On September 25, Benjamin Woolf, Simon Raftopoulos and Paul Muspratt met to sign a bundle of documents. The three men are based in the Cayman Islands, where Woolf and Raftopoulos have senior positions in the corporate practice of international law firm Appleby, from which the so-called Paradise Papers cache of documents on offshore tax planning clients leaked three years ago. Muspratt works for a separate corporate services firm in the Caribbean nation.

Between 4.20pm and 4.40pm, they signed winding-up declarations for three Irish-registered companies: Facebook International Holdings I Unltd, Facebook International Holdings II Unltd and Facebook Ireland Holdings Unltd. Woolf, Raftopoulos and Muspratt had joined the boards of the three companies on June 18. All other directors live in Silicon Valley, near Facebook’s global headquarters in Menlo Park. None are based in Dublin, where the three subsidiaries are formally located at Facebook’s gleaming offices on Grand Canal Square.

At 6.54pm, EY’s technology sector lead for Ireland, Marie Treacy, signed off on the declarations establishing that the three companies’ balance sheets showed $0 in both assets and liabilities. By the end of that day, a liquidator in KPMG’s Cayman office was appointed to wind up the companies.

Dublin law firm Matheson (Raftopoulos’s previous employer before he moved to Appleby’s Grand Cayman office) later filed copies of the documents with Ireland’s Companies Registration Office. At first sight, the liquidations and the defunct companies’ empty balance sheets could look like a simple clean-up of dormant units in the vast corporate structures of a sprawling multinational. 

Instead, they signal the end of an era for the social media giant.

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The Facebook Holdings subsidiaries now in liquidation used to form a three-tier Russian doll structure allowing the group’s US parent to exploit the double Irish tax scheme via the Cayman Islands. They were registered in Ireland but domiciled in the Caribbean low-tax jurisdiction for tax purposes.

Although they have been in operation for years, they only ever filed public accounts once, for 2018, when Irish legislation governing the reporting obligations of unlimited companies was finally brought into line with European obligations.

Sitting at the top of the pyramid, Facebook International Holdings I appeared to have no other purpose than to blend US and Cayman ownership of cascading subsidiaries around the world, from which funds trickled up and were distributed to its US parents under the form of $28 billion in dividends between 2018 and 2019. Holdings I did not trade in 2018 and its sole asset at the end of that year was its majority stake in Facebook International Holdings II, valued at $541 million. 

Holdings II, in turn, owned Facebook Ireland Holdings. These two companies have remained fully opaque, their accounts consolidated into Holdings I along with those of many other related entities. One crucial piece of information, however, emerged from their single filing: Facebook Ireland Holdings was the only subsidiary in this branch of the group listed as “internet platform IP holder”. 

The document added the following definition: “The Facebook Platform (“Platform”) is a social utility that helps people share information.” There you have it, the goose that lay the golden eggs in Facebook’s double Irish structure since it based its non-US business in Dublin in 2010. Facebook Ireland Holdings held, until now, the intellectual property rights to the technology and the brand allowing Facebook to operate outside the US.

As previously reported, the initial transfer of this intellectual property to Ireland is now at the centre of a court battle between the social media firm and the US Internal Revenue Service (IRS). Court reports from the US have revealed that the 2010 transaction was valued by the social media group at $6.5 billion. The US tax authority argues the IP assets involved were worth at least twice as much, in light of the value they generated in the following years.

Facebook Ireland, the trading company selling advertisements on the platform around the world for the past decade, paid more than $14 billion in royalties and cost-sharing payments to its parents between 2011 and 2016, according to Reuters’s reporting on the litigation before the US Tax Court. The double Irish structure now in liquidation acted as a buffer for this income. Facebook Ireland Holdings, through its role as “IP holder”, helped channel profits to the companies domiciled in the Cayman Islands, where there is no tax on corporate income.

