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One of Facebook's Biggest Accomplishments Has Nothing to Do With Likes and Shares

One of Facebook's Biggest Accomplishments Has Nothing to Do With Likes and Shares

By Renae Merle, The Washington Post | Updated: 15 July 2016 13:13 IST

One of Facebook's biggest accomplishment this year has nothing to do with how many new parents post baby photos on the site or use it to wish friends happy birthday. Instead, the social network's latest victory may reside in its arcane finances.

Facebook said it expects its effective tax rate to fall from 40 percent to about 27 percent this year. That is considerably lower than the federal corporate tax rate, 35 percent, and tax experts say a reflection of the tech giant's growing maturity.

"When companies start making money they start thinking about taxes more," said Steven Rosenthal, a senior fellow of the nonpartisan Tax Policy Center in Washington.

But this also comes as Facebook tangles with the Internal Revenue Service over assets the tech giant moved to Ireland, which has a considerably lower tax rate than the United States, and amid a worldwide re-examination of the tax strategies employed by US multinationals.

Facebook, the IRS said in court documents, may have underestimated by "billions of dollars" the value of some of the assets. That would have allowed the company to avoid potentially millions in taxes, tax experts say.

"It looks like Facebook is taking affirmative steps to shift income from the US to more friendly foreign environments," said Robert Willens, an independent tax expert.

Facebook declined to comment on the investigation. "Facebook complies with all applicable rules and regulations in the countries where we operate," the company said in a statement.

The fight is just the latest example of a large US company under scrutiny for its tax practices. French authorities raided the Paris headquarters of Google and McDonald's in May and the European Commission is investigating tax deals that Amazon and Apple reached in Luxembourg and Ireland.

The European Commission is slated to rule by the end of this month on whether Apple owes billions in back taxes. Treasury Secretary Jack Lew, who had repeatedly complained that the European investigations of US companies were unfair, is scheduled to meet with European Competition Commissioner Margrethe Vestager this week.

"There is certainly an irony to Jack Lew going over there to defend US companies accused of [dodging their taxes] when they are being accused of the same thing here in the US," said Rosenthal, former legislative counsel to the Joint Committee on Taxation. "If anybody is going to squeeze our companies it ought to be US"

Facebook has already been forced to change the way it operates overseas. Earlier this year, the tech giant said it would change the way it pays taxes in Britain. Instead of booking revenue earned in Britain through its Irish unit, where the tax rate is lower, Facebook said it would pay local, higher British taxes on it.

That followed withering criticism the company received after news emerged that it paid just $6,100 in British corporate tax in 2014, while giving employees in the country an average bonus of more than $200,000 that year.

The company declined to comment on how it lowered its tax rate. But tax experts note the effective tax rate reported by companies to the Securities and Exchange Commission is often higher than what the company actually pays because it doesn't reflect deductions taken for stock options issued to employees or other expenses. In fact, said Willens, the tax expert, when Facebook was reporting a 40 percent tax rate, its rate was likely closer to 13 percent.

"It is really impressive. It is really a testimony on what they've done," he said.

Many of the tax strategies being employed by large US companies, including Facebook, have become commonplace, said Reuven S. Avi-Yonah, a University of Michigan law professor. "What has really changed is that the Europeans have woken up to this. They have started worrying about American companies not paying taxes in Europe," he said.

And Facebook is hardly alone is the tech community in finding ways to lower its tax rate. Twenty-one tech companies on the S&P 500 had an effective tax rate of 20 percent or lower, including IBM and Alphabet, the parent company of Google, according to a report by S&P Global Market Intelligence. Another 10 companies, the report said, has "no material tax rates," the report said.

"I think their [US corporations] income taxes are complicated because commerce and the world is complicated now," said Rosenthal. "Things we do here affect far corners of the planet, everybody talks around with an iPhone these days."

Facebook's current tussle with the IRS centers on the company's decision in 2010 to transfer many of its global "intangible" assets - those not in the United States or Canada - to its Irish holding company. The transfer allows the company to pay a lower tax rate on the profits made from those assets, tax experts say.

"This is very standard operating procedure. They want to have all, or as much profits as possible in a market that has a low tax rate," said Brian Wieser, senior analyst at Pivotal Research. "That is the optimal corporate tax structure."

But the IRS began reviewing the move in 2013 and said in court documents that the way the assets were valued was "problematic." The "transferred intangibles" may have been undervalued by "billions of dollars," the agency said in a court documents.

Last month, the IRS sent Facebook Chief Financial Officer David Wehner a request for more information so the agency could better understand the valuations, according to the court documents. The tech giant did not respond by the June 17 deadline and the IRS has now gone to court to force the company to produce the documents.

"Facebook's failure to comply with the summonses continues to this date," the Justice Department's Tax Division said in court filing last week.

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