
Facebook could owe $5B in back taxes - blawson
https://www.washingtonpost.com/news/the-switch/wp/2016/07/29/facebook-could-owe-5-billion-in-back-taxes/
======
dang
This looks like the story that was discussed at
[https://news.ycombinator.com/item?id=12193216](https://news.ycombinator.com/item?id=12193216).

------
chollida1
When Microsoft got dragged into court for their antitrust issues, wall street
pointed out that it was partially because Microsoft didn't play politics.

They didn't employ lobbiest in any meaningful way, infact they ignored
Washington altogether and just went about their business.

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.

It turns out one good thing about the IRS is that it doesn'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.

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.

Here is a list of companeis with Irish subsidiaries
[https://en.wikipedia.org/wiki/List_of_companies_of_Ireland](https://en.wikipedia.org/wiki/List_of_companies_of_Ireland)

and check out the list of companies using the double Irish agreement
[https://en.wikipedia.org/wiki/Double_Irish_arrangement](https://en.wikipedia.org/wiki/Double_Irish_arrangement)

There are alot of heavy hitters watching this case very carefully:)

~~~
zaroth
> Say what you will about the IRS but I think it might be one of the least
> political organizations in Washington.

I would so love for that to be the case. But I haven't forgotten the massive
controversy surrounding IRS red-flagging tax-exempt applications based on
their conservative ideology.

[1] -
[https://en.wikipedia.org/wiki/IRS_targeting_controversy](https://en.wikipedia.org/wiki/IRS_targeting_controversy)

~~~
beatpanda
> _In January 2014, the FBI told Fox News that its investigation had found no
> evidence so far warranting the filing of federal criminal charges in
> connection with the scandal, as it had not found any evidence of "enemy
> hunting", and that the investigation continued. On October 23, 2015, the
> Justice Department declared that no criminal charges would be filed._

But whatever, keep grinding that axe.

~~~
joobus
The FBI also said it wouldn't recommend prosecution against Hillary, and the
DOJ isn't prosecuting, but everyone under the sun knows Hillary broke the law.
The FBI's inaction isn't indicative of an absence of criminality.

~~~
Frondo
Nope. Innocent until proven guilty. It's not just a saying, it's a way of
life.

~~~
roywiggins
That's a legal idea. It doesn't bind citizens to not come to their own
conclusions. We're not actually jurors.

------
cs702
Unlike small businesses and individuals, most S&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.

A couple of years ago the NY Times published an eye-opening interactive chart
showing the actual tax rates paid by S&P 500 companies:
[http://www.nytimes.com/interactive/2013/05/25/sunday-
review/...](http://www.nytimes.com/interactive/2013/05/25/sunday-
review/corporate-taxes.html?_r=0) (Related article:
[http://www.nytimes.com/2013/05/26/opinion/sunday/who-will-
cr...](http://www.nytimes.com/2013/05/26/opinion/sunday/who-will-crack-the-
code.html) )

Regardless of whether you think corporate income taxes should be higher or
lower, it'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't have a choice.

The IRS, understandably, wants to stop this charade.

~~~
3327
SP500 companies don't pay anything while Joe in montana whom gets by with his
family on 40K a year pay 35% or whatever the bracket is.

law is the law and they are not breaking it but its time the IRS crackdown on
this practice.

~~~
tedunangst
40K pays an effective rate of 11%, in case you were wondering.

~~~
jessaustin
Does that vary by e.g. family size?

~~~
tedunangst
Somewhat. Dependency deduction is relatively small.

------
erdevs
I think this article helps illuminate the issue and provides more context:
[http://www.wsj.com/articles/facebook-gets-tax-notice-over-
tr...](http://www.wsj.com/articles/facebook-gets-tax-notice-over-transfer-of-
assets-overseas-1469750400)

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 "headquarters" in a low-tax territory in order to avoid domestic taxes
doesn't seem right. On a first principles basis, what seems fair is to pay
sales/vat taxes on revenue in whatever territory it's generated in and to pay
income taxes at whatever the domestic rate is in the country you're actually
headquartered in. It's silly that FB is _clearly_ 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'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.

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.