From the contested $6.5 billion valuation in 2010, years of depreciation left the net book value of intellectual property on the consolidated balance sheet of Facebook’s double Irish companies at $25 million at the end of 2018. There were also $37 million worth of patents, similarly well amortised, and $741 million booked under unspecified “indefinite useful life assets”. 

This means that Facebook had exhausted most of the value of the intangible assets it had based in double Irish structures before it placed them into liquidation last month. From now on, the group has two options under new tax rules in force since the December 2017 US tax reform: 

• Keep intellectual property and other intangibles inside the US and charge subsidiaries around the world for its use, with corresponding profits taxed by the IRS under the reduced-rate foreign-derived intangible income (FDII) scheme – what Google appeared to have chosen to do after hollowing out its own double Irish structure last December; or
• Join Apple, Microsoft and many others in onshoring IP into fully Irish companies under the so-called green jersey scheme, which combines capital allowances and 12.5 per cent corporate tax in Ireland with another US tax break, the global intangible low-taxed income (GILTI) regime.

Documents filed by Facebook so far have given no indication as to which option it has chosen to manage intangible assets left over from the liquidation of its double Irish holding companies, and new ones associated with future developments in its non-US business.

Last dividend completes $42 billion profit repatriation

Aside from intangibles, the three defunct companies also owned the mountain of cash accumulated through the double Irish scheme over the years. At the end of 2018, their consolidated balance sheet showed $6.4 billion in cash and $8.8 billion in “highly liquid” investments, mostly US government bonds. This was after paying $14 billion in dividends to US parents in 2018.

Although the consolidation of Facebook accounts hides which companies exactly owned this treasure chest, we know most of it was either in Facebook International Holdings II or in Facebook Ireland Holdings. That’s because their reporting parent Facebook International Holdings I owned no cash; and their subsidiary Facebook International Operations had only €5.4 million in cash and equivalents on its own balance sheet, where it valued its ownership of Facebook’s other subsidiaries outside the US at $7.4 billion. This hardly allows for any significant cash reserves in any of them except for the main trading entity Facebook Ireland, which had €1.3 billion in cash and equivalents. Other subsidiaries filing accounts in Ireland had cash reserves in the millions at most.

Of the $15.2 billion cash stash consolidated in the Irish branch of the group, this left just under $14 billion in the companies that went into liquidation 21 months later. A post-balance sheet note to Facebook Ireland Holdings I’s accounts indicates that this is precisely the amount it paid in dividends to its US parent in 2019, hollowing out the double Irish structure before its liquidation this year.

We know have the full picture of profits repatriated through this channel since its inception in 2010: $14 billion between 2011 and 2016, as reported by Reuters from US court proceedings; $165 million in 2017, then $14 billion in each of 2018 and 2019 – following another Trump tax break on profits previously parked overseas by US multinationals – according to accounts filed in Ireland. The grand total is in excess of $42 billion.

The new ownership of Facebook’s Irish-based business is now in a straight line from the US through Facebook International Operations, a company registered and tax-resident in Ireland. It owns, in turn, 33 subsidiaries – most of them managing data centres and connectivity infrastructure here and around the world, some providers of group services in Dublin – and Facebook Ireland, the advertising sales behemoth employing 1,300 people out of Dublin’s Grand Canal Square at the end of 2018.

Unlike other US tech multinationals, however, Facebook doesn’t use Irish holding structures to own trading subsidiaries in other countries. Its customer-facing entities around the world are typically controlled directly from the US.

What is the new routing to direct income from those countries where advertising is bought and seen back to the group’s Menlo Park headquarters?

The liquidation of Facebook’s double Irish structure leaves many questions open: where is the social media giant now locating intellectual property and other intangible assets, such as users’ personal data? What is the new routing to direct income from those countries where advertising is bought and seen back to the group’s Menlo Park headquarters? And which jurisdictions along the route are likely to benefit from the corresponding tax take, now that the Cayman Islands are out of the equation?

