Just for posterity

The real questions we should ask about Facebook and tax

POSTED ON OCTOBER 12 2015

I have a posting on the Guardian’s Comment is Free site under the above title tonight.

I will be doing an more in-depth analysis here tomorrow if all goes according to plan (and sometimes it does not).

2

4

0

6

21
21 Responses to “The real questions we should ask about Facebook and tax”

Andrew Jackson says:
October 13 2015 at 9:17 am
In your article, you say:

“…they will say Facebook made a loss of £28m in the year. But the problem is, this figure is almost certainly not true. Payments of £35m in shares to employees have supposedly been made and the company has, I note, not recognised these sums as due on its balance sheet, where it implies it actually made a profit of £7m in the year, which is much more likely to be the correct figure. It’s absurd that two such differing views can be included in one set of accounts.”

But RSUs are invariably issued by the parent company, not the employing company. There is no reason why you might expect the share issues to be recorded on the balance sheet.

If you look at note 15 you’ll see a reserve credit for the amount of the RSU cost. So what has happened is that:

– shares have been issued to the company’s employees
– there has been a P&L charge, as required under GAAP
– the P&L impact has been reversed in reserves, as the company is not actually bearing the cost
– a tax deduction has been taken, as required by UK tax law

Or, in simple terms:

– The US parent has issued shares to UK individuals
– The UK company has therefore received a UK tax deduction, 80% of which is worthless to it, but the remainder of which saves it about £1.4m of corporation tax
– The UK company will have had to pay out about £4.8m in secondary NI
– The UK employees will have had to pay out £15m or more in PAYE and NI
– The cost is borne by the US parent (or its shareholders, if you prefer to think of it like that)

So if there had been no RSUs, we would have UK tax receipts of £1.4m.

Because of the RSUs, we have UK tax and NI receipts of about £20m, and about £20m of shares in the hands of UK individuals. The cost is borne by Facebook (£35m in the US, £5m in the UK).

To me, this seems like a good deal for the UK. It’s a massive transfer of value from the US to the UK, half of it going directly to the Treasury 🙂

Reply
Richard Murphy says:
October 13 2015 at 3:06 pm
And you think having two figures for the results for the year is a true and fair view?

Reply
Andrew Jackson says:
October 13 2015 at 3:32 pm
Which two figures do you mean?

If you mean having an accounting figure for the profits and a separate figure for taxable profits, then yes: that seems entirely true and fair to me.

If you’re looking only at the accounting figures we have a slight complication, in that there is an underlying profit, the RSU charge, and the reimbursement of that charge. This means that it’s useful to look at the figures both including and excluding the RSU charge. So once again: yes, I think that it is fair to show them both.

What would you prefer to have shown in the accounts?

I think there is a slightly odd situation here, in that the cost of the RSUs seems to be borne by the parent company, although accounting principles (and indeed common sense) would suggest that it should normally be pushed down to the employing entity. On that basis it is the figure of £7m profit that is the anomaly, and the loss of £28m is the better. That might explain why the £28m is more prominent in the accounts.

Of course, if you take the view that the RSU charge is not really a cost to either company then you might prefer the £7m. But that leaves open the question of who it is a cost to. Certainly the UK employees (and the Treasury) have benefited, so there must be a cost somewhere.

I personally think that the existing shareholders ultimately bear the cost, but that it seems reasonable to recognize it in the parent company at least; and I can see there is a good deal of logic in pushing the cost down to the operating company.

Richard Murphy says:
October 13 2015 at 5:28 pm
The P & L shows a loss of £28 million

The balance sheet shows a positive reserve movement of £7 million

That is two very different figures for profit

Now, which one is right?

Andrew Jackson says:
October 13 2015 at 3:34 pm
Incidentally, what is your view of the way that the interest has been taxed even though (or, if you prefer: assuming for the sake of argument that) the company has substantial losses?

The schedular system is clearly kicking in to the company’s disadvantage here.

