Facebook Is Facing an IRS Investigation for Possible Corporate Tax Reduction Scheme

Facebook Is Facing an IRS Investigation for Possible Corporate Tax Reduction Scheme
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U.S. tax officials with the IRS have sued Facebook to compel the company to turn over documents related to the 2010 transfer of many of its global assets to its Irish subsidiary.

The IRS suspects that Facebook may have underreported the value of the assets it transferred to its holding company, Facebook Ireland Holdings, by billions of dollars. DOJ attorneys working in the Tax Division filed a petition in the U.S. District Court for the Northern District of California to compel Facebook to respond to their requests to hand over documents relating to the transfer.

The IRS hopes to use the documents to accurately evaluate the company’s federal income tax liability for 2010. Facebook apparently hopes otherwise.

According to Nina Wu Stone, an IRS agent based in San Francisco, the IRS presented to Facebook six requests for information over the past few years, all of which the company has ignored or otherwise refused to comply with.

Facebook, which retained the services of the accounting firm Ernst & Young for its global reshuffling of assets, transferred ownership of its global services and operations to its overseas subsidiary in 2010. On the advice of Ernst & Young, Facebook classified some of the intangible holdings it was moving (i.e. its user base, marketing intangibles, and online platform) as stand-alone assets, rather than interdependent, which reduced their value by billions of dollars.

An IRS team investigating these valuations found these claims to be problematic and suspect; indeed, some of the Facebook employees that the IRS officials interviewed indicated that these intangible assets were interdependent.

Ireland’s corporate tax rate is 12.5% whereas the U.S. rate is 35%. If the IRS finds that the assets were interdependent, Facebook could be on the hook for more taxable income.

In a public statement, the Facebook spokesperson said: “Facebook complies with all applicable rules and regulations in the countries where we operate.”

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