The government wants to tax social media revenue, rather than profit, based on national user headcount. While Mark Zuckerberg says he’ll give most of his money away to good causes, forcing moguls to pay more tax could be better all round, argues John Picton.
Mark Zuckerberg is the philanthrocapitalist poster boy, pledging to give away virtally all his wealth during his lifetime – but tax reform should trump the Facebook chief’s charitable ways because his company makes money by selling its user base data to advertisers.
The UK government recently proposed taxing social media companies’ revenues by reference to the size of their national user base.
The plan is to stop the likes of Facebook making artificially low profits by paying large royalties to subsidiaries. The treasury said:
Pending reform of the international framework, the government will explore interim options to raise revenue from digital businesses that generate value from UK users, such as a tax on revenues that these businesses derive from the UK market.
The UK will work with other countries to consider how such a tax could be targeted, designed and coordinated to minimise business burdens and distortion. However, the government stands ready to take unilateral action in the absence of sufficient progress on multilateral solutions.
According to the latest figures, 78% of online adults are signed up to Facebook in Britain. It’s likely, then, that the treasury’s plan would increase Facebook’s tax liability. It currently pays relatively little UK corporation tax. In 2016, it reported sales of £842.4m, pre-tax profit of £58.4m and paid £5.1m in corporate tax.
The less tax Facebook pays, the more wealth it can distribute to its shareholders – the largest of which is its co-founder and CEO, Zuckerberg. But Zuckerberg does something surprising with this untaxed money: although he undoubtedly enjoys an extraordinary standard of living, he also gives much wealth away to good causes.
Because the wealthy are inclined to donate, not everyone objects to large and minimally taxed profit. A new movement of philanthrocapitalists has emerged, with the argument that the super-rich are well placed to meet worldwide social needs. This is because they are made up of skilled entrepreneurs, who have already proven their metal.
Through the Chan-Zuckerberg Initiative, which Zuckerberg runs alongside his wife Priscilla Chan, he has committed to give away 99% of his fortune over the course of his life. There is no question that it supports worthwhile causes. It has spent money to curb mass incarceration in the US, invests in research to cure diseases and, among other things, provides free eyesight examinations.
But philanthrocapitalism is problematic when understood as a widespread alternative to old-fashioned tax-and-spend. Some wealthy people choose not to give to charity. Steve Jobs famously had no philanthropic public record, despite having amassed a personal fortune of $8.3 billion.
Philanthrocapitalism is also undemocratic. Governments, when spending public money, are accountable to electorates. If a state pays for a social service, the decision flows from a deliberative process in which everyone has a stake.
When Zuckerberg spent $100m on public schools in New Jersey, he was able to stamp his preferences upon the nature of the project – a scheme criticised for widespread inefficiency.
There is also a problem particular to Facebook’s strategy. Low business taxes are sometimes tolerated by electorates if they are seen to support high-employment industries. Manufacturers might be given tax breaks in the hope that they will generate work.
But Facebook employs few people. In contrast to traditional industries, such as steel manufacturing or coal mining, its wealth is created without a large labour force. With fewer wage packets to pay, Facebook’s advertising-based business pumps most of the money straight up to the top.
Facebook UK has routinely minimised its tax liability. Until last year, it routed all advertising sales through Ireland, which has lower corporation tax than Britain. Yet even the Irish branch doesn’t pay very much, as it is understood that its wealth is transferred out of the country in royalty payments. Facebook UK also pays its employees in shares, which – if they appreciate in value – can be deducted from the corporation tax bill.
But Zuckerberg is unlikely to arrange Facebook’s affairs to maximise tax. It’s inevitable that he prefers control over the company’s wealth – even if he chooses to spend the large surplus on good causes.
The UK government’s proposals are welcome – because Facebook makes most of its money from advertising, taxing revenues based on the size of its national user headcount has the potential to target the real source of the company’s value: your data.