Facebook Inc’s future cash flows and results could suffer a major blow if it loses a battle over new US tax liabilities related to the transfer of its global operations to Ireland in 2010.
The US Internal Revenue Service (IRS) on Wednesday delivered a notice of deficiency to the social media giant for US$3 billion to US$5 billion, plus interest and penalties, based on the agency’s audit of Facebook’s transfer pricing, the company said in a regulatory filing on Thursday.
Facebook, which plans to challenge the notice in federal tax court, said its balance sheet could suffer if it is held liable.
Facebook said in the filing that the liability “could have a material adverse impact” on its finances, results or cash flows. “In addition, the determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment by management, and there are many transactions where the ultimate tax determination is uncertain,” it said.
The IRS claims Facebook’s tax adviser, Ernst & Young LLP, undervalued the company’s property as it was transferred to Facebook Ireland Holdings Ltd by evaluating pieces of the online platform separately, according to court filings.
Facebook employees told the IRS that the property was “interdependent,” and that “it would be difficult to isolate one from the other,” the government said.
“I don’t think Facebook is necessarily hiding anything, but it’s a fight over pricing,” said Stephen Hamilton, a tax lawyer in Philadelphia.
“This is what companies do when they transfer their own assets; they try to value them as low as possible and when the issue is litigated, they usually end up somewhere in the middle,” he added.
The IRS began investigating the transaction in 2013 and found that Ernst & Young’s method for determining the value of those assets individually worked in direct conflict with otherwise intertwined business entities. In April last year, tax officials issued a preliminary presentation to Facebook and set out to find further evidence that Ernst & Young’s estimates were flawed, according to the complaint.
Last month, officials filed the first of seven requests for records through court summons in hopes of receiving details of the company’s business risks, its decision to make Dublin its international headquarters, and its user and advertising growth.
Facebook failed to appear on June 17 at the IRS’ offices in San Jose, California, then again on June 29, according to the complaint. The statute of limitations for the IRS to continue requesting documents was set to lapse tomorrow. By serving Facebook with the tax bill, the IRS can continue its court fight, Hamilton said.
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