Facebook Estimates Tax Bill of Up to $5 Billion From IRS Audit

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.

By Dolores W. Gregory

July 28 — Facebook Inc. could be looking at a tax bill of up to $5 billion, plus interest and penalties, arising from an IRS audit of its transfer pricing, the company said in a filing with the Securities and Exchange Commission.

In its 10-Q report for the second quarter, filed July 28, the social media giant said that dollar figure would apply to tax years 2010 and beyond if the Internal Revenue Service prevails. The company said it plans to challenge the proposed tax deficiency in the U.S. Tax Court.

Facebook has been under audit for tax years 2008 through 2013, the company said. The IRS audit is looking closely at a 2009-10 restructuring that granted Facebook's Irish subsidiary the rights associated with the parent's worldwide business outside of North America.


The deal transferred the U.S. parent's user base outside the U.S. and Canada to the Irish subsidiary and transferred the rights to the intangible property that constitutes Facebook's “online platform.” The IRS thinks Facebook's tax adviser, Ernst & Young LLP, severely undervalued the intangibles involved in the restructuring, according to court documents.

Earlier this month, the agency filed a petition in federal district court seeking enforcement of a half-dozen summonses in connection with the audit. The IRS is asking the U.S. District Court for the Northern District of California to force company officials to comply with requests for various documents, books, records and other data related to the Irish restructuring deal (25 Transfer Pricing Report 307, 7/14/16).

The IRS amended the petition July 25 to seek enforcement of a seventh summons issued to the company (25 Transfer Pricing Report 364, 7/28/16).

Deficiency Notice

According to court filings, the IRS asked Facebook officials to appear on two occasions to produce the requested records. Both times, company officials failed to appear at the appointed hour.

Facebook said it received a statutory deficiency notice from the IRS on July 27. The notice relates to Facebook's transfer pricing with foreign subsidiaries for the 2010 tax year, the company said.

“While the Notice applies only to the 2010 tax year, the IRS states that it will also apply its position for tax years subsequent to 2010, which, if the IRS prevails in its position, could result in an additional federal tax liability of an estimated aggregate amount of approximately $3.0-$5.0 billion, plus interest and any penalties asserted,” Facebook said.

If the IRS prevails, “it could have a material adverse impact on our financial position, results of operations or cash flows,” the company said.

Facebook said its 2014 tax year and subsequent years remain open to examination by the IRS, while its 2011 and subsequent years remain open to examination in Ireland.

The company has 90 days from the date of the statutory notice to file its petition in the U.S. Tax Court.

According to the SEC filing, Facebook's effective U.S. tax rate for the second quarter was 26 percent, compared to the statutory corporate income tax rate of 35 percent.

In the summons enforcement action, Facebook is represented by Scott Frewing of Baker & McKenzie LLP in Palo Alto, Calif. The IRS is represented by James Weaver of the Department of Justice.

To contact the reporter on this story: Dolores W. Gregory in Washington at dgregory@bna.com

To contact the editor responsible for this story: Molly Moses at mmoses@bna.com

For More Information

Facebook's quarterly report is at http://src.bna.com/her.

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