Facebook has informed that the US Internal Revenue Service delivered a "notice of deficiency" seeking $3bn (€2.68bn) to $5bn, plus interest and penalties, based on the agency's audit of Facebook's transfer pricing.
The IRS investigation started in 2013 as the IRS found documents related to the royalty value Facebook Ireland paid the primary Menlo Park, California-based Facebook business back in 2010. According to the court papers, Facebook understated its US income by selling rights to an Irish subsidiary. Furthermore, the complaint says Facebook has been resisting IRS efforts, giving the agency "limited" documents. The IRS has stated that Facebook has failed to attend seven appointments at the IRS office in San Jose, 19 miles from Facebook’s headquarters in Menlo Park.
The IRS claims Facebook's tax adviser, Ernst & Young LLP, undervalued the company's property as it was transferred to Facebook Ireland by evaluating pieces of the online platform separately. Facebook employees told the IRS that the property was "interdependent", and that "it would be difficult to isolate one from the other." IRS officials found that EY's method for determining the value of those assets individually worked in direct conflict with otherwise intertwined business entities.
On July 28, Facebook informed that the company received a Statutory Notice of Deficiency informing that the IRS will also apply its position for tax years subsequent to 2010. This could result in an additional federal tax liability of an estimated aggregate amount of approximately $3.0-$5.0 billion, plus interest and any penalties asserted. The company stated that the penalty could have a “material adverse impact” on its financial position.
"We do not agree with the position of the IRS and will file a petition in the United States Tax Court challenging the Notice. If the IRS prevails in the assessment of additional tax due based on its position, the assessed tax, interest and penalties, if any, could have a material adverse impact on our financial position, results of operations or cash flows," Facebook informed.
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