The U.S. Department of Justice filed a petition this week to force social networking company, Facebook Inc., to turn over information to the Internal Revenue Service (IRS) about the transfer of assets to Facebook’s Irish holding company, Facebook Ireland Holdings Limited (Facebook Ireland).
The petition, which was filed in U.S. District Court for the Northern District of California on Wednesday, indicates that the IRS is conducting an examination of the federal income tax liability of Facebook for the tax period ending December 31, 2010 (as well as the prior two years). Part of the exam focuses on agreements between Facebook Inc. and Facebook Ireland made in 2010 to transfer rights associated with Facebook’s worldwide business to Facebook Ireland. The IRS is trying to determine whether Facebook’s outside accountants, identified in court documents as Ernst & Young, undervalued those assets by billions of dollars.
According to court documents, Facebook Ireland is organized and existing under the laws of Ireland, with a registered address in Dublin, Ireland but its place of “management and control” is in Grand Cayman, Cayman Islands. It was formed “to centralize in Ireland the operation of the Facebook business outside North America in Ireland.” A year later, Facebook US granted Facebook Ireland certain rights in intangible property relating to its online platform, online marketing intangibles and online communities of social networking users, advertisers, and developers. Since intangible property doesn’t really have a home – unlike, say real estate – it’s easy to transfer intangible property to countries which offer certain benefits, including more favorable tax treatment.
It is not illegal or uncommon to transfer assets, including intangible assets, offshore. However, when that happens, the transfer is supposed to be “arm’s length” meaning that the goods, services, and assets are transferred for the same price as they would have between unrelated parties. But that’s not always what happens. With a wink and a nudge, transactions are structured to shift profits from high tax countries (like the U.S.) to low tax countries (like Ireland) to cut their tax bills. That seems to be what IRS is alleging happened here.
(For more on transfer pricing and IRS efforts to crack down on transfer pricing abuse, click here.)
To find out more about the transfer and whether it was appropriately valued, Revenue Agent Nina Wu Stone, who is employed in the Large Business and International Division of the IRS, issued six IRS summonses directing Facebook to appear at IRS offices on June 17, 2016, to produce books, records, papers and other data. Facebook did not appear and did not produce the information requested by IRS. That resulted in the court filing, a petition which seeks to make Facebook comply with the summonses or otherwise “show cause” (in other words, justify or explain) why they should not have to comply with the summons.
I reached out to Facebook to ask why the original request was ignored and whether Facebook intends to comply. In response to my inquiry, a Facebook spokesperson issued the following statement: “Facebook complies with all applicable rules and regulations in the countries where we operate.”