~~~
eru
Wouldn't the change of rule you are suggesting just lead to Facebook moving HQ
to Singapore?

~~~
somenomadicguy
Twitter made this same threat with San Francisco when it extorted us for
corporate welfare. In reality we should have a tax system which rewards job
creation and creates very stiff penalties for trying to sneak out of paying
for the infrastructure which makes their profits possible.

~~~
eru
Just stop taxing labour and capital, and tax land. Land can't move overseas.

------
thinkloop
The issue here is not related to off-shoring, but to "the transferred
intangibles may have been undervalued by billions of dollars."

It's a tricky question how to value IP. In many ways web companies' entire
businesses are extensions of their IP. Where do you draw the line between idea
and execution.

------
jasonjei
My wife is a CPA and former auditor at E&Y, and mentions that transfer pricing
is one of the trickiest things in corporate accounting (relying on "judgment
calls" rather than binary decisions).

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'll just be a
matter of negotiation and litigation.

------
kapauldo
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.

------
dogma1138
Facebook owes probably considerably more, 5 bln. $ is what the IRS thinks it
can get.

~~~
mentat
What it owes is what the IRS can get, there's not some abstract "just" amount
that it should pay.

~~~
gentleteblor
Isn't this confusing the "free" market with the tax code?

Why is Facebook's tax liability some arcane figure that can only be determined
by IRS clout, Facebook lobbying/marketing/lawyers and the revolving door
between the private and public sector?

~~~
tedunangst
It depends on the value of an intangible asset. Who do you propose set the
price?

~~~
gentleteblor
I agree that there are difficulties in assessing the value of some of the
assets (like the article mentions).

I just don't believe "what they can get" should be one of our options.

Ideally, there would be an impartial entity responsible for settling these
valuation disputes (how do we handle this between corporations?). Heck, I'd
even take using market valuations (which isn't the same thing as whatever the
IRS can get from FB).

~~~
tedunangst
Transactions between corporations are generally voluntary. They agree on a
price, or there's no exchange. The impartial entity in this case is the court
system.

~~~
dogma1138
All transactions are voluntary but they are also verified by 3rd parties to
prevent tax avoidance and other shenanigans. For example if I want to leave a
property to some one if I gift it to them they (or I) will have to pay tax on
it just like on any other transaction the value of the property would be
assessed and it will be taxed. This happens regardless of the sum of the
transaction so I can't just sell it to them for 1$ so effectively no tax would
be paid, in these kinds of transactions they usually tax the value of the
transaction unless it was substantially lower than the estimate (most
government estimates are some what low balled).

If I report a transaction for a value considerably lower than the estimate
they'll investigate it which usually would result in a new estimation and if
that one is as well differs considerably than the transaction amount there
would be an investigation regarding possible tax evasion.

Corporations aren't different when they exchange assets the valuation figures
are reported to the authorities if the regulatory body thinks the estimates
were set higher or lower than their actual value they can choose to open an
investigation and if need be fine or prosecute the offending parties.

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

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

------
harry8

        Facebook gets Moxie to do end to end encryption on whatsapp.
        Google haven'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.
    

Are these events as totally and wholly unrelated as they should be? What do
people think around here?

~~~
a13n
Seems a bit paranoid. I also think you're giving too much credit to the
government by thinking they're able to competently coordinate this across
major agencies (IRS + NSA).

~~~
nostromo
The IRS absolutely does work with the FBI, CIA and NSA. This isn't a secret.

But I agree this isn't about encryption.

~~~
JumpCrisscross
> _the IRS absolutely does work with the FBI, CIA and NSA. This isn 't a
> secret_

Source?

~~~
nostromo
[https://www.eff.org/deeplinks/2013/08/dea-and-nsa-team-
intel...](https://www.eff.org/deeplinks/2013/08/dea-and-nsa-team-intelligence-
laundering)

[http://www.reuters.com/article/us-dea-sod-
idUSBRE97409R20130...](http://www.reuters.com/article/us-dea-sod-
idUSBRE97409R20130805)

