The future cash flows of Facebook Inc. (NASDAQ: FB) could experience a major hit if the social networking giant loses a legal tussle over new US tax liabilities associated with the transfer of the company’s international operations in Ireland back in 2010.
Just recently, the social networking titan said in a regulatory filing that the Internal Revenue Service gave a notice of deficiency to Facebook for $3 billion- $5 billion, plus penalties and interest. The company intends to challenge the mentioned notice in federal tax court. Moreover, Facebook stated that its balance sheet position could take a significant blow if it is held liable.
“In addition, the determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment by management, and there are many transactions where the ultimate tax determination is uncertain,” said Facebook.
The IRS asked a California federal magistrate judge to oblige the company to provide detailed internal corporate records that are associated with the value of the assets that it moved to Ireland. All operations outside the United States and Canada were included.
The agency asserted that Ernst & Young LLP, which served as the tax adviser of the social networking corporation, undervalued the assets that were transferred to Facebook Ireland Holdings Ltd by evaluating the parts of the platform separately. Employees of the social media giant told the IRS that the assets were “interdependent,” and that “it would be difficult to isolate one from the other”.
According to Philadelphia tax lawyer Stephen Hamilton, “I don’t think Facebook is necessarily hiding anything, but it’s a fight over pricing.”
“This is what companies do when they transfer their own assets; they try to value them as low as possible and when the issue is litigated, they usually end up somewhere in the middle,” he further added.
The IRS then started to look for further evidence that the estimates of Ernst & Young were flawed. However, these moves by the IRS are met with resistance as the social networking giant initially provided limited documents in the month of January, then refused to give further details by the month of April.
In the month of June, IRS officials filed the first request for Facebook to provide records in hopes that it would be able to obtain details regarding the decision of the company to make Ireland its global headquarters, its business risks, as well as its growth in advertising and user base.
On June 17, the social networking corporation did not appear at the offices of the government agency in San Jose, California. The complaint also stated that Facebook failed to appear again on June 29. Hamilton stated that by service the company with a tax bill, the agency can resume its court battle.
As of the time of writing, the Facebook stock is changing hands at $125.
The $3.2 billion in overseas revenue reported by Facebook in the quarter ended June 30 accounted for almost exactly half of the company’s total revenue, with the rest coming from the U.S. and Canada.