. The company no longer details these, nor payments made to related parties.
Yet we know from the structure in place since 2010 that most of these expenses are royalties and cost contributions for the use of Facebook’s intellectual property outside America. Any other expenses reported by the company, from direct cost of sales to personnel, depreciation, foreign exchange losses and leases, come to a total of just over €1 billion.
This is confirmed in the consolidated accounts of Facebook International Holdings I Unltd. Its 2018 revenues of $30 billion were an exact match for Facebook Ireland Ltd’s €25.9 billion in sales. The holding’s consolidated cost base was higher than the main trading subsidiary’s, because it also owns companies providing connectivity and data centres, as well as other subsidiaries around the world. This was illustrated in its head count of 1,506, or 176 higher than at Facebook Ireland Ltd.
The holding structure also collected most of the royalties paid by Facebook Ireland Ltd, keeping $15.3 billion in pre-tax profit that year – a 51 per cent margin. Facebook International Holdings I Unltd and its subsidiaries also reported paying another $5.3 billion in purchases from Facebook, Inc.
Out of this, the holding and its subsidiaries paid consolidated income taxes of $101 million that year. This is equivalent to the combined individual tax bills reported by its Irish-based trading companies. The bulk of profits were held tax-free under the double Irish scheme because Facebook International Holdings I Unltd is tax-resident in the Cayman Islands – until the US decided to slap a deemed repatriation tax on them from 2018. Changes to Irish legislation have closed the overall scheme from this year.
Facebook, Inc has spent $16.9 billion of this buying back its own shares in the past two years and has authorised the repurchase of another $14.9 billion.
What does Facebook do with all this cash? A lot of it is moving back to its US parent and its shareholders. Now that profits accumulated offshore are deemed taxed under the 2017 US legislation, Facebook repatriated $14 billion in dividends in each of 2018 and 2019, joining other Irish-based multinationals in a distribution frenzy. Facebook, Inc has spent $16.9 billion of this buying back its own shares in the past two years and has authorised the repurchase of another $14.9 billion.
The group has also been investing in infrastructure, including in this country – all without raising debt. Its $15 billion annual capital expenditure bill includes cable laying and data centres such as the extension under construction in Clonee, Co Meath.
In 2018, as it was completing phase one of the server farm and obtained planning permission for phase two, the group’s dedicated subsidiary Runways Information Services Ltd more than doubled the value of buildings and computer equipment on its books to €1.46 billion. It also added another €920 million in assets under construction.
Before it began construction of phase two in 2019, Runways reported paying €42 million to execute land purchases at the site. Planning documents show that the company had an option on 191ac of farmland when it applied for permission, which would value the land at €220,000/ac, or 20 times the average price paid for agricultural land in Meath that year, according to the Irish Farmers Journal land report.
In Dublin and Cork, Facebook leases all its offices and reported an expense of €11.85 million on its Grand Canal Square HQ in 2018. It is due to move to the redeveloped AIB campus opposite the RDS in Ballsbridge by 2022, leasing buildings owned by investors assembled through Goodbody and AIB under the Serpentine Consortium; those of Davy Target Investments; and the Fibonacci Square new development under construction by Johnny Ronan’s group and Colony Capital. This is expected to add capacity for several thousand staff.
On the corporate structure front, too, Facebook will continue to move. In December 2017, it announced that it was moving to a local selling model, declaring sales – and paying tax – in countries where it has an office to support sales to local advertisers. “In simple terms, this means that advertising revenue supported by our local teams will no longer be recorded by our international headquarters in Dublin, but will instead be recorded by our local company in that country,” chief financial officer Dave Wehner said at the time. The move has been gradual and cannot yet be seen in accounts published by Facebook Ireland Ltd.
It was announced as the US Congress was passing the tax reform closing loopholes used by Facebook and other US-based multinationals for decades – not to make them pay more tax, but to ensure more of it was paid in the US.
“Tech companies should serve society. That includes at the corporate level, so we support the OECD’s efforts to create fair global tax rules for the internet.”
Mark Zuckerberg
Other countries, too, want their share of taxation of digital business and they hope to come to an agreement on global rules this year under the OECD’s base erosion and profit shifting (BEPS) process. Facebook knows this is coming and its CEO Mark Zuckerberg wrote in the Financial Times last week: “Tech companies should serve society. That includes at the corporate level, so we support the OECD’s efforts to create fair global tax rules for the internet.”
