The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
July 26 — The IRS is seeking information from Facebook Inc. about its arrangements with third-party developers and investors to determine whether the social media giant grossly mispriced the transfer of intangibles to its Irish subsidiary in 2010, a filing in U.S. district court reveals ( United States v. Facebook, Inc., N.D. Cal., No. 3:16-cv-03777, amended petition 7/25/16 ).
The Internal Revenue Service filed an amended petition July 25 asking the U.S. District Court for the Northern District of California to enforce not seven summonses that Facebook officials have ignored.
According to the filing, company officials were summoned to meet with IRS auditors June 29 to produce “books, records, papers, and other data” in connection with an audit of the company's transfer pricing. The officials failed to show and didn't submit the requested documents by the deadline.
The IRS suspects Facebook understated by billions of dollars the value of intangibles transferred as part of the 2010 restructuring, and that the company mispriced two licensing agreements granting the Irish affiliate the rights to those intangibles (25 Transfer Pricing Report 307, 7/14/16).
The original petition sought to enforce six summonses issued in connection with the audit. The amended petition adds a seventh summons to the enforcement request.
In an amended declaration filed with the amended petition, the IRS said the documents sought under the seventh summons “may be relevant to understanding Facebook executives’ internal views regarding the transferred intangibles, Facebook’s valuation with respect to third-party investors, Facebook’s valuation with respect to the sale of stock by Facebook employees, and valuation modeling with respect to acquired companies, and thus may be relevant to determining the value of the transferred intangibles.”
The seventh summons indicates Facebook transferred the rights in its intangibles through an “online platform intangible property buy-in license agreement” and a “user base transfer and marketing intangibles license agreement,” both effective Sept. 15, 2010.
Under these agreements, Facebook granted Facebook Ireland territorial rights in intangible property relating to its online platform, online marketing intangibles and online communities of social networking users, advertisers and developers. These transfers enabled Facebook Ireland to operate the business in territories outside the U.S. and Canada.
In the summons, the IRS noted that in May 2009, Digital Sky Technologies (DST) Global invested $200 million in Facebook in the U.S. in exchange for preferred stock. This represented a 1.96 percent equity stake at a valuation of $10 billion.
Citing “an internet news item,” the IRS also noted that in June 2010, Elevation Partners purchased $120 million in Facebook shares from private shareholders.
The IRS also noted that, according to the company's transfer pricing documentation, international revenue projections for the transferred intangibles were split 70-30 between Facebook's technology platform and user base. The documentation supports this split by pointing to revenue-sharing relationships that Facebook had with third-party developers.
The IRS noted that Facebook acquired FriendFeed in August 2009, Instagram in August 2012 and WhatsApp in February 2014. The agency said documents related to those acquisitions are being requested to determine whether Facebook used the same 70-30 split for those deals that it used for the rights transferred to Facebook Ireland.
Further, during the tax years under audit, before Facebook completed its initial public stock offering, shares of Facebook were sold in secondary markets such as SharesPost and SecondMarket by Facebook employees, former employees and investors, the IRS said.
Facebook went public in 2012 and its stock currently trades on NASDAQ.
The summons indicates a former employee revealed in an interview with auditors that he had participated in a sale of stock by employees and had seen a valuation of the stock in connection with that permitted sale. The company reportedly communicated a valuation amount to all employees who were eligible to sell their stock, the IRS said.
The summons seeks documents related to quarterly presentations to the company's board of directors for tax years 2008-11, as well as documents related to the investment by DST Global in 2009 and the investment by Elevation Partners in 2010. It also seeks documents related to the sale of shares by current or former employees or investors and documents related to the acquisitions of FriendFeed, Instagram and WhatsApp.
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.
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