Richard Murphy says:
October 13 2015 at 5:26 pm
£4,327?

In £104 million

You really are sweating the small stuff if that is what is worrying you

Andrew Jackson says:
October 13 2015 at 5:31 pm
If you look in the reserves, the difference is neatly explained: there is a figure of £35m relating to the RSUs which comes in to the reserves without going through P&L.

With the £4k tax on interest, I’m not particularly interested in the amount, but more the principle that the tax rules deliberately manipulate loss relief such that the company can’t use its losses against profits. From your response, I take it you’re OK with that?

Richard Murphy says:
October 13 2015 at 6:27 pm
The accounting is a big issue

The profit offset is not

I am all in favour of taxing the returns on capital and that is what the system is designed to do

Andrew Jackson says:
October 13 2015 at 8:31 pm
I am all in favour of taxing the value generated by a business.

In this case, because of the RSU scheme the value has all arisen in the hands of the employees, not of the company.

So the employees are getting taxed, and the company is not.

Seems perfectly fair and reasonable to me 🙂

Richard Murphy says:
October 13 2015 at 8:37 pm
Except as ever you entirely miss the pint of the whole discussion Andrew

Andrew Jackson says:
October 13 2015 at 10:14 pm
That’s because you keep moving the point every time you realise your argument is falling apart 🙂

Richard Murphy says:
October 13 2015 at 10:37 pm
Not once

Not ever

Just as not once, not ever, have you ever got a point

Eileen says:
October 13 2015 at 11:24 am
“Do these accounts allow us to really form a view on the right amount of tax Facebook should pay? The answer is glaringly obviously no, or the outrage would not have happened.”

Presumably HMRC have been supplied with all the information they need to form a view. And they know far more about tax than you.

The outrage has been whipped up by political campaigners using half-truths and falsehoods.

Reply
Richard Murphy says:
October 13 2015 at 1:56 pm
Is that a contribution to debate?

Or just abuse?

Reply
Johnny Ray says:
October 13 2015 at 3:04 pm
Oh come on Eileen, I swear what he means at this moment you mean everything
you said as the usual neoliberal fingers-in-the-ears compared to what normal people think.

Reply
Eileen says:
October 13 2015 at 6:21 pm
“The P & L shows a loss of £28 million

The balance sheet shows a positive reserve movement of £7 million

That is two very different figures for profit

Now, which one is right?”

Seriously? You claim to be an accountant and you are confused because reserves have not moved in exactly the same way as the P&L profit?

They are, of course, both right. Andrew Jackson (above) has even explained what happened and how quite legally and properly both figures are correct and that the UK exchequer is comfortably better of because of what happened.

It is confusing only to those who don’t understand GAAP and RSU accounting.

And it’s noticeable that as soon as arguments get technical, your responses become shorter and shorter and deal less and less with the points made.

Reply
Richard Murphy says:
October 13 2015 at 6:26 pm
I understand that accounting

And I am absolutely clear: that accounting is nonsense and deeply misleading. What is very clear from the accounting is that the P&L does not, and cannot, represent the real return this company is earning

It does not need deep technical discussion to state that: it is, to be blunt, simply true

Andrew Jackson says:
October 13 2015 at 8:33 pm
What you’re missing is that the company is earning a real return and promptly handing it (and more) over to its employees.

The value generated is being taxed where it ends up: in the hands of the employees, not those of the company.

Richard Murphy says:
October 13 2015 at 8:36 pm
No I am not missing that because that is simply not true

The reason he those employees are earning that return is not Ben g dsiclosed in teae accounts and so your claim is utterly unfounded

Wrong, to put it another way

I could be less subtle

Somewhere else says:
October 13 2015 at 10:08 pm
If it’s not being disclosed in the accounts how is he able to show the numbers/impact from looking at the accounts?
Or are you arguing that the accounting treatment is wrong? which is an entirely different issue.

