Facebook might have cut its tax bills after potentially underestimating the value of intellectual property it transferred to its Irish subsidiary by "billions of dollars", the US Internal Revenue Service (IRS) said on Friday (8 July).
US authorities are investigating whether the world's largest social media network deliberately underestimated its US income by selling rights to an Irish subsidiary too cheaply. The practice would have allowed Facebook to reduce its taxable income in the US, which has a corporate tax rate of at least 35%, and boost its income in Ireland, where the tax rate stands at 12.5%.
On Wednesday, the US Justice Department filed a lawsuit in San Francisco, calling for the social network to produce a series of documents as part of the probe.
The Nasdaq-listed company's tax adviser Ernst & Young (E&Y) were in charge of determining the price for the intangible property, according to the lawsuit.
"The IRS examination team's preliminary positions suggested that the E&Y valuations of the transferred intangibles were understated by billions of dollars," the papers said.
According to court papers, Facebook sold the rights to exploit the Facebook platform outside the US and Canada to Facebook Ireland Holdings in 2010. The latter subsequently leased the rights to exploit Facebook's platform to its own subsidiary, Facebook Ireland, for a fee.
"Facebook complies with all applicable rules and regulations in the countries where we operate," said Facebook's spokesperson Anteneh Daniel.
Facebook could have directly leased the rights to Facebook Ireland, its main international unit, made €4.8bn (£4.1bn, $5.3bn) worth of sales in 2014, but doing so would have meant reporting that income in the US rather than in Ireland.
The California-headquartered firm does have to pay tax on the fee it received from Facebook Ireland Holdings. However, should the latter sell the rights to Facebook Ireland for a higher fee than the one it paid Facebook, the margin allows profit to be registered in a jurisdiction with a lower tax rate.
A number of US companies have taken advantage of advantageous tax rates in Ireland and other nations and relocated their legal domicile to said countries, a process known as "tax inversion". In April, the US government announced tighter rules to control tax inversion deals in a bid to tackle "serial inverters".
The White House said in a statement that tax loopholes exploited by multinationals damaged "the American tax base, undercuts businesses that play by the rules and ultimately leaves the middle class and small businesses to pay the tab".