In a case that would set the benchmark for incoming US governments against US tech giants on taxation, the IRS is ready to take the fight upto Facebook in a court of law, with close to $9 billion on the line for the social media giant. Facebook Inc. and Internal Revenue Service will face each other in a U.S. Tax Court case that can end up costing about $9 billion to the tech behemoth.
Facebook has been accused of evading the higher tax rates in U.S. by shifting profits to its subsidiaries in other countries. Most prominent of all those subsidiaries, is the the one in Ireland. Thus, Facebook pays less in taxes than it is supposed to, as noted by IRS. The case will put to end a 9 year old battle between Facebook and IRS about how the company has shaped its international operations.
Facebook isn’t the only company from the U.S. that follows such schemes, facing criticism in the United States and Europe. How this case pans out will set a path for other companies with similar cases in the pipeline.
The outcome of the case will hinge on how resources for the company have been divided among different subsidiaries in different countries, which send royalties to their HQ in the U.S. The case is based on the time period before Facebook went public, back in 2010, and how Facebook routed profits from its channels to Irish subsidiaries of the company. If Facebook valued the property owned by these subsidiaries, like user base and company’s technology, lower than the actual numbers, the companies would end up sending less royalties back to U.S. which would have been charged a massive 35% tax rate. The company processed the royalties through a different Cayman Islands channel instead, which warrants just a measly 15.5% tax rate, which Facebook owned up to as per a tax filing in 2017.
Facebook says that the company had to find meaningful routes for lower tax penalties to maintain stability, as the company was just starting. On a rather contradictory note a Facebook presentation in May 2009 said,”Reducing taxes is a key to preserving profits given Facebook’s trajectory toward significant pretax income in 2010 and beyond.”
The company also states that at the time of the valuation, the company disclosed the aforementioned assets to be worth $7 billion, which is higher than it actually was, thus stating that it actually owed a refund. The claim comes from the understanding that the trajectory of the company was uncertain at that time and the Irish subsidiary did a lot in expanding the non U.S. side of the business. The social media giant states that “Facebook Ireland and Facebook’s other foreign affiliates—not Facebook U.S.—led the high-risk, and ultimately successful, international effort to sell Facebook ads,” and is thus entitled to larger chunk of profits.
Facebook’s spokesperson Bertie Thomson has shown keen interest in presenting the company’s point of view in the upcoming trial, whereas IRS has decided not to comment on the matter.
However, IRS maintains the stand that separate components of Facebook’s integrated global business such as its users base, technology and marketing assets should not be evaluated individually but as a whole, and should amount to be larger than the sum of its parts.
The government has also ridiculed Facebook’s excuses for its Irish subsidiaries, citing statements from company officials that say that Facebook was already on a strong path in 2010. The cited statements add that Facebook had to call its Ireland headquarters as its international headquarters for tax purposes. IRS first audited an actual value of $14 billion for Facebook’s assets back in 2010, double than what it paid for, later stating it to be even more, closer to the $21 billion mark.
The trial before Judge Cary Pugh starts in San Francisco and is scheduled to continue in Washington later this year.