Reply
Richard Murphy says:
October 13 2015 at 10:36 pm
My arguments clear

What are you refusing to note in it?

38 thoughts on “Just for posterity”

  1. So Much For Subtlety

    Has he banned them both and deleted the exchange yet?

    As I keep saying, Ritchie is obviously mentally …. fragile. When reality dawns, he is going to have some problems.

  2. Bloke in North Dorset

    Have I got this right?

    Facebook Ireland has to pay Facebook UK for the services of its engineering support unit.

    That has to be paid at market rates using transfer pricing guidelines. When I was doing a lot of consulting the transfer of consulting services between entities was cost + 15%, IIRC.

    Facebook has decided to pay that 15% in bonuses to its staff in the form of RSUs and therefore doesn’t pay corporation tax on it.

    This whole row is about the accounting treatment of the bonuses and maybe whether or not the transfer price was adequate, but that’s a secondary proble.

    Or am I being too simplistic?

  3. @BiND

    In most of the world you’re about right but in Ritchielland you miss that Facebook does the same thing the whole world over.

    Yes, he really does claim that every entity of Facebook does the same thing everywhere.

  4. Arn and Hammer is sleeping on the job as the Comments policy disintegrates into farce – Pellinor has nailed him completely, and, as is so often the case when cornered he resorts to ad hominem abuse and insults. Clueless – absolutely clueless. Then, like a drowning man clutching at straws Matt Usselmann is grasped as a support mechanism – an act of sheer desperation, surely!

  5. “The reason he those employees are earning that return is not Ben g dsiclosed in teae accounts and so your claim is utterly unfounded”

    OK, happy to admit I know nothing about GAAP and RSU accounting. And putting aside the obvious shift from “P&L and accounting figures can’t both be true” to “why is Facebook handing out £35m in RSUs”, is he actually arguing that the latter questions relevant to a company’s accounts?

    Is there any question RM doesn’t answer with ‘more government micro-management’?

  6. “And it’s noticeable that as soon as arguments get technical, your responses become shorter and shorter and deal less and less with the points made.”

    That just about sums Murphy up. Well played Andrew Jackson for taking him down so conclusively and for doing g the research I really didn’t want to do and now don’t have to!

  7. “because the world’s leading auditors have so managed the setting of auditing standards that a true and fair view by and large means that the right boxes can be ticked with regard to that legal compliance”

    Wow, doesn’t that just sum up the guy’s stance on letter vs spirit of law. Compliance shouldn’t be a mechanical, deterministic process with a binary result. All tax accounts are a jumping-off point to a big moral bun fight over whether you’re paying a morally acceptable level of tax.

  8. Bloke in North Dorset:

    You’re not quite right. Facebook pays the +15% to Facebook UK, so Facebook UK actually makes an underlying profit of £7m or so.

    Facebook also operates an RSU scheme, which basically means that employees get given shares for nothing (probably so long as they perform well).

    The value of the shares issued to employees is regarded as a cost to the employer, for accounting purposes, so Facebook UK has booked a £35m charge in the year (an estimate of the eventual cost of settling the RSUs) in relation to RSUs which haven’t yet been settled.

    For UK tax, however, you only get a deduction when you settle the RSUs. So that £35m gets added back, but Facebook gets a deduction for older RSU’s (that have already been accounted for) that are settled in the year.

    In addition, Facebook Inc seems to have made Facebook UK a gift of the £35m, to keep the balance sheet intact. This has been taxed.

    This means that we have Facebook UK having an overall neutral result from the RSUs, but there is £35m added back for this year’s RSUs and a smaller deduction for RSUs of previous years.

    So £m profit gets £35m added back and about £17m deducted, leaving profits of £25m to be covered by losses brought forward. The losses seem to come from RSUs settled in earlier years (largely 2012).

