Facebook could owe billions to Uncle Sam after an IRS investigation is over, the social media company is warning shareholders.
In 2010, Facebook shifted the rights to its assets, excluding the US and Canada, to Ireland, a low-tax haven for corporations.
On Thursday, the company said it could owe an IRS penalty of $3 billion to $5 billion, plus interest, according to a filing with the Securities and Exchange Commission, if it turns out Facebook was undervaluing its assets, reports CNN.
Assets included hard to quantify assets such as 'user base, online platform and marketing intangibles.'
The penalty could have an 'material adverse impact' on its profits, said the company who last week surpassed Warren Buffet's Berkshire Hathaway in market value.
For six years, the IRS has been trying unsuccessfully to force Facebook into cooperating with its investigation.
The social media behemoth has ignored seven summonses to hand over documents related to their overseas operation in Ireland, the IRS says.
In a new court filing on Wednesday, the federal agency says it has sent seven requests for books, records, papers and other data to the company's CFO David Wehner but that all of them have been ignored.
The IRS filed a lawsuit against the Palo Alto, California-based company earlier this month, claiming they skimped on their taxes by undervaluing their company in order to pay lower taxes abroad.
Facebook is one of many corporations who have set up offices in Ireland, which boasts a lucratively low corporate tax rate of just 12.5 per cent.
In order to operate out of the country though, Facebook had to license its intellectual property - the website and its brand - to an offshore company.
Facebook Ireland Ltd. is then able to make huge profits due to Ireland's low tax rate coupled with the fact that their fees and royalties to Facebook Ireland Holdings become deductible.
Facebook deals with two subsidiaries because it protects them from having to report the income they actually make in Ireland. If they dealt directly with the second company, they would have to report that income in the U.S. and then pay taxes domestically as well.
The point that the IRS takes issue with is the valuation that Facebook placed on its intellectual property when first licensing to Facebook Ireland Holdings.
Facebook's accounting advisers, Ernst & Young, were brought in to make the valuation, which the IRS says was undervalued by billions.
If so, Facebook has been reaping unfairly low tax rates and could owe the IRS big time.
At stake is billions of dollars. Facebook Ireland Ltd. is Facebook's main international business and in 2014, made $5.3billion in sales.
In the most recent court filing, representatives for the IRS petitioned a judge to force Facebook into complying with their orders, since the statute of limitations on the case expires at the end of the month.
While Facebook has handed over several documents related to the case, IRS officials say they have not turned over the books, records, papers and other data as specified in the previous seven summonses.
When the lawsuit was filed earlier this month, the company issued a sharp denial of 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 and Amazon 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 possible.
In 2010, Facebook shifted the rights to its assets, excluding the US and Canada, to Ireland, a low-tax haven for corporations.
On Thursday, the company said it could owe an IRS penalty of $3 billion to $5 billion, plus interest, according to a filing with the Securities and Exchange Commission, if it turns out Facebook was undervaluing its assets, reports CNN.
Assets included hard to quantify assets such as 'user base, online platform and marketing intangibles.'
The penalty could have an 'material adverse impact' on its profits, said the company who last week surpassed Warren Buffet's Berkshire Hathaway in market value.
For six years, the IRS has been trying unsuccessfully to force Facebook into cooperating with its investigation.
The social media behemoth has ignored seven summonses to hand over documents related to their overseas operation in Ireland, the IRS says.
In a new court filing on Wednesday, the federal agency says it has sent seven requests for books, records, papers and other data to the company's CFO David Wehner but that all of them have been ignored.
The IRS filed a lawsuit against the Palo Alto, California-based company earlier this month, claiming they skimped on their taxes by undervaluing their company in order to pay lower taxes abroad.
Facebook is one of many corporations who have set up offices in Ireland, which boasts a lucratively low corporate tax rate of just 12.5 per cent.
In order to operate out of the country though, Facebook had to license its intellectual property - the website and its brand - to an offshore company.
Facebook Ireland Ltd. is then able to make huge profits due to Ireland's low tax rate coupled with the fact that their fees and royalties to Facebook Ireland Holdings become deductible.
Facebook deals with two subsidiaries because it protects them from having to report the income they actually make in Ireland. If they dealt directly with the second company, they would have to report that income in the U.S. and then pay taxes domestically as well.
The point that the IRS takes issue with is the valuation that Facebook placed on its intellectual property when first licensing to Facebook Ireland Holdings.
Facebook's accounting advisers, Ernst & Young, were brought in to make the valuation, which the IRS says was undervalued by billions.
If so, Facebook has been reaping unfairly low tax rates and could owe the IRS big time.
At stake is billions of dollars. Facebook Ireland Ltd. is Facebook's main international business and in 2014, made $5.3billion in sales.
In the most recent court filing, representatives for the IRS petitioned a judge to force Facebook into complying with their orders, since the statute of limitations on the case expires at the end of the month.
While Facebook has handed over several documents related to the case, IRS officials say they have not turned over the books, records, papers and other data as specified in the previous seven summonses.
When the lawsuit was filed earlier this month, the company issued a sharp denial of 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 and Amazon 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 possible.
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