As the old saying goes, the only two certainties in life are death and taxes.
Unless you are Facebook.
The world’s largest social media company recorded $ 712 million in advertising revenue in Australia in 2020, up from $ 673 million in 2019, according to financial reports filed with ASIC last Friday.
However, after some creative settlements, that revenue was reduced to just $ 38 million in taxable profits, of which only $ 11 million (30 percent) was paid in taxes.
That means the company paid less tax on its profits in 2020 than it did in 2019 – despite generating more revenue.
And the missing piece of the puzzle is no more expensive.
All of that revenue conveniently disappeared because the company had shipped $ 559 million in reseller spending overseas under a contract with its US-based parent company.
That’s $ 51 million more than it sent overseas in 2019 – which affects revenue growth and some more – despite Facebook paying more taxes overall in 2020, for a total bill of $ 20.1 million if taxes have been included on other payments.
If you ask Facebook executives, they’ll likely say no rules have been violated, which is true, but it doesn’t take a tax law degree to find out that’s not the point.
How Facebook is minimizing Australian taxes
So how did you do it?
Miranda Stewart, a professor at the University of Melbourne, said Facebook excluded revenue from its Australian taxable income by making payments to affiliates overseas under supply agreements.
While Facebook Australia had $ 712 million in advertising revenue in 2020, it was basically using software owned by its overseas affiliates.
And so Facebook Australia paid other companies within the global Facebook stable to provide these services.
“Most of their services – their advertising services – are provided by their offshore companies,” Professor Stewart told The New Daily.
“It is very likely that it came from a company in a low-tax area.”
Since Facebook’s software is not a tangible commodity like a videotape, the Australian arm generates revenue from assets that are not located in Australia.
Other affiliates are then paid to access this software, the cost of which makes up the majority of advertising revenue in Australia. The local company therefore has very little profit.
And if Facebook Australia isn’t making a lot of money, the Australian Income Tax Office, which collects all of our tax money, isn’t making a lot either.
But Facebook doesn’t mind. All of the money it sent overseas goes back to its global business and helps fund further improvements to its software, allowing them to bill the Australian arm even more.
As an associate professor at UNSW, everything is legal Ann Kayis-Kumar explained.
“While tax laws often offer companies (fully legal) ways to minimize their taxes, the challenge for governments today goes beyond tax law to the corporate concept of ‘separate legal entities’,” she told TND via email.
“Companies can include companies in overseas countries at the push of a button. These overseas jurisdictions may have zero or low corporate tax rates.
“This enables profits to be channeled to countries with lower taxes and expenses to be booked in countries with higher taxes.”
An endemic tax problem
Facebook isn’t the only company doing this, either.
It has become an endemic feature of the global tax system, especially as tech companies have grown into trillion-dollar giants.
“It’s pretty common,” said Professor Stewart.
“It’s an important way like them [multinational companies] manage their global sales and profits. “
According to a 2018-19 tax transparency report released by the ATO in December, 741 companies with incomes greater than $ 100 million paid no taxes at all, which is about 32 percent of the total list.
So what is being done about it?
Well, this is where things get interesting, as tax professionals are confident that we could move towards a possible (partial) solution to this mess.
The Organization for Economic Co-operation and Development (OECD) has held a number of meetings in recent years to find a way to combat multinational tax avoidance. And now there is a plan.
Late last week, after representatives of the OECD had their recent talks about the erosion of the tax base, the US Treasury Department came out saying a global minimum tax rate of 15 percent should be created.
“The Treasury Department reiterated that the global corporate tax, which is functionally set to zero today, has seen a race to the bottom in corporate taxes,” the Treasury Department said in its statement on the talks.
“The Treasury Department underlined that 15 percent is a lower limit and that discussions should continue to be ambitious and increase that rate.”
Treasurer Josh Frydenberg welcomed the US commitment and said Australia would continue to participate “actively and constructively” in the talks.
“Australia welcomes the commitment of the United States to continue to participate in the discussions led by the OECD to agree on a globally unified approach to the tax challenges of the digitization of the economy,” he said in a statement on Monday.
A multinational tax treaty
The way this would work is a bit complex (this is tax law, after all), but Professor Stewart said experts are confident that the US and countries like Australia will sign a fundamental agreement on a new treaty by July.
This treaty would, by and large, contain new rules that require businesses to pay taxes based on where their consumers are, rather than on their use of software.
“The rules of jurisdiction mapping will be changed via a formula so that tax jurisdiction mapping will go more to consumer-facing countries,” said Professor Stewart.
“We have a lot of Facebook consumers, but most of the revenue is booked offshore, so this new formula could allocate more of that revenue to Australia and some of Facebook’s taxable profit.”
This is difficult to manage and can take years to successfully implement.
The proposed lower limit of 15 percent is also half the rate that companies are currently expected to pay in Australia (30 percent).
But Professor Stewart said while it’s an incomplete solution, it’s better than the status quo, which allows many businesses to evade tax burdens altogether.
“Compared to the current situation, everything will be progress,” she said.