By Sam Schechner
Snapchat owner Snap Inc. -- gearing up for what could be one of the year's highest-profile public offerings -- said it is making London its main overseas office and will eschew some of the controversial maneuvers many larger tech companies have used, especially in Europe, to lower taxes.
Those arrangements have attracted intense scrutiny in recent years, triggering an international effort to close loopholes as well as probes into whether firms, including Apple Inc., have been unfairly paying too little tax.
Targeted companies have said they pay their fair share, but many have moved recently to overhaul their tax practices in thewake of these reviews.
As Snap, based in Venice, Calif., gears up for an IPO in the U.S. that could value the startup at as much as $25 billion, the tax strategy could boost investor transparency -- while potentially avoiding any distracting criticism or scrutiny of its overseas tax arrangements.
Still, few have gone so far as Snap in promising to keep its overseas tax arrangements tidy, something tax lawyers said could be a sign of how other companies could restructure.
"Creating a structure to pay no tax is increasingly difficult," said Heather Self, a tax partner at Pinsent Masons LLP in London. "Large groups are starting to look for where can they have a structure that pays a reasonable amount of tax, and is less likely to be challenged."
Snap said Tuesday it will immediately start collecting all international revenue through its business in the U.K. A spokeswoman said the company will then shift soon to collecting revenue from foreign clients at local branches, and pay local taxes.
For clients in countries with no local Snap branches, the company will continue to book revenue in Britain.
That breaks from the practice at many other tech firms, including Google parent Alphabet Inc. and Facebook Inc.
Many of those bigger firms have chosen headquarters in smaller European countries that have allowed them to take advantage of a patchwork of national rules to lower taxes, including legally moving profits to tax havens such as Bermuda. The U.K.'s 20% corporate income tax is relatively low and is slated to go down to 17% beginning in 2020, but that rate still is well above the 12.5% rate in Ireland, a popular destination for many firms.
The decision to establish a cleaner structure also is a lot easier for Snap than for other tech firms, which have set up shop around the world well before all the new scrutiny of the various tax strategies. Some avenues pursued by others, meanwhile, simply are no longer an option.
In Ireland, a popular "Double Irish" structure has been blocked for new companies, though existing ones have until 2020 to change. The structure allowed many firms to route significant revenue through Irish-based subsidiaries, and then eventually to other, lower tax regimes.
The financial stakes also are lower for Snap, which isn't bringing in nearly as much money as some of its more-established Silicon Valley peers.
Snap is primarily known for its Snapchat messaging app that is particularly popular among teens and millennials. In September, it changed its corporate name to Snap to reflect its ambitions beyond the messaging app and began selling Spectacles, a pair of sunglasses that are outfitted with a camera.
Snap makes the bulk of its money showing ads to Snapchat users. While it isn't profitable and isn't likely to be posting a big overseas taxbill for now, its success reaching a young audience has garnered ad dollars from big brands such as PepsiCo Inc. and led to partnerships with media companies such as BuzzFeed Inc. and The Wall Street Journal. Snap is currently hiring someone in London to help monetize advertising products, according to a job posting.
Non-U.S. ad revenue totaled just $18.3 million, or 5% of its total in 2015, according to estimates from market research firm eMarketer. But that figure is expected to rise to $440 million, or 25% of the total ad revenue in 2018, eMarketer says.
For Snap, establishing London as its main office for overseas operations makes plenty of practical sense, taxes aside. It said the size of the U.K. advertising market and the company's 10 million users in the U.K. drove its decision.
The firm already has 75 employees in the city, making it one of the company's biggest overseas outposts. It also has offices in Canada, France,Australia and Ukraine.
London offers a large, well-educated English-speaking labor pool, access to nascent tech research hubs like the Universities of Cambridge and Oxford, and a well-regarded international legal and business regime. Despite economic uncertainty surrounding Britain's vote to leave the EU, tech companies including Apple have since announced London expansion plans.
Other companies have taken measures to begin cleaning up their tax affairs in Europe.
Last year, Facebook began directing big U.K. clients to start paying a Facebook unit in the country rather than moving that revenue through low-tax Ireland and then on to the Cayman Islands. Alphabet's Google said last January that it would start attributing some revenue from Google clients in the U.K. to its local unit. And in 2015, Amazon.com Inc. began to collect customer revenue from subsidiaries in several EU countries where it does business -- instead of collecting it all in Luxembourg.
All of these companies have maintained they pay their fair share in tax.
--Georgia Wells contributed to this article.
Write to Sam Schechner at email@example.com
(END) Dow Jones Newswires
January 10, 2017 16:33 ET (21:33 GMT)
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