The Internal Revenue Service is seeking records from Facebook as part of an investigation into whether the social network understated its 2010 tax liability by valuing intangible assets it sold to an Irish subsidiary too cheaply.
The Justice Department filed a court petition last week asking a federal judge to compel Facebook to comply with IRS summons for the records.
“Part of the IRS’s examination concerns matters arising under certain agreements between Facebook Inc. and Facebook Ireland Holdings Limited purporting to transfer rights associated with Facebook’s worldwide business to Facebook Ireland,” the petition said.
The property includes Facebook’s user base outside the U.S. and Canada and the online platform that allows users to communicate, Facebook to store user information, and advertisers to reach users.
Facebook hired Ernst & Young to value the transfers for income tax purposes. According to a court declaration, the IRS’s preliminary investigation suggests that EY’s valuations “were understated by billions of dollars.”
As Reuters reports, any undervaluation “could boost taxable profits in Ireland, which has a corporate tax rate of 12.5%, and reduce taxable income in the United States which has a rate of at least 35%.”
A Facebook spokesman said the company “complies with all applicable rules and regulations in the countries where we operate.”
After acquiring the rights to the Facebook platform, Facebook Ireland Holdings in turn leased them to its own subsidiary, Facebook Ireland Ltd., in return for a fee. Facebook Ireland Ltd. is Facebook’s main international business unit, generating sales of 4.8 billion euros ($5.3 billion) in 2014, the last year for which accounts are available.
“If Facebook Ireland Holdings paid less for the rights than it charges Facebook Ireland Ltd., this margin allows profit to be built up in the lower tax jurisdiction,” Reuters said.
The transfer pricing arrangements of Amazon and Microsoft have also come under investigation by the IRS and the European Commission.