The IRS is claiming that social media giant Facebook grossly undervalued its intellectual property when it sold it to a subsidiary in Ireland in 2010 in order to avoid taxes.
Facebook’s subsidiaries pay a royalty to the U.S. parent company for its user base, platform technologies and trademark, among other elements. Facebook Ireland paid its US counterpart more than 14 billion dollars from 2010 to 2016.
The IRS claims that the valuation Facebook gave its intellectual property is too low and should be taxed accordingly. Facebook claims the low valuation reflected the risk involved with its international expansion, since the sale happened before its IPO and the development of its advertising systems.
According to Facebook spokeswoman Bertie Thompson, at the time of the 2010 valuation, Facebook, “Had no mobile advertising revenue, its international business was nascent, and its digital advertising products were unproven.”
The process of setting up a subsidiary in Ireland to take advantage of low tax rates is a common accounting maneuver for large corporations, with companies like Apple doing the same thing.
If the IRS wins, Facebook would have a tax liability of up to nine billion dollars, plus interest and penalties.