    Moving away from tax and accounting, what we have is:

    – Facebook UK makes £7m profit from selling services to Facebook Inc
    – Facebook Inc rewards the UK employees for that £7m profit by giving them £35m in share bonuses
    – The employees get taxed on the shares they receive.
    – Facebook UK doesn’t pay tax on its £7m because it has given so many shares away in bonuses in previous years

  9. Share option tax and accounting is a bit weird 🙂

    Incidentally, in the interests of full disclosure I should point out at I’m sitting at Andrew Jackson’s desk right now, drinking his tea and trying to remember if he has any biscuits secreted away… 😉

  10. aha.

    so if we extract ourselves from the details of the accounting, is this right: Facebook chooses to run its UK business by paying its staff in large part by share options, but is revenues are determined at cost plus over salaries. This implies a steady-state in which each year it makes an operating profit which is erased for tax purposes by share options issued in previous years being settled.

    Here’s a bit I am less sure about. Relative to a counter factual in which employee compensation is entirely salaries, so wage bill correspondingly higher, and operating profit scaled accordingly and corp tax is paid on those profits, the situation from UK treasury perspective is better or worse?

    And, setting aside questions such as whether Facebook should really be allowed to say its UK ad sales originate in Ireland etc., and just looking at this Facebook UK services arm, is there anything about this arrangement that we might regard as unsatisfactory, a bad deal, something that UK citizens might justly complain about and what to see, perhaps, legislative redress?

  11. You’re nearly right, but the odd bit is that Facebook Inc now seems to be plugging the gap in Facebook’s UK’s finances that the RSUs make.

    Normally, the cost of issuing employee shares is borne by the employing company: as Facebook Inc is the one issuing the shares, you’d expect Facebook UK to pay Facebook Inc for them, and thus be making an overall loss. This year however Facebook Inc has basically waived that cost – I’m not sure what has happened in earlier years – so Facebook UK is making a massive profit. Conceptually, it has received £35m worth of work from employees that it hasn’t had to pay for (because it’s been paid for by the US).

    So the proper counterfactual is that the wage bill is entirely salaries, but that Facebook Inc has paid £35m of that bill on the UK’s behalf. In that situation you’d expect a big UK taxable profit – and this is indeed what we see. Facebook UK has had to use up £25m of losses brought forward, so must have had a taxable profit of £25m.

    I think the simplest way to think of it is just that:

    – Facebook has made £7m of profit in the UK
    – They’ve distributed £35m of that profit to employees
    – Overall Facebook is therefore worse off as a result of the UK business
    – Instead of £7m at CT rates, the Treasury will be getting £35m at PAYE & NI rates.

    So I think that, if you just look at this UK services arm, this is a fantastic deal for the UK. The US is throwing money at us, half of which sticks with the UK Treasury and half with UK consumers 🙂

  12. LE

    Year on year, if it was all salaries (and when paid) – then yes, total cost + x% as a notional income might be a better ‘politcal’ argument for a murph to make.

    But they don’t, and loads of UK taxes get paid in any case. And standing back further, their consolidated C tax rate (after all these transactions) is clearly higher than the equivalent UK C tax rate, and so trying to label them (overall) as tax avoiders doesn’t work either?

  13. OK I see where you are coming from but I don’t think the US paying 35m of salaries is the right counter factual because 1. it appears to be an odd thing to do in case of share options 2. it would not even be possible if Facebook UK just paid salaries (I am guessing)

  14. PF sure, I am not really asking whether they are tax avoiders etc. just asking once we understand what’s going on, what we should make of it, i.e. is there any valid grounds for objection. I am getting the answer: no, if anything good for UK.

  15. This exchange is his entire blog in a nutshell. He is exposed as a fool, his responses get shorter and more shrill to the point of being mere denials, then come the accusations of abuse, and finally The Flounce. All that remains is the Banning.

    “I could be less subtle”

    Lol.

  16. And in addition, when the shares vest, there will be the possibility of taxable dividends, subject to double tax relief, and, almost certainly, capital gains tax on sales.

