The US Department of Justice has filed a lawsuit against Facebook over their lack of cooperation with an IRS investigation. Facebook transferred some if its intellectual property to a wholly-owned subsidiary located in Ireland. The transfer was made because of more favorable tax rates in Ireland versus the United States. This is a fairly common practice, so why are the IRS and DoJ involved?
The IRS maintains that Facebook transferred its IP overseas at a lower value to avoid paying taxes in the US. The company has not been terribly cooperative with the investigation, which prompted the DoJ to get involved, filing suit to force them to turn over documents related to the inquiry. Detailed in the suit,
The IRS examination team's preliminary positions suggested that the E&Y (Ernst & Young tax adviser) valuations of the transferred intangibles were understated by billions of dollars.
Facebook has denied these accusations, releasing a statement saying,
Facebook complies with all applicable rules and regulations in the countries where we operate.
Unfortunately, this is not an uncommon scenario, with companies transferring taxable income out of North America and into countries with lower corporate taxes. That will make it more difficult for Facebook to explain away the behavior and the potential of billions of dollars being devalued in the transfer. This scenario has been a major aspect of tax reform conversations, with some suggesting that laws should be created to prevent this behavior, and others recommending that corporate taxes be changed so companies are not in a better situation leaving the country.