The US Internal Revenue Service(IRS) is investigating Facebook over a transfer of assets to an Irish subsidiary. In 2010, Facebook Inc sold the rights to exploit the social media platform outside of the United States and Canada to Facebook Irish Holdings. The IRS believes that the company undervalued the sold assets by billions of dollars in order to reduce its tax bill.
Facebook Irish Holdings licenses the right to exploit the Facebook platform to its own subsidiary, Facebook Ireland Ltd. If Facebook Irish Holdings charges more from its subsidiary than it paid to its parent company for those rights, income can be built up in a low tax jurisdiction. Ireland has a corporate tax rate of 12.5% compared to America which has a corporate tax rate of 35%.
Companies can even avoid the 12.5% Irish tax by registering as a tax resident of another country, typically a tax haven, and pay that country’s tax rate instead of the Irish one. Facebook declined to state whether Facebook Irish Holdings was a tax resident of another jurisdiction. Since it is an unlimited company, Facebook Irish Holdings has no publicly filed records to document its status. Even if it is using a complicated structure to reduce its tax, any income that flows back to the parent company is still subject to the American tax rate. Many companies use Ireland in a similar way, which made it a prime place for numerous European headquarters for US International firms, often with the unlimited company set up like it is here.
The company denied it did anything wrong and stated, “Facebook complies with all applicable rules and regulations in the countries where we operate.” Despite the claims of innocence, the company has been less than cooperative with the IRS investigation. The Department of Justice has filed a lawsuit against Facebook in a federal court in order to enforce IRS summonses that were served to the company, and to force the company to turn over documents relevant to the investigation.
Court filings note that IRS has served six summonses to the social media giant to turn over the documents and that the company has not complied to date. The filings also state that Facebook’s accountants at Ernst and Young undervalued the assets that were sold to the Irish subsidiary by billions of dollars. However, time is running out for the Department of Justice. The filings also indicate that the statute of limitations will come into effect on July 31. Even if the IRS obtains the documents it is seeking, it won’t have much time to analyze them before that date.
Do you think Facebook has done anything wrong regarding its taxes? What do you think of companies taking advantage of tax loopholes like this? Do you believe the climate has changed any since the release of the Panama Papers on cases like this? Leave your comments below!