Facebook May Owe Billions More in Taxes
July 28 2016 - 11:10PM
Dow Jones News
Facebook Inc. said it could be on the hook for $3 billion to $5
billion in additional taxes as a result of an Internal Revenue
Service investigation into how the social network transferred
assets overseas.
The company said in a quarterly filing Thursday that the IRS had
issued a "statutory notice of deficiency" a day earlier saying
Facebook owes more taxes for 2010. The July 27 notice came the same
day that Facebook said second-quarter profit nearly tripled to
$2.06 billion.
The notice flows from an investigation that started in 2013 into
the company's treatment of assets it transferred to Ireland in
2010.
The IRS earlier this month sued Facebook for documents related
to the transfer, saying it suspected that Facebook's accountants
had undervalued some of those assets by "billions of dollars." But
neither the agency nor Facebook had said before Thursday what the
company's potential tax liability could be.
The IRS notice applies only to the 2010 tax year, but if the IRS
takes a similar position for other years it is investigating and
wins in court, it could result in an additional federal tax
liability of between $3 billion and $5 billion, plus any interest
or penalties.
Facebook said it disagrees with the IRS's position and plans to
file a petition in U.S. Tax Court challenging the notice. If the
IRS prevails, it would have a "material adverse impact to
Facebook's finances," the company said in the filing. Tax Court
cases can take years to conclude and can be appealed into other
federal courts.
If Facebook were required to pay an additional $5 billion in
taxes, that amount would exceed its entire tax cost for 2014 and
2015 combined.
Other major companies like Microsoft Corp., Amazon.com Inc. and
Coca-Cola Co. have tangled with the IRS over the issue of
attributing profits to foreign subsidiaries. Last year, Coke
received notice of a potential $3.3 billion federal income-tax
liability and is challenging that in tax court. Amazon, like Coke,
is also challenging the IRS in tax court. Microsoft said in a
securities filing Thursday that its audit is continuing and could
have a "significant" impact on the company's finances.
U.S. companies pay the country's full 35% tax rate on profits
they earn around the world. They get foreign tax credits to prevent
double taxation and don't have to pay the residual U.S. tax until
they repatriate the money. That gives companies incentives to book
profits in low-tax countries and leave the money there.
One common technique is to put intangible property—such as
patents—in foreign countries such as Ireland, allowing much or all
of a company's non-U.S. profits to be booked there instead of in a
high-tax foreign country. Those transactions between the parent
company and a subsidiary are supposed to be conducted as if between
two unrelated parties, and that rule leads to frequent disputes
with the IRS over what that right price should be.
In its lawsuit filed earlier this month in U.S. District Court
in San Francisco, the IRS said Facebook entered into agreements in
September 2010 with Facebook Ireland Holdings Unlimited to transfer
the rights to its "online platform" and its "marketing intangibles"
outside the U.S. and Canada. It also entered into a cost-sharing
agreement with the Irish subsidiary to cover future
development.
Facebook then hired the accounting firm Ernst & Young, now
known as EY, to assign a value to the transfers. The IRS's initial
investigation in 2013 and 2014 signaled that EY's methodology for
valuing the assets was "problematic" and it shared that information
with Facebook in April 2015, according to court filings.
The IRS said it went to court because Facebook failed to hand
over requested documents. In a court filing Monday, the IRS said
Facebook failed to respond to a seventh summons from the IRS.
Facebook also didn't show up in court on June 29 and didn't provide
the information demanded by the IRS.
A Facebook spokeswoman didn't immediately respond for comment.
The IRS doesn't comment on individual companies.
Richard Rubin contributed to this article.
Write to Deepa Seetharaman at Deepa.Seetharaman@wsj.com
(END) Dow Jones Newswires
July 28, 2016 22:55 ET (02:55 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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