Facebook Inc. and the IRS will meet in U.S. Tax Court on Feb. 10, to do battle over $9 billion the tax agency claims the company owes despite moving its profits to a low-tax jurisdiction overseas.
The trial is scheduled to begin in a special session of the court to be held in San Francisco.
The hearing comes as lawmakers come under increasing pressure from both left and right to act legislatively against Facebook because of how the company is thought to treat users, as opposed to anything arising out of tax issues. Republicans say Facebook is biased against conservatives and censors their pages, while Democrats claim Facebook favors President Donald Trump and tipped the scales to get him elected.
The yearslong tax dispute concerns Facebook’s policy of moving overseas profits to low-tax centers, which many U.S.-based multinational corporations do. Such practices are widely criticized by government officials in the United States and Europe, who claim the companies that pursue such an approach don’t pay their fair share of taxes.
The IRS argues that a bigger chunk of the company’s profits should have been taxed at higher U.S. rates, rather than being subject to the low tax rates in Ireland, where the company established its international headquarters.
Specifically, the case arises from financial restructuring the company carried out to set up its global operations, before it went public with its highly anticipated initial public offering in May 2012.
“The result will likely hinge on the valuation of intellectual property used by Facebook’s overseas subsidiaries, which pay royalties to the parent company,” according to a Wall Street Journal analysis.
The case has garnered attention because whatever the court decides could create a roadmap for other companies with similar tax disputes to follow.
“Both sides have salient arguments, and that makes it an exciting case,” William Byrnes, a law professor at Texas A&M University, told the newspaper. “What happens with Facebook sets the tone for what happens” to others.
Facebook has been pursuing its tax-minimization strategy, which has bolstered the company’s long-term financial viability, for a decade, according to ProPublica.
In early 2008, when Facebook had nearly 100 million users–today it has more than 2 billion—it hired Sheryl Sandberg away from Google to become the company’s chief operating officer. At the time, Facebook CEO Mark Zuckerberg said his new hire would take the company “to the next level.”
Based on her experiences at Google, Sandberg overhauled Facebook’s approach to dealing with taxation.
“My experience is that by not having a European center and running everything through the US, it is very costly in terms of taxes,” she wrote to other Facebook executives in April 2008, as reported by Pro Publica. The company’s top tax official agreed, saying Facebook had to locate to “a low taxed jurisdiction to park profits.”
The same year, Facebook designated Dublin as its international headquarters, copying what Google did when Sandberg worked there. Facebook worked out a way to keep profits in Ireland and pay a tax rate close to zero while maintaining a sufficient presence in Dublin, according to an internal email from Sandberg, “to justify the benefits.”
Facebook transferred some of its intellectual property overseas, which reduced how much in royalties its subsidiaries had to pay to the parent company. Before the Trump-led tax reforms of 2017, royalties would be taxed at 35 percent instead of a lower rate. Facebook used a holding company based in the Cayman Islands, a famous tax haven, to reduce its tax liability and had to pay a 15.5 percent tax on those profits under a one-time tax provision in the 2017 tax law.
The issue, according to the IRS, is whether the company should have to pay a higher tax rate. Facebook says it doesn’t and wants a refund of taxes it claims it overpaid.