Facebook (NASDAQ:FB) is under scrutiny and criticism in the U.K. and Ireland after pulling a “Double Irish” to get away with massive tax cuts that left the Ireland-based operation paying less than 1 percent of its annual revenue in taxes.
A “Double Irish” involves moving money to other subsidiaries in the form of royalty payments. Facebook moved $1.2 billion from Ireland to California and the Cayman Islands. After the transfer, Facebook Ireland could report $24.3 million in losses despite having made $1.4 billion in gross profits, leaving it to pay just $5.2 million in corporation tax. The company also managed to avoid a great share of tax in the U.K. and will now face scrutiny from U.K. authorities as they try to crack down on this sort of economic leeching, for which Starbucks (NASDAQ:SBUX) has also been criticized.
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While Facebook’s tax avoidance in Ireland and the U.K. may have allowed it to make a quick buck — or a billion — the company doing so risks damaging the relationship between it and the host of its Irish branch. Ireland has become a major hub for tech companies, and Facebook’s tax avoidance could damage its relationship with a crucial country. Though A-level management would know how to get the most of their money, they would also likely avoid putting the company at odds with the local government — a sign that Facebook’s management may be narrow-sighted.
Facebook shares may have gotten a boost in the short-term, as the company was able to avoid taxes and post heightened revenues. However, an angered U.K. may work out some tougher restrictions to the way companies move around money within the country, which could decrease Facebook’s ability to hold onto revenue in the future, especially if Ireland decides to follow the U.K.’s lead on the tax crack down.