With all this brouhaha over the censorship of Twitter and YouTube in Turkey there’s now a demand that Twitter should open an office in that country, a demand that Twitter seems keen to quietly dodge. The interesting thing being why they want to dodge it: having an office of the company in a place isn’t all that different from having a representative there who handles things for the company. Why not just stick one employee there, as an “office” and make the local government happy? The answer being that having an office in a country changes the tax position completely and the important phrase to understand here for non-accounting types is “permanent establishment.”
Here’s one report on what Turkey seems to be demanding of Twitter:
Twitter Inc., the social-media website that Turkey blocked during critical March elections, has no immediate plans to meet government demands to open a local office, a company executive said Wednesday, a stance likely to prolong Ankara’s gripe with the U.S. company.
This “permanent establishment” thing is why Twitter is so keen not to have to open an office in Turkey. Because having such a PE is exactly the thing that makes you liable to local taxation. And that’s just not how our brave new world of international tech works, opening oneself up to the rapacious tax offices of everywhere business is conducted.
For those interested in details here’s the UK/Turkey double taxation treaty. The tax agreements between Turkey and the US, or Eire, or whatever other countries will be very much the same as they’re all based on OECD guidelines, first set up by the League of Nations back before WWII. The basic set up is that if you “do business” in a country then that business pays the local taxes on profits, sales etc, just like any other business in that country does. But if you simply import something into that country then sure, it’s got to pay the same sales taxes etc as every other business does, but the profits you make on those sales gets taxed back at home in the country where the business is domiciled. This is for the fairly obvious reason that if you sell $50 worth of something to Armenia it’s not worth anyone’s while in making you fill out an Armenian tax form. But if you’ve got a big base and big business there then you probably ought to be treated like everyone else.
However, these laws are a little archaic: no one has really revised them since it became obvious that you could manage a large business in a country without actually having a large base in that country. So the definition of when you’ve got to pay the local profit taxes is that “permanent establishment” which, broadly, is defined as whether you have an office in the country that you do your business out of. In the past that seemed like a reasonable cut-off point. You couldn’t do big business without having an office, so we can assume that those with an office are doing big business and we get to tax them locally. This simply isn’t true today at all. Google certainly claims (as does Facebook) that the entirety of their non-US advertising business is run from Ireland. Apple similarly, with its entire global manufacturing chain and also its non-US marketing one. Sure, there might also be local offices around but they’re very certainly not those permanent establishments: they’re the local service office maybe, or the local research outfit, but absolutely, certainly, we run the actual business out of Ireland.
All of which has the lovely effect of meaning that those international profits are taxed at Irish profit tax rates. Or, in more detail, not very much: Apple declares that its overseas tax rate is around 2% of profits.
And that’s it really: that’s why Turkey wants Twitter to open an office there which it will do business from, and that’s also why Twitter is gently declining. It’s all about who gets the tax money.
Since Saturday, the discussion in Turkey has shifted gears from content to taxes. Mr. Erdogan and Finance Minister Mehmet Simsek have attacked social-media firms including Twitter, Facebook Inc. and Google for avoiding taxes while profiting from Turkey’s online market. The premier vowed to “go after” Twitter on taxes, while Mr. Simsek suggested Tuesday that Turkey may sidestep international treaties to collect corporate and revenue tax from Internet firms.
Yep, that is pretty much it.