  17. Pellinor

    I don’t know what Andrew Jackson puts in his tea, but it’s clearly working for you my friend.

    One note of caution I would throw in here though:
    this work of yours, however excellent, remains and must remain guesswork. Because Facebook’s tax affairs, like everybody’s tax affairs, are confidential. This principle of UK tax policy has been established over centuries. It is this very principle thay Murphy wishes to destroy. Not his own yax confidentiality of course, just the evil MNCs.
    The bitter irony of this is that, even by his own mad reasoning, the real loss to the exchequer with all the resulting damage to the economy and body politic he claims is through shadow economy evasion. This evasion is of course accompanied by benefit fraud. But let’s not mention this, because Evil 1% etc.
    One this that seems beyond doubt is that the UK tax take here is greater as a result of Facebook’s use of share options.

  18. @lizardking

    I suspect that McDonnell’s Uturn and the parliamentary debate on surpluses mandated by law may occasion this breakdown, if his current flirtation with MMT continues

  19. Re: soarer post October 14, 2015 at 7:50 am

    Jolyon Maugham informs me that he did not make this change and I accept that he is correct.

    It was a genuine mistake on my part, and I was not trying to mislead. I apologise to Jolyon for my mistake..

  20. I’m very grateful to @soarer and I absolutely don’t want to stand on ceremony but it’s important for people to know I don’t change my posts to deflect criticism – and if I do change them materially in light of criticism I say so.

  21. Aww my post to his
    “Reply
    Richard Murphy says:
    October 13 2015 at 6:26 pm
    I understand that accounting

    And I am absolutely clear: that accounting is nonsense and deeply misleading. What is very clear from the accounting is that the P&L does not, and cannot, represent the real return this company is earning

    It does not need deep technical discussion to state that: it is, to be blunt, simply true”

    Along the lines of that he was at face value value claiming the accounts were incorrectly prepared and audited, but being an qualified accountant himself he surely realises what a serious accusation that is; so perhaps he could explain what he is clear about. Accounts are wrong or in his opinion the accounting standards for certain areas should be reviewed or just that he feels it’s wrong for some other (social/political) reason not related to the actual accounting treatment.

    To be fair I did have some system issues around the same time I was trying to post so maybe issue my side not his as to why it isn’t there.

  22. Jolyon

    And of course on your blog you most definitely do not allege anything untoward in Facebook’s accounts or return. You do, however, smear with innuendo. I’m afraid it doesn’t become you.

  23. So Much For Subtlety

    Ironman – “You do, however, smear with innuendo. I’m afraid it doesn’t become you.”

    >munches popcorn<

  24. Dennis the Peasant: if you mean me at all, then I can’t take any credit. I don’t try to trap Murphy, I just respond to his observations with comments of my own. I’m not devious enough to want to try to play word games, and I doubt my ability to manage it if I did try.

    Soarer: I too read Maugham’s post as being about Facebook throughout, and was rather surprised on re-reading it to find that the last reference was in fact to “X”. Certainly the obvious inference is that X is Facebook, and to be honest I read “X” *as* Facebook.

    Whether my error was on initial reading, in comprehension, or in memory, I don’t know; but whichever it was, it left me up the garden path 🙂

  25. When I read a headline like: “A few thoughts on Facebook’s accounts” on a blog called “Waitingfortax” I assume the post is about, well, Facebook’s tax affairs really. Silly me.

  26. “Dennis the Peasant: if you mean me at all, then I can’t take any credit. I don’t try to trap Murphy, I just respond to his observations with comments of my own. I’m not devious enough to want to try to play word games, and I doubt my ability to manage it if I did try.”

    Pellinor –

    That may be, but the effect was the same as if you’d taught Mr. N. Machiavelli everything he knew. Intent has nothing to do with it… Only results count. Again, I bow to you, sir.

Leave a Reply

Your email address will not be published. Required fields are marked *