More filings expected later this year will answer some of these questions. Already, the developments of the past three years give some clues. In December 2017, eight days before the US Congress passed President Donald Trump’s Tax Cuts and Jobs Act to implement the tax breaks detailed above, Facebook’s chief financial officer Dave Wehner published a brief blog post announcing that the group was moving to a “local selling model”. 

“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,” he wrote. The change was to roll out to those countries were Facebook had a local office during 2018, targeting completion by the first half of 2019.

A €100 million French tax bill

Facebook France posted a net loss of €87.6 million in 2019, according to accounts it filed in Paris in August. This what despite skyrocketing revenue and a doubling in pre-tax profit to over €30 million. The gap was caused by a once-off tax bill of more than €100 million imposed by the French authorities over profits made in 2018 and earlier (including a €22 million penalty). This plunged the subsidiary into negative equity and forced its US parent to inject fresh capital this year. 

The social media giant was the latest multinational to reveal a settlement with the French taxman, following deals worth €965 million with Google and €500 million with Apple. All were targeted for sales made in France but recorded in Ireland over previous years. 

As promised by Wehner, Facebook France started to book more revenue in France in 2018. From an annual growth trend of around 50 per cent over the previous seven years, its turnover suddenly jumped by 600 per cent that year, then doubled again in 2019. This, however, doesn’t account for all sales in the country. The company’s latest filing states that its advertising revenue comes from “large French customers” only. 

Smaller sales – such as ads automated through Facebook’s website without human negotiation – continued to be recorded by Facebook Ireland. As specified by Wehner, only revenue “supported by our local teams” had moved out of Dublin.

Neither was the growth in Facebook France’s revenue reflected in its profitability. When its turnover was multiplied by seven in 2018, the profit taxable in the country grew less than three-fold. The reason? Out of €389 million in revenue, the company paid €325.6 million in unspecified “other purchases and external charges”. Last year again, the French subsidiary spent the bulk of its €746.7 million in revenue on similar expenses totalling €659 million. 

There is no other plausible explanation for these soaring expenses than payments to other group companies, but Facebook France does not detail transactions with related parties other than to state: “No transaction was conducted with a related party that was significative or other than at arm’s length.”

Despite Wehner’s local selling model announcement, Facebook Ireland’s revenue jumped by €6.5 billion in 2018, reaching €25.5 billion. This was equivalent to $30.1 billion, which is exactly the revenue reported outside the US and Canada by the entire group. In the year following Wehner’s blog post, all of Facebook’s overseas revenue continued to transit through Ireland.

There is, however, one detail buried in the footnotes of Facebook Ireland’s 2018 accounts – its revenue comes from the combination of two streams, for which separate figures are not available:

• “Primarily” advertising sales, directly or through agencies and resellers; and also
• “Through a services agreement with another group company for the provision of research and development services”. The company doesn’t disclose related party transactions and no further details are available on this cost-sharing deal, but it signals the possibility that Facebook may continue to direct income through Ireland under the form of inter-company participation to research and development costs – even though customer-facing sales are booked elsewhere.

The French example above shows that Facebook is prepared to relocate some of its revenue to those countries where users’ personal data generates the value in its business. To a lesser degree, this also means relocating a portion of taxable profits there. However, the growing unspecified costs above the bottom line of Facebook France indicate that other group entities are likely capturing a large part of the additional local revenue.

This may be through payments such as charges for the use of intellectual property or cost-sharing agreements for the development of new technologies. Accounts for 2018, when the double Irish was still alive and well, show that Dublin-based subsidiaries retained a central position in those financial channels. 

Whether that is still the case after the end of the tax scheme this year – and now the liquidations of the holding companies at the heart of the process for the past decade – will determine how much of Facebook’s billions transit through Ireland in the future. 

Continued plans for expansion here, from data centres to the firm’s new office campus in Ballsbridge, show its commitment to Dublin as a physical base. The scale of financial flows, however, is what will determine how much the Exchequer can levy in corporation tax from Facebook in the coming years.

Further reading

Mapping multinationals: The story of how just 25 companies booked €100bn in profits in Ireland