Facebook May Owe $5 Billion to the Internal Revenue Service

In its most recent quarterly filing with the U.S. Securities and Exchange Commission, Facebook yesterday stated that it could owe as much as $3 billion to $5 billion in taxes to the Internal Revenue Service.

Facebook said it received a Statutory Notice of Deficiency from the IRS on Wednesday, but noted it disagreed with the agency's position and planned to challenge it. "Facebook complies with all applicable rules and regulations in the countries where we operate," a Facebook spokesperson told us via email today.

The IRS investigation focused on Facebook's obligations for the 2010 tax year, and raised questions about how the company valued its overseas holdings, in particular those in Ireland.

On July 6, the Justice Department filed a petition in U.S. District Court in Northern California against Facebook to enforce summonses by the IRS. The complaint alleged that Facebook failed to comply with the IRS by not appearing for a scheduled June 17 hearing or producing documentation requested as part of the agency's tax investigation.

Foreign Subsidiaries Raise Tax Issues

Many technology companies have set up corporate offices in Ireland in recent years thanks to the nation's low tax rates for businesses, prompting criticism that giants, including Facebook, Apple, Google and Microsoft, are not paying a fair share of U.S. taxes on their large profits. A tax-reducing strategy known as the "Double Irish" arrangement is being phased out, but the country has recently cut its already low tax rate of 12.5 percent to 6.25 percent for corporations whose profits come from patents.

With this latest IRS development, Facebook joined companies like Microsoft and Apple that have also been also tangling with the agency over taxes related to foreign subsidiaries. In fact, Microsoft also filed a report with the SEC yesterday noting that its ongoing IRS audit could affect its financial...

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