US tax authorities investigate Facebook’s Irish transfers

US tax authorities are pursuing Facebook for information about the transfer of global assets to its Irish subsidiary, alleging the company's accountants may have undervalued them by billions of dollars.

The US Internal Revenue Service wants to know more about how Facebook valued the intangible property when it transferred it in 2010. The property includes its userbase outside the US and Canada and its ability to provide access to advertisers and developers through its online platform.

The IRS has previously investigated both Amazon and Microsoft over transfer pricing, with Amazon transferring rights to its Luxembourg subsidiary and Microsoft transacting with affiliates in Puerto Rico and Bermuda. European Commission investigators have also criticised Amazon's transfer pricing arrangement and investigated Apple's tax arrangements with Dublin.

EY valued the transfers for income tax purposes, but the IRS examination team’s preliminary position on the transfers suggested that the valuations “were understated by billions of dollars”, according to a declaration filed in federal court by a local IRS agent.

The US Department of Justice’s tax division has filed a petition in a Northern California court, asking for an order to enforce summonses served by the IRS on Facebook.

Summons

Facebook has failed to comply with the six summonses, due on June 17 and served personally on June 1 to David Wehner, the social network’s chief financial officer, the filing said. Facebook said in a statement it complied with “applicable rules and regulations in the countries where we operate”.

Nina Wu Stone, the San Francisco-based agent with the IRS who is examining Facebook, said in her supporting declaration that she learned the company reported royalty income from transfers of intangible property to Facebook Ireland.

The IRS is examining Facebook’s tax affairs in 2010. The investigation was opened in January 2013, adding to existing reviews of its taxes in 2008 and 2009.

Facebook had provided some documents earlier in the process, but the IRS said they were “only three emails with attachments” and that Facebook’s interpretation of the request was too narrow.

The social network, like many large US technology companies, has its international headquarters in Ireland, which has a low corporate tax rate. However, earlier this year it did make changes to its UK tax structure that are expected to result in it paying millions of pounds more in corporation tax.

– Copyright The Financial Times Limited 2016