Facebook To Save The Taxman

Facebook is innovating on tax, and that will make many countries happier. In short, if the social media giant follows through on its new plan, Nigerian government will benefit: it will pay “full” taxes on ad sales generated in Nigeria. That is a good thing.

Facebook is making changes to its tax structure under pressure from U.S. and European authorities. CFO Dave Wehner said Tuesday it will in future pay taxes in the countries where it actually makes ad sales, rather than funneling international business through its Irish subsidiary, where it enjoys a disproportionately low tax rate. The EU is working on plans to force digital companies to book sales closer to the ultimate buyer, making it easier for tax authorities to capture the value-added (Source: Fortune Newsletter)

In the past, most technology companies have worked to reduce their tax burdens across the world by domiciling their effective businesses, for tax purposes, in tax havens where they pay low taxes. But with this move, the implication is that Facebook will pay full taxes in countries where the revenues are generated.

I think Google and Uber could follow this lead from Facebook. Doing that will be fair to developing countries, as paying full taxes will make their missions even more believable. It makes sense to pay taxes on the domains where the ad sales happened, and there is no better corporate social responsibility than that. They can setup the local selling structure which Facebook is working on.

Facebook Inc. is changing its tax structure so that it will pay taxes in the country where sales are made, rather than funneling everything through its Irish subsidiary.

The company said it will move to a “local selling structure” in countries where it has an office to support sales to local advertisers. Menlo Park, California-based Facebook shifted its international business operations to Ireland in 2010

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“We believe that moving to a local selling structure will provide more transparency to governments and policy makers around the world who have called for greater visibility over the revenue associated with locally supported sales in their countries,” Chief Financial Officer Dave Wehner wrote Tuesday in a statement.

Mitigating the Dislocation

Nigeria’s Federal Inland Revenue Service (FIRS) wins if these companies adopt this tax paying paradigm. We need to thank the European Union for the heat on these companies. Nothing would have made Facebook to change its tactics, if not for the onslaught from the EU on Google and Apple. A new tax system is needed in the world because technology has changed the dynamic structures of firms and how they relate with nations, and their competitors.

The implication of this local selling structure is huge. Facebook makes money through ads anchored on aggregation construct. Increasingly, aggregation business which Google and Facebook are leaders will continue to disrupt newspaper companies, crippling their revenue structures. It is very obvious that this trajectory will continue in the near future, locally and internationally. But where Google and Facebook decide to pay taxes to Nigeria on the ad revenue made in Nigeria, the impact of this business dislocation, at least on tax purposes, will be manageable. It simply means that taxes government lost from Guardian and ThisDay are now paid by Facebook and Google.

Under the aggregation construct, the companies that control the value are not usually the ones that created them. Google News and Facebook control news distribution in Nigeria than Guardian, ThisDay and others. Because the MNCs tech firms “own” the audience and the customers, the advertisers focus on them, hoping to reach the readers through them. Just like that, the news creators have been systematically sidelined as they earn lesser and lesser from their works. But the aggregators like Facebook and Google smile to the bank. The reason why this happens is because of the abundance which Internet makes possible. Everyone has access to more users but that does not correlate to more revenue because the money goes to people that can help simplify the experiences to the users who will not prefer to be visiting all the news site to get any information they want. They go to Google and search and then Google takes them to the website in Nigeria with the information. Advertisers understand the value created is now with Google which simplifies that process.

The impact of the aggregation is that value, especially on ad revenue, will move from media companies to aggregators like Google and Facebook to the extent that companies like Guardian and ThisDay will experience diminished revenues, even when their products are making money for Google and Facebook. The new tax structure Facebook plans to implement will not redesign the business dynamics, but the Nigerian taxman will certainly get a relief because even if Guardian and ThisDay will not send the tax money, it is sure that Facebook and Google will. By doing that, this new model will save the taxman.

Facebook needs to be commended for this, and I do hope other foreign companies follow the lead and implement local selling structure. It makes sense for a fair and just world. You cannot deny Nigerian government tax money just to bread more millionaires in America through inflated earnings. But with this, it cannot be any better: pay the tax where the ad sales happened, so that in future you can have more ad sales, as the local economy will be supported with the taxes you have paid.

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