Facebook is facing the heat from U.S. tax authorities, as news emerged this week that the U.S. Department of Justice (DoJ) has sought a court order to force the social networking giant to provide the Internal Revenue Service (IRS) with more details related to the transfer of certain global assets to an Irish subsidiary.
According to a petition filed with the U.S. District Court for the Northern District of California on July 6, the IRS is examining Facebook’s income tax liability for the period ending December 31, 2010, relating to “certain agreements” between Facebook Inc. and its Dublin-based subsidiary, Facebook Ireland Holdings. The crux of the issue centers on Facebook Inc.’s transfer of its global assets — aside from those in the U.S. and Canada — to its Irish subsidiary. The IRS is questioning how the company’s accountants, Ernst & Young (E&Y), valued the individual assets for income tax purposes.
While E&Y valued Facebook’s user base, online platform, and marketing intangibles as standalone entities, the IRS suggests that they perhaps should have been treated as one, because they are “interdependent.” IRS agent Nina Wu Stone noted in a declaration:
The IRS issued a number of information document requests (IDRs), reviewed numerous public documents, and conducted interviews of certain Facebook employees. Several of those employees indicated that the user base, online platform, and marketing intangibles were interdependent and it would be difficult to isolate one from the other. The information gathered suggested to the IRS examination team that the E&Y approach to valuing Facebook’s transferred intangibles on a stand-alone basis was problematic.
Later in the declaration, Stone added that assets may have been undervalued by “billions” of dollars. She said:
The IRS examination team’s preliminary positions suggested that the E&Y valuations of the transferred intangibles were understated by billions of dollars.
According to the DoJ petition, the IRS requested that a Facebook representative appear in person at the IRS offices in San Jose on June 17 and produce the appropriate “books, records, papers, and other data” as requested. Facebook didn’t show up. Stone said:
Facebook failed to appear on June 17, 2016, the date scheduled for compliance with the summonses, and did not produce the books, records, papers, and other data demanded in the summonses. Facebook’s failure to comply with the summonses continues to this date.
Facebook, along with other major tech companies, has long faced criticism for how and how much it pays in taxes around the world. Earlier this year, the company announced it would stop booking sales to U.K. clients via Ireland, a move that followed the British government’s introduction of a new tax on offshore profits.
In response to the latest events, Facebook issued a response that will be familiar to those who have followed the ongoing tax wranglings of the world’s corporate giants in recent years: “Facebook complies with all applicable rules and regulations in the countries where we operate.”
Google faced the wrath of an angry U.K. once again this year when representatives from the company were questioned by the U.K. Parliament’s Public Accounts Committee. A similar story emerged there too — the company’s complex global setup, involving subsidiaries in Bermuda, Ireland, and elsewhere, may well be “tax-efficient,” but Google maintains that it operates within the legal frameworks permitted by the countries involved.