The Internal Revenue Service is suing Facebook for $9 billion in back taxes. The trial began on Tuesday and is expected to go on for about a month. Five Facebook executives have been subpoenaed to testify, including Chief Technology Officer Mike Schroepfer, AR and VR Vice President Andrew "Boz" Bosworth, Chief Revenue Officer David Fischer, and two others.
The IRS alleges Facebook undervalued intellectual properties when selling them to an Irish subsidiary in 2010. Shuffling money internally this way is not unusual for multinational corporations. Ireland is considered a haven because of its lower corporate tax rates.
Reuter's reports that between 2010 and 2016, the subsidiary paid Facebook US more than $14 billion in royalties and cost-sharing. These payments were for the use of "trademarks, users, and platform technologies."
Facebook's defense is that inherent risks of expanding overseas drove the valuation down. The deal was also penned before the company's IPO and before it had developed its digital advertising platform, which is its highest revenue earner.
"[In 2010, Facebook] had no mobile advertising revenue, its international business was nascent, and its digital advertising products were unproven," Facebook spokesperson Bertie Thomson told Reuters.
In addition to the IRS inflating the value of its IPs in 2010, Facebook is claiming that the tax burden lies on its international affiliates and not on the US-based parent company.
"Facebook Ireland and Facebook's other foreign affiliates - not Facebook US - led the high-risk, and ultimately successful, international effort to sell Facebook ads," said the company's legal team in a brief before the trial began.
While the suit lists the taxes owed at $9 billion, if Facebook loses the case, it will also have to cough up interest and penalties, which could put its settlement into the 11-figure bracket.
Masthead credit: Cryptographer via Shutterstock