U.S. tax agency
investigates Facebook's Ireland asset transfer
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[July 08, 2016]
By Nate Raymond and Tom Bergin
(Reuters) - The U.S. Internal Revenue
Service (IRS) said Facebook Inc may have understated the value of
intellectual property it transferred to Ireland by "billions of
dollars", unfairly cutting its tax bill in the process, according to
The U.S. Justice Department filed a lawsuit on Wednesday in federal
court in San Francisco seeking to enforce IRS summonses served on
Facebook and to force the world's largest social network to produce
various documents as part of the probe.
The tax authority is examining whether Facebook understated its U.S.
income by selling rights to an Irish subsidiary too cheaply.
Doing so could boost taxable profits in Ireland, which has a
corporate tax rate of 12.5 percent, and reduce taxable income in the
United States which has a rate of at least 35 percent.
Facebook denied any wrongdoing.
"Facebook complies with all applicable rules and regulations in the
countries where we operate," Anteneh Daniel, a spokesperson for the
company, said in a statement.
The complex tax structuring used by big technology companies such as
Google <GOOGL.O> and Amazon <AMZN.O> has prompted governments in
recent years to launch a program to rewrite tax rules so that
inter-group deals that shift profits into tax havens are no longer
The lawsuit said that in 2010 Facebook Inc sold the rights to
exploit the Facebook platform outside the United States and Canada
to Facebook Ireland Holdings.
The price used for the intangible property was determined by
Facebook's tax adviser Ernst & Young (E&Y).
"The IRS examination team's preliminary positions suggested that the
E&Y valuations of the transferred intangibles were understated by
billions of dollars," the lawsuit said.
E&Y was not immediately available for comment.
Facebook Ireland Holdings in turn leased the rights to exploit the
Facebook platform to its own subsidiary, Facebook Ireland Ltd, in
return for a fee, accounts for Facebook Ireland Ltd, filed with the
Irish company registry, show.
Facebook Ireland Ltd. is Facebook's main international business
unit, reaping sales of 4.8 billion euros ($5.3 billion) in 2014, the
last year for which accounts are available.
Facebook Inc in the United States could have licensed its
intellectual property directly to Facebook Ireland Ltd but then it
would have to report that income in the United States and pay tax
[to top of second column]
Facebook CEO Mark Zuckerberg is seen on stage during a town hall at
Facebook's headquarters in Menlo Park, California September 27,
2015. Picture taken February 27, 2015. REUTERS/Stephen Lam/File
It does have to pay tax on the money it received from intermediary Facebook
Moreover, if Facebook Ireland Holdings paid less for the rights than it charges
Facebook Ireland Ltd., this margin allows profit to be built up in the lower tax
U.S. technology companies sometimes don't even have to pay the 12.5 percent
Irish corporate tax rate.
They frequently take advantage of a quirk of Irish tax law which allows
companies to designate an Irish registered company as being tax resident
elsewhere -- an arrangement tax professionals have termed a "double Irish".
This involves the rights-holding company being designated as tax resident in a
tax haven. However, since the companies concerned are Irish-registered, the
transactions don't trigger a U.S. tax bill.
Facebook declined to say where Facebook Ireland Holdings was tax resident. It is
an unlimited company, which means it doesn't have to file accounts so there are
no public documents on its status.
Unlimited companies are unusual structures in Ireland but U.S. multinationals
frequently establish these as part of their tax structuring.
(Reporting by Nate Raymond in New York and Tom Bergin in London; Editing by
Richard Chang and Keith Weir)
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