Facebook is facing a tax trial in California as the Internal Revenue Service (IRS) attempts to convince the United States Tax Court that Facebook owes in excess of $9 billion in taxes and fees. In 2010, Facebook struck a deal with its Irish subsidiary, shifting its profits to Ireland to take advantage of the country’s lower business tax rate. The IRS alleged that Facebook undervalued the intellectual property it sold to the subsidiary. As a result, the IRS claimed that Facebook has evaded billions in taxes. Facebook claimed valuation at $6.5 billion, but the IRS purported it should have been more than $13 billion.
Facebook told The Verge that it was standing by its initial valuation, “ which it says occurred when the company had no mobile ad revenue, a ‘nascent’ international business, and when its ‘digital advertising products were unproven.’” Facebook is organized such that its subsidiaries pay royalties to the United States parent company to use items such as its trademark, users and technologies. From 2010 to 2016, Facebook Ireland allegedly paid more than $14 billion in royalties and other payments to Facebook U.S.
The trial could force Facebook executives to testify, including Hardware Chief Andrew Bosworth, CTO Mike Schroepfer, CRO David Fischer, and longstanding members of the company’s growth team, such as Naomi Gleit and Javier Olivan.
“Facebook Ireland and Facebook’s other foreign affiliates – not Facebook US – led the high-risk, and ultimately successful, international effort to sell Facebook ads,” Facebook stated. Facebook is the second-largest online ad seller behind Google.
Other governments or government entities have taken measures against this type of maneuver. For example, the European Union demanded that Apple pay $15.4 billion in taxes in Ireland in 2016, after stating the company illegitimately received a tax benefit. France’s investigation will cause Google to pay more than $1 billion. Google also stated it would no longer take advantage of tax loopholes in Ireland, the Netherlands, and Bermuda.
Facebook is represented by Baker & McKenzie before the Tax Court.