Well, the U.S. government isn’t going to “like” this: Facebook shifted a little over $1 billion in profits earned overseas to the Cayman Islands last year.
The world’s largest social networking site avoids hefty tax bills on most of its international earnings by using a web of subsidiaries in Ireland and the Cayman Islands, a favorite tax haven for many multinational corporations because it has no corporate tax.
Facebook uses a tax-avoidance scheme that has been dubbed the “double Irish” because it involves two subsidiaries incorporated in Ireland. Similar strategies have been employed by other large multinationals like Google and Apple. In Facebook’s case, one subsidiary, Facebook Ireland Limited, collects advertising revenue from around the world. In 2012, for example, it boasted a profit of €1.75 billion (or about $2.3 billion), but that quickly turned into a pre-tax loss of €626,000 (or about $850,000) when the company paid €1.75bn in “administrative expenses” tied to the use of intellectual property to the second subsidiary, Facebook Holdings Limited, the Financial Times reported.
The string of money moves dramatically reduced the taxes Facebook owed for 2012. In the end, Facebook reportedly paid €1.9 million (about $2.6 million) in Irish corporate taxes even as revenues surged to €1.79 billion.
The company defended its tax payments. “Facebook complies with all relevant corporate regulations including those related to filing company reports and taxation. We have our international headquarters in Ireland that employs almost 400 people and a series of smaller local offices providing support services all over Europe. Dublin was selected as the best location to hire staff with the right skills to run a multilingual hi-tech operation serving the whole of Europe,” a spokesman for Facebook said in a statement.
This isn’t the first time the social media giant’s tax practices have come under scrutiny. Earlier this year, the Center for Tax Justice, a left leaning tax advocacy group, released a report saying Facebook paid a negative tax rate in 2012, as company filings showed it would receive a tax refund of $429 million despite booking $1.1 billion in U.S. profits. The tax refund resulted from Facebook’s use of a tax break that allows companies to treat executive stock options the way they treat compensation—as an expense that trims their profits. The company’s CEO and founder Mark Zuckerberg paid a bigger tax bill last year – about $1 billion.
Facebook is not alone, of course. In fact, every year U.S. multinational corporations avoid paying an estimated $90 billion in federal income taxes by sheltering profits in subsidiaries registered in tax havens, according to a report issued earlier this year by the U.S. Public Interest Research Group (PIRG).
The report showed that the top 100 publically traded U.S. corporations, including tech giants Apple, Microsoft and Google, had a collective $1.17 trillion stored offshore. Just 15 companies accounted for about two-thirds of that total.
Here are the top 10 companies sheltering the most money offshore, according to PIRG.
General Electric: GE has the most money parked offshore. In 2012, it held at least $108 billion abroad, with the money distributed across 18 subsidiaries in tax havens like Bermuda, Bahamas and Ireland.
Apple: The tech titan stores $102 billion offshore – under three Irish subsidiaries, two of which have no employees. PIRG estimates that if Apple didn’t harbor these profits offshore, it would owe the U.S. government $26 billion in taxes. Instead, it paid an effective tax rate of 3.4 percent on its offshore cash.
Pfizer: The world’s largest pharmaceutical company operates 174 subsidiaries in tax havens and currently stores $73 billion offshore. According to PIRG, Pfizer made more than 40 percent of its sales in the U.S. between 2010 and 2012 and still managed to report no federal taxable income in the U.S.
Microsoft: The company reported that five offshore subsidiaries held $60.8 billion in 2012. PIRG estimated that the software giant would owe $19.4 billion in U.S. taxes if it didn’t use tax havens. Microsoft also uses a subsidiary in Puerto Rico to avoid U.S. taxes on 47 percent of its U.S. sales, a Senate investigation found last year.
Merck: One of the largest pharmaceutical companies in the world, New Jersey-based Merck Co., had an estimated $53.4 billion offshore at 151 different subsidiaries in tax haven countries.
Johnson & Johnson: The company may be based in New Jersey but it harbored an estimated $49 billion abroad. It operates 55 different subsidiaries in tax havens like Ireland, Hong Kong, Luxembourg and Singapore.
IBM: The tech and financial consulting corporation headquartered in New York stored $44.4 billion offshore in 2012 through 16 different subsidiaries.
Exxon Mobil: The Texas-based oil giant generated some $450 billion in 2012 revenue. It had $43 billion offshore, controlled by 36 different subsidiaries in places like Bermuda, Luxembourg and Hong Kong, among others.
Citigroup: The bank reported operating 427 tax haven subsidiaries in 2008 but disclosed only 20 in 2012. Over that time period, Citigroup increased the amount of cash it reported holding offshore from $21.1 billion to $42.6 billion, ranking the company ninth on PIRG’s list.
Cisco Systems: The California-based tech company shelters $41.3 billion offshore. It reported having 47 different subsidiaries in places like Bahrain, Costa Rica, Cyprus, Jordan and Ireland.
Follow Brianna Ehley on Twitter: @BriannaEhley
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