Beyond the data centre investments and the 25-year lease for the Ballsbridge campus, more signs indicate that Facebook intends to continue doing business in Ireland. In the past three years, it has registered a series of new subsidiaries here. Registered in 2018, FB Representative Services DAC acts as the group’s data controller in Europe under new GDPR legislation – much like WhatsApp Ireland Ltd for the Facebook-owned instant messaging service.
Also in 2018, Facebook International Treasury Operations Ltd and Facebook International Services Ltd were created to provide services for the wider group. Meanwhile, two Irish companies held directly by US parents manage specific businesses out of Ireland: Facebook Technologies Ireland Ltd is the conduit for sales of Oculus virtual reality headsets around the world and has a research and development office in Cork, while Calibra was registered on Grand Canal Square last year to manage Facebook’s proposed cryptocurrency Libra – though the plan has hit stern opposition by central bankers everywhere since then.
As it ramped up investment in power-hungry data centres, Facebook also registered an Irish dedicated renewable energy company, Qstar Ltd, in September 2017. Qstar has yet to report operations.
Twitter plots new structure for $9.5 billion IP assets
Although dwarfed by Facebook’s in size, financial weight and corporate complexity, Twitter’s Irish subsidiaries on Dublin’s Fenian St bear many resemblances to those at work a few minutes’ walk away on Grand Canal Square.
Twitter International Company is the trading arm of the social network in Ireland, selling promoted tweets outside America and charging other group companies for the right to access Twitter intellectual property. It also owns 19 subsidiaries in Europe, Asia, the Middle East and South America. It had €1 billion in revenues in 2018 but finished the year with a loss of €2.5 million after booking high costs and was liable to pay just €5.9 million in tax.
Twitter, however, has more companies registered in Ireland. All its subsidiaries here are owned by holding companies in the US state of Delaware. Until November 30, 2018, the group’s main money channel in this country was TI Sparrow Ireland II, a company domiciled in the Cayman Islands for tax purposes. Accounts show that it had $848 million in revenues, primarily from charging royalties to Twitter International Company for use of its intellectual property.
Under the double Irish rules applicable at the time, this allowed Twitter International Company to reduce its taxable income virtually to zero while TI Sparrow Ireland II put away €195 million in tax-free profit in Cayman in 2018.
With changes to US and Irish tax rules, however, change is afoot. On November 30, 2018, the holding company stopped billing its trading sister for IP royalties. Twitter transferred $9 billion worth of intellectual property rights from TI Sparrow Ireland II to another entity, Cayman-based TI Sparrow Holdings III, in exchange for shares.
In a separate transaction, TI Sparrow Ireland II sold another $534 million worth of IP rights specific to Latin America and Canada to TI Sparrow Ireland I, a similarly Irish-registered, Cayman tax-resident company, which in turn distributed it to its US parent on January 1, 2019. A total of $9.5 billion worth of intellectual property therefore left Twitter’s double Irish structure last winter.
This, however, doesn’t mean that Twitter has given up on basing IP here. It may just have been regrouping to set up a new asset structure using capital allowances for tax optimisation, much like Microsoft has done in recent years.
With double Irish incentives no longer in place to hold intangible assets in a separate offshore tax-resident company, the Dublin-based trading subsidiary Twitter International Company itself has been considered as a vehicle for the intellectual property: “At 27 June 2019, the company is exploring the possibility of acquiring certain IP rights to develop, promote, expand and maintain a real-time information service for users and advertisers worldwide, excluding the Americas,” it reported in its latest accounts.
This would confirm the position of Twitter’s Dublin office as the centre of its international business. The 173 staff employed there in 2018 were on an average gross salary of €90,000. They occupy 96,000sq ft of 1 Cumberland Place, a 1970s office block entirely refurbished by Hibernia Reit in 2016.
Should they need more space, Hibernia will this year complete the extension under construction on the Fenian St front of the site and is now looking for tenants for another 56,000sq ft. For the time being, however, Twitter appeared to be reducing staff numbers in recent years. After reaching 200 employees in 2016 as announced three years earlier, it has since reduced its directly employed workforce to 173 in 2018.
Read more from the Mapping multinationals series:
