By rights, Facebook’s chief executive, Mark Zuckerberg, should order an immediate review into the firm’s underperforming operation in the UK. The accounts for 2017 suggest that the UK unit is woefully off the pace. The operating profit margin was a miserable 4.9% versus the 50% that Facebook achieved globally last year.
Zuckerberg will do no such thing, of course. As the UK operation boasted in its annual attempt to deflect questions about the modest level of corporation tax it pays, Facebook continues to invest heavily here. There were 1,290 employees in the UK on average in 2017, there will be 2,300 people by the end of this year, and the expansion of the London office will create capacity for 6,000 by 2022. So it’s fair to guess that things are going better than a glance at the pure UK numbers – an operating profit of just £62m on revenues of £1.27bn – suggests.
The tax bill of £15.8m, incidentally, looks roughly correct in the sense that it corresponds with the rate of corporation tax. Indeed, it was a little higher because Facebook had some expenses that were not deductible for tax purposes. But the question to ask is why UK operating profits were so small.
It wasn’t because of any fancy footwork with debt: the UK unit had a small amount of interest income. Nor were large share-based payments to UK staff a special factor because Facebook, as a whole, charges such expenses, and the group-wide profit margin still came out at 50%. The answer, therefore, must lie within the trading terms between Facebook UK and Facebook itself. As with so often with big technology firms, those internal arrangements are the crucial piece of the financial jigsaw.
But you will gain no insight into the terms from the UK accounts. The directors did not even explain why operating margins fell by two-thirds from the 15.2% achieved in 2016.
In the circumstances, you can see why the chancellor, Philip Hammond, is contemplating a “digital services tax” that would be charged on revenue, which is also what the European commission has proposed.
“The time for talking is coming to an end and the stalling has to stop,” Hammond said last week. He should consider Facebook UK’s accounts as another exercise in stalling. The numbers, no doubt, are entirely in accordance with international tax treaties and nobody is suggesting that laws have been broken. But the complete refusal to explain why reported UK profits are so low is just arrogant.
A revenue-based tax would breach the basic principle that corporate taxes should be charged on profits, not turnover, but what alternative does a national exchequer have? Get on with it, chancellor.
Unilever needs a plan B
The embarrassed board of Unilever will know its troubles did not end on Friday when it dumped the nonsensical plan to move its headquarters to Rotterdam. If the Anglo-Dutch group still thinks the corporate structure needs “simplifying”, which is the official stance, it will have to produce a plan B.
The obvious solution is to incorporate in the UK and unify the shares within the plc class rather than the NV variety. That would seem to give Unilever everything it says it wanted, including the ability to easily issue shares to fund acquisitions.
There would be no point in seeking a UK domicile if Dutch investors were also able to rebel and block. But an oddity of the abandoned plan was that Unilever required only a 50.1% majority among the NV shareholders, rather than the 75% needed with the plc class. That makes a London HQ easier to impose.
Yes, the idea looks rough on the Dutch brigade, but Unilever, as its board was made to realise, has to be pragmatic. It is hard to believe the chief executive, Paul Polman, would happily recast the original plan, with London taking the place of Rotterdam. But, since he was instrumental in creating this mess, he will have to explain why not.
