Facebook fights US tax authorities over information demand

Facebook is fighting back against United States tax authorities, which the social network says are asking for too much information over allegations that the company undervalued assets when it transferred them to Ireland.

The world’s largest social network has accused the IRS of being “extraordinarily broad” when it issued summonses to obtain documents that may help it establish if Facebook’s accountants undervalued the assets by billions of dollars.

In documents filed in court on Tuesday, Facebook argued the tax authority was responsible for delays in the process, having frequently asked for extensions on its audit, being inconsistent about when it works and unco-ordinated internally.

The company said it was asked for “hundreds of thousands of documents about virtually every aspect of Facebook’s core business”, as the IRS requested information about its growth.

“Facebook could not produce ‘all’ responsive documents unless it examined almost every document sent or received by every Facebook employee between 2008 through 2012,” it wrote in the filing, adding it had more than 3,000 employees at the end of 2011.

Intangible property

The IRS is investigating how Facebook valued intangible property such as its entire user base outside the US and Canada and its ability to provide access to advertisers and developers through its online platform.

The assets were transferred to Ireland in 2010 but the IRS said that the accountants EY may have undervalued them by “billions of dollars”, according to a declaration filed in federal court by an IRS agent in July.

The IRS has also investigated Amazon and Microsoft over transfer pricing, with Amazon transferring rights to its Luxembourg subsidiary and Microsoft transacting with affiliates in Bermuda and Puerto Rico.

Facebook is looking for a case-management meeting on a “reasonable timeframe”, arguing it will take until January 2017 to provide the information necessary for all seven summonses.

Ronald Deng, Facebook's tax counsel, said in a filing that the cost of complying will be at least $1 million. Baker & McKenzie, Facebook's outside counsel, said it had already collected more than 200,000 documents, more than 50,000 of which are relevant to the request, to comply with just the first two summonses.

The latest development in the tax case comes as Facebook’s tax bill sparked protests in the UK.

The social network paid £4.2 million in corporate tax for 2015, nearly 1,000 times more than the £4,327 it paid the previous year. But it reported a tax credit, rather than a liability, because of deductions on share options issued to employees. – (Copyright The Financial Times Ltd)