Facebook Inc. said that it could be on the hook to pay additional taxes between $3 billion and $5 billion due to the result of an Internal Revenue Service investigation into the overseas transfer of assets by the social networking company. In a quarterly filing made on Thursday, the company said that a ‘statutory notice of deficiency’ had been issued by the IRS a day earlier, which said that Facebook owes additional taxes for 2010. The July 27 notice came on the same day the social network announced that its profits for the second quarter had nearly tripled and reached $2.06 billion. The notice comes from an investigation, which was launched in 2013 into the treatment of assets by the company that it had transferred to Ireland in 2010.
Earlier this month, the IRS had sued Facebook for documents pertaining to the transfer. It said that it suspected that the accountants of the social networking firm had undervalued some of the assets transferred by ‘billions of dollars’. Nonetheless, before Thursday, neither the IRS nor Facebook had put a value to the potential tax liability of the company. The notice from the IRS is only applicable to the 2010 tax year, but if a similar stance is taken for other years and it scores a victory in court, it could lead to an additional federal tax liability of somewhere between $3 billion and $5 billion, along with any penalties and interests.
Facebook stated that it was not in agreement with the IRS’s stance and added that it was going to challenge the notice by filing a petition in the US Tax Court. However, if the IRS prevails, it could end up having a substantial impact on the social network’s finances. Cases of the Tax Court can take years to end and appeals can be made in other federal courts. If an additional tax liability of $5 billion is imposed on Facebook, it would exceed the entire tax cost of the company in 2014 and 2015.
Other major companies like Amazon.com Inc., Microsoft Corp. and Coca-Cola Co. have gone head to head with the IRS concerning the issue of attributing their profits to foreign subsidiaries. Last year, the IRS had sent Coke a notice of a potential federal income-tax liability of $3.3 billion, but the company is challenging that in court. Similarly, Amazon is also challenging the IRS in tax court. In a securities filing on Thursday, Microsoft said that its audit is ongoing and could have a major impact on the finances of the company.
US companies pay the full 35% tax rate of the country on any taxes they earn all over the world. Double taxation is prevented through foreign tax credits and they are not required to pay the residual US tax until repatriate the money. This provides the firms incentive to book profits in countries that have low tax rates and they leave the money there. One widely used technique is to put intangible assets like patents in foreign countries.