As the old saying goes, the only two certainties in life are death and taxes.
Unless you’re Facebook.
The world’s largest social media company recorded $712 million worth of advertising revenue in Australia in 2020, up from $673 million in 2019, according to financial records filed with ASIC last Friday.
But after some creative accounting, that revenue was whittled down to just $38 million in taxable profits, of which just $11 million (30 per cent) was paid in tax.
That means the company paid less tax on its profits in 2020 that it did in 2019 – despite bringing in more revenue.
And the missing piece of the puzzle isn’t higher costs.
All that revenue conveniently disappeared because the company sent $559 million in “reseller expenses” overseas under a deal with its US-based parent.
That’s $51 million more than it sent overseas in 2019 – eating into its revenue boost and then some – though Facebook did pay more tax in total in 2020, with a total bill of $20.1 million once taxes on other payments were included.
If you ask Facebook executives, they’ll likely say no rules were broken, which is true, but it doesn’t take a tax law degree to work out that’s not the point.
How Facebook minimises Australian tax
So, how did they do it?
University of Melbourne professor Miranda Stewart said Facebook was excluding sales revenue from its Australian taxable income by making payments to related businesses overseas under supply deals.
Basically, while Facebook Australia raked in $712 million in ad revenue in 2020, it did so using software owned by its related companies overseas.
And so Facebook Australia paid other companies within the global Facebook stable to provide these services.
“Most of their services – their advertising services – are being supplied from their offshore entities,” Professor Stewart told The New Daily.
“It’s very likely it’s from an entity in a low-tax jurisdiction.”
Because Facebook’s software isn’t a tangible good like a video tape, the Australian arm generates revenue using assets that aren’t in Australia.
It then pays other subsidiaries for access to this software – the cost of which happens to equal most of its ad revenue in Australia – leaving the local company with very little profit.
And if Facebook Australia doesn’t make much money, neither does the Australian Taxation Office, which collects all our tax money.
But Facebook doesn’t mind. All that money it sent overseas feeds back into its global business, helping fund further improvements to its software, which in turn let’s them charge even more money to the Australian arm.
It’s all legal, as UNSW associate professor Ann Kayis-Kumar explained.
“While the tax laws often present (entirely legal) ways for companies to minimise their taxes, the challenge for governments today goes beyond tax law to the corporate law concept of ‘separate legal entities’,” she told TND via email.
“It is possible for companies to incorporate entities in overseas jurisdictions at the click of a button. These overseas jurisdictions might have no or low corporate tax rates.
“This makes it possible to funnel profits into lower-taxing countries and book expenses in higher-taxing countries.”
An endemic tax problem
Facebook aren’t the only company doing this sort of thing, either.
It’s become an endemic feature of the global tax system, particularly as tech companies have grown into trillion-dollar behemoths.
“It’s quite common,” Professor Stewart said.
“It’s a major way they [multinational companies] manage their global revenues and profits.”
According to a tax transparency report for the 2018-19 year published by the ATO in December, 741 companies with more than $100 million in income paid no tax at all, which is about 32 per cent of the entire list.
So, what’s being done about it?
Well, this is where things get interesting, because tax experts are hopeful we might be moving towards a potential (partial) solution to this mess.
The Organisation of Economic Co-operation and Development (OECD) has held a series of meetings in recent years to work out a way to crack down on multinational tax avoidance. And now there’s a plan.
Late last week, after OECD representatives held their latest series of talks about tax base erosion, the United States Treasury came out and said a 15 per cent minimum global tax rate should be created.
“Treasury reiterated that with the global corporate minimum tax functionally set at zero today, there has been a race to the bottom on corporate taxes,” the US Treasury said in its statement about the talks.
“Treasury underscored that 15 per cent is a floor and that discussions should continue to be ambitious and push that rate higher.”
Treasurer Josh Frydenberg welcomed the US commitment and said Australia will remain an “active and constructive” participant in talks.
“Australia welcomes the United States’ commitment to continue to engage in the OECD-led discussions seeking to agree a globally consistent approach to the tax challenges posed by the digitalisation 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, after all, tax law) but Professor Stewart said experts are hopeful that the US and countries like Australia will sign an in-principle agreement on a new treaty by July.
This treaty would set out, in broad terms, new rules requiring companies to pay tax based on where their consumers are located, and not on the use of software.
“The rules about allocation to jurisdiction will be changed via formula so that the allocation of tax jurisdiction will go more to consumer-facing countries,” Professor Stewart said.
“We have lots of consumers of Facebook, but most of the revenue is booked offshore, so this new formula might allocate more of that revenue and a share of the taxable profit of Facebook to Australia.”
This will be difficult to administer and could take years to implement successfully.
The suggested floor of 15 per cent is also half the rate companies are supposed to pay in Australia right now (30 per cent).
But Professor Stewart said although it is an imperfect solution it is better than the status quo, which is allowing many companies to escape tax bills altogether.
“Anything will be progress compared to the current situation,” she said.