Snapchat maker Snap dodges uproar — and maybe taxes — with London office

By funneling much of its overseas revenue through London instead of a widely used tax haven such as Dublin, Ireland, Snapchat maker Snap Inc. stands to recognize similar benefits with far less uproar.

Global corporations, led by tech giants Apple and Google, have faced increased public scrutiny in recent years for complex schemes aimed at lowering their taxes. Even young, privately held software companies similar to Snap — including Airbnb and Uber — employ tactics that could pull their taxes well below standard rates.

Many of them shelter overseas revenue in Ireland, Luxembourg, the Netherlands and other countries with favorable tax rules. The practice shields upward of $240 billion in potential annual income tax, according to economists. But pressure from regulators in Europe and politicians worldwide has put those corporations on the defensive and spurred policy changes.

In the new climate, Snap, which maintains its global headquarters in Los Angeles, took the path of least resistance. The company behind the popular ad-supported video-sharing app announced Tuesday that it would collect ad revenue from Britain and countries where it doesn’t have offices in London. In countries where it has branches, it will pay taxes locally on income generated there. Snap, for now, has ad sales office in the U.S., Canada, France and Australia.

“This allows us to pay taxes in the U.K., which we believe is part of being a good local partner as we grow our business,” the company said. “We want to pay taxes in the countries where we sell advertising, and this is an important step in building the infrastructure to achieve that goal.”

Rules either recently enacted or in the works are turning locales such as Dublin into less attractive tax havens than they were before 2014. For instance, the infamous “Double Irish” tax-avoidance strategy employed by the likes of Apple and Oracle — where a pair of Irish subsidiaries separates a firm’s profits and taxation — is no longer available to new firms. And the atmosphere remains turbulent: Apple is battling a $14-billion back taxes charge sought by European Commission officials.

“It would make sense for companies to think long and hard about moving their subsidiaries and affiliates to Dublin,” said Sepi Ghiasvand, an attorney at Hopkins & Carley in Silicon Valley.

In contrast, London has been boosting incentives and moved to bring down its corporate tax rate to 17% in the coming years — well below the U.S.’s 35% and close to Ireland’s 12.5%. The recent devaluation of the British pound has lowered the cost of doing business. Treatment of capital gains, foreign earnings and research spending is generous to businesses and their shareholders, corporate tax experts said. They also expect British lawmakers to pile on business-friendly policies as the country follows through on its separation from the European Union, a plan nicknamed Brexit.

The European Union is hoping to standardize tax policies across its member nations. But Britain will be motivated to stop businesses from leaving for the EU by making concessions, the thinking goes. Financial analysts estimate that Snap isn’t yet generating profits, so it has time to wait out the legislative process too.

“You could make the case London is the most favorable destination for companies right now,” said Robert Willens, a tax and accounting consultant who teaches at Columbia University. “The U.K. system might not be quite as good on every count as Ireland, but it’s comparable and you don’t risk the publicity damage now that Ireland has been so identified as a tax haven.”

Snap has grown from a handful of employees in London to 75 in the last year. Last week, the company changed its corporate name in London from Snapchat to Snap Group to recognize its new structure.

The London plans are far from likely to mollify critics of corporate America’s tax-avoidance strategies. Snap could still end up paying very little in taxes, especially if rates continue to tumble. Should taxes hold steady, Snap still would come out ahead by avoiding the after-the-fact liability that Apple is now battling.

Snap’s finances and future plans are publicly unknown, leaving much in question. Revenue reached about $400 million last year, according to estimates. More could become clear if, as expected, the company files to trade its stock publicly in the coming months.

Snap isn’t the only company adapting to the new tax constraints and sensitivity. More tech companies are aligning tax strategies with business operations rather than opting for a creative web of subsidiaries, said Friedemann Thomma, an attorney at the firm Venable who helps start-ups across California with such planning.

“There’s a balancing act between tax savings, public scrutiny and public perception,” he said. “All three will have a direct result on your market cap, and Snap is taking advantage of those dynamics.”

Sam Kang, an attorney who wrote a report on the tax-avoidance issue at the public advocacy group Greenlining Institute, said the tech industry needs to commit to paying its fair share around the world.

“I’m still really suspicious,” Kang said. “I would reserve judgment and take a wait-and-see approach on Snap.”

paresh.dave@latimes.com / PGP

Twitter: @peard33

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