Margaret Hodge, chairperson of the Public Accounts Committee of the Parliament of the United Kingdom criticized the tax records of Facebook Inc (NASDAQ:FB), and alleged that the social network giant is engaging in “deliberate manipulation of accounts of economic activity” to avoid paying proper tax contribution,” according to a report from the Guardian.

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Facebook’s structure in Europe

Last year, Facebook Inc (NASDAQ:FB) generated a profit of approximately £223 million in Britain, one of the largest advertising markets in Europe. However, the company did not pay any taxes on its income.

“Facebook complies with all relevant corporate regulations including those related to filing company reports and taxation,” according to a spokesperson for Facebook Inc (NASDAQ:FB).

The spokesperson explained that the international headquarters of the social network giant is located in Ireland with nearly 400 employees, and it has a series of smaller local offices providing services across Europe.

“Dublin was selected as the best location to hire staff with the right skills to run a multilingual hi-tech operation serving the whole of Europe,” added the spokesperson.

The social network giant has a subsidiary in United Kingdom with more than 120 employees. A majority of the staff are selling advertisements, but advertisers receive billing from another Facebook Inc (NASDAQ:FB) subsidiary based in Dublin, Facebook Ireland Ltd.

Last year, Facebook Ireland Ltd generated £1.5 billion, but it recorded a payment of £670 million to its parent company and another £645 million to Facebook Ireland Holdings for using its platform. The social network giant only paid £4.4 million in taxes to the Irish government.

According to the Guardian, the earnings of Facebook Ireland Holdings are untraceable because it is not filing full public accounts. Based on some of its filings, it is owned by the subsidiaries of Facebook Inc (NASDAQ:FB) based in Cayman Islands, a jurisdiction that does not collect corporate taxes. The corporate structure of the social network giant suggests that it is diverting most of its income internationally to the Cayman Islands, a tax haven.

Other technology companies such as Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG) were also accused of tax avoidance using their subsidiaries in Ireland. Both companies said they complied with the law and paid their tax obligations. Political leaders in Europe encouraged the Irish government to step up its effort in resolving the problem.

Irish government proposed changes to its tax rules

In October, the Irish government proposed changes to its tax rules used to prevent multinational companies from minimizing their tax liabilities in response to the pressures of other governments. Finance Prime Minister Michael Noonan proposed to illegalize companies registered in Ireland without a tax residence elsewhere.