What's the deal with Facebook and tax? video

John Cowie

What's the deal with Facebook and tax?

The last known amount of tax social media giant Facebook paid in New Zealand was about $43,000: roughly the same amount a family-owned building company might pay.

Taxes are paid on profits, and in 2014 - the most up to date accounts we have - Facebook made a pre-tax profit of just $12,000 in New Zealand.

Its small tax bill pushed it to a $31,000 loss, but it's more interesting to poke around the rest of the accounts, as light as they are on detail.

The numbers behind Facebook's $43,000 tax bill in New Zealand.
If you take the number of Facebook users in New Zealand and multiply it by what the average Asia/Pacific user is worth, Facebook’s revenue here would likely be between $5m and $6m.
But in 2014, its declared revenue was just $1.197m, about a fifth of this amount. This puts a New Zealand Facebook user’s worth at about 50c, well below the average Asia/Pacific user worth of $2.90.
Of this $1.197 million, $1.185 (98 percent) went towards Facebook’s expenses.
This means Facebook’s pre-tax profit was just $12,000, and after paying $43,000 in tax, it made a loss. Facebook’s significant costs in New Zealand whittled away its revenue, leading to a tiny profit which kept its tax bill low.
WORDS Hamish McNicol
PRODUCTION Suyeon Son and Andy Fyers
UI & UX Katrina Berry and Britt McLeod
Revenue
The amount of money Facebook makes. Most of its revenue comes from businesses paying to advertise on the site.
Expenses
The cost of doing business, such as employee wages.
Profit
What's left over when you take expenses away from your revenue. Taxes are then paid on any profits.

Facebook New Zealand's income was slightly less than $1.2 million in 2014, earned for providing unspecified services to Facebook Ireland.

But its costs of doing business in New Zealand were only slightly less than this, leading to that tiny $12,000 pre-tax profit.

New Zealand had about 2 million active Facebook users, so these figures appeared to suggest each Kiwi only generated about 50 cents of revenue a year.

We also know, however, that at that time an Asia Pacific user was worth about $1.50 a head to Facebook: this number's now about $2.90.

Facebook makes the vast majority of its money from advertising, and in New Zealand it roughly costs about $10 to get your advertisement seen by about 1000 people.

So if Facebook New Zealand made its money providing services to Facebook Ireland, where did the advertising money spent by New Zealand businesses go?

Facebook Ireland.

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One Wellington eatery, which did not want to be named, spent about $100,000 advertising on Facebook last year.

That's just one Wellington restaurant, spending slightly less than 10 per cent of what Facebook New Zealand claimed as its entire income for 2014.

They provided an invoice Facebook sent them for their advertising bill: it clearly states the restaurant was billed by Facebook Ireland.

One Wellington restaurant's Facebook advertising invoice shows it gets invoiced by Facebook Ireland.
SUPPLIED

One Wellington restaurant's Facebook advertising invoice shows it gets invoiced by Facebook Ireland.

So - and this happened around the world - Facebook's New Zealand advertising revenue appeared to go to its business based in Ireland.

Ireland has a 12.5 per cent corporate tax rate, less than half New Zealand's 28 per cent.



But Irish law also allowed for what was known as "the double Irish", a structure where two subsidiaries are registered there and one routes its revenue through a tax haven.

Facebook Ireland reportedly paid little tax as well, as it also made a small profit.

This was because of payments it in turn made to Facebook in the US and another company, Facebook Ireland Holdings, which was reportedly owned by multiple Facebook subsidiaries based in the tax-free Cayman Islands.

This was the "double Irish": revenue gets routed to Ireland, where corporate tax was much lower, where it then gets re-routed to another Facebook company based in a fully-fledged tax haven.

Facebook's value approached US$400 billion (NZ$574b) not long after it announced it made US$27.6b in revenue last year.
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Facebook's value approached US$400 billion (NZ$574b) not long after it announced it made US$27.6b in revenue last year.

It is likely the Government is actually spending a lot more money advertising on Facebook than it is getting back in tax.

Last year, Government agencies spent at least $2.6m on Facebook advertising: the Electoral Commission, for instance, spent $270,000, while local councils often spent around $1000 each.

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And globally, the sums involved are huge.

Facebook's value approached US$400 billion (NZ$574b) not long after it announced it made US$27.6b in revenue last year.

It paid US$2.3b of tax and turned a profit of US$10.2b - a figure higher than the overall market value of most of the companies on New Zealand's stock exchange.

In 2014, when it paid $43,000 tax in New Zealand, the parent company paid US$1.97b of tax.

The loophole was closing over the next few years as part of international efforts to crack down on sweetheart tax deals for multinationals, but it was all legal.

 - Stuff

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