Facebook could owe $5B in back taxes

This looks like the story that was discussed at <a href="https:&#x2F;&#x2F;news.ycombinator.com&#x2F;item?id=12193216" rel="nofollow">https:&#x2F;&#x2F;news.ycombinator.com&#x2F;item?id=12193216</a>.

When Microsoft got dragged into court for their antitrust issues, wall street pointed out that it was partially because Microsoft didn&#x27;t play politics.<p>They didn&#x27;t employ lobbiest in any meaningful way, infact they ignored Washington altogether and just went about their business.<p>Google and Facebook internalized this lesson and became two of the most politically connected companies and some of the biggest spenders on lobbyists in America.<p>It turns out one good thing about the IRS is that it doesn&#x27;t care much for politics or who is running the show, it just cares that it gets paid what it thinks its owed. Say what you will about the IRS but I think it might be one of the least political organizations in Washington.<p>If the issue is that auditors are signing off on companies licensing its IP and trademarks way too cheaply to a wholly owned foreign subsidiary, then maybe the solution is to have auditors responsible for a portion of the taxes owed if the IRS challenges and wins. At the least it would start making auditors a more risk adverse.<p>Here is a list of companeis with Irish subsidiaries <a href="https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;List_of_companies_of_Ireland" rel="nofollow">https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;List_of_companies_of_Ireland</a><p>and check out the list of companies using the double Irish agreement <a href="https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Double_Irish_arrangement" rel="nofollow">https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Double_Irish_arrangement</a><p>There are alot of heavy hitters watching this case very carefully:)

Unlike small businesses and individuals, most S&amp;P 500 companies, like Facebook, pay less in income taxes than the official corporate income tax rate of approximately 35% implies, by doing things like booking profits abroad in specially created subsidiaries domiciled in jurisdictions like Ireland and Singapore, and never repatriating those profits, thereby deferring tax payments forever.<p>A couple of years ago the NY Times published an eye-opening interactive chart showing the actual tax rates paid by S&amp;P 500 companies: <a href="http:&#x2F;&#x2F;www.nytimes.com&#x2F;interactive&#x2F;2013&#x2F;05&#x2F;25&#x2F;sunday-review&#x2F;corporate-taxes.html?_r=0" rel="nofollow">http:&#x2F;&#x2F;www.nytimes.com&#x2F;interactive&#x2F;2013&#x2F;05&#x2F;25&#x2F;sunday-review&#x2F;...</a> (Related article: <a href="http:&#x2F;&#x2F;www.nytimes.com&#x2F;2013&#x2F;05&#x2F;26&#x2F;opinion&#x2F;sunday&#x2F;who-will-crack-the-code.html" rel="nofollow">http:&#x2F;&#x2F;www.nytimes.com&#x2F;2013&#x2F;05&#x2F;26&#x2F;opinion&#x2F;sunday&#x2F;who-will-cr...</a> )<p>Regardless of whether you think corporate income taxes should be higher or lower, it&#x27;s dysfunctional to have a system in which large companies and super-wealthy individuals can avoid paying headline tax rates but small companies and individuals don&#x27;t have a choice.<p>The IRS, understandably, wants to stop this charade.

I think this article helps illuminate the issue and provides more context: <a href="http:&#x2F;&#x2F;www.wsj.com&#x2F;articles&#x2F;facebook-gets-tax-notice-over-transfer-of-assets-overseas-1469750400" rel="nofollow">http:&#x2F;&#x2F;www.wsj.com&#x2F;articles&#x2F;facebook-gets-tax-notice-over-tr...</a><p>Curious what others think about this. All for tax optimization in whatever ways the rules allow, but this rule seems silly. Transferring intangibles like IP to a &quot;headquarters&quot; in a low-tax territory in order to avoid domestic taxes doesn&#x27;t seem right. On a first principles basis, what seems fair is to pay sales&#x2F;vat taxes on revenue in whatever territory it&#x27;s generated in and to pay income taxes at whatever the domestic rate is in the country you&#x27;re actually headquartered in. It&#x27;s silly that FB is <i>clearly</i> headquartered here (along with many other US-based companies that utilize this loophole) but tries to claim these substantial IPs are housed elsewhere. Alternatively, I could see a system wherein your net income is taxed proportionally in each territory where you actually have expenses. So, if 80% of your expenses (payroll, etc) are generated in the US, you&#x27;d pay US corporate income tax on 80% of your net income, and the remaining 20% could be taxed ratably in each jurisdiction where you have associated expenses.<p>In any case, yet another example of an overly complicated and clearly suboptimal, subjective system that ultimately costs billions in overhead and legal fights to adequately resolve.

The issue here is not related to off-shoring, but to &quot;the transferred intangibles may have been undervalued by billions of dollars.&quot;<p>It&#x27;s a tricky question how to value IP. In many ways web companies&#x27; entire businesses are extensions of their IP. Where do you draw the line between idea and execution.

My wife is a CPA and former auditor at E&amp;Y, and mentions that transfer pricing is one of the trickiest things in corporate accounting (relying on &quot;judgment calls&quot; rather than binary decisions).<p>It comes as no surprise that the IRS and Facebook are having a tussle over transfer pricing. Many companies have the same beef with the IRS (not just tech companies) including her employer LVMH based in Paris. It&#x27;ll just be a matter of negotiation and litigation.

We need tax reform in this country. This is so unpatriotic. Companies who turn their backs on the country that has been so good to them should be tariffed the amount of the tax savings. I hate this greed and we should fix it with legislation.

Facebook owes probably considerably more, 5 bln. $ is what the IRS thinks it can get.

Good. I wonder if Zuck could PR his way out of this?

Unfortunately they will probably negotiate their way down to $500m.

<p><pre><code> Facebook gets Moxie to do end to end encryption on whatsapp. Google haven&#x27;t done something similar. American public servants hate end to end encryption because they want to spy on everything. IRS makes this claim against facebook but not a similar one for google. Google and Facebook both aggressively minimize taxes with various offshore schemes. </code></pre> Are these events as totally and wholly unrelated as they should be? What do people think around here?