The Internal Revenue Service (IRS) is challenging Facebook to a tax trial in San Francisco, according to Reuters. The IRS has accused the world's biggest social network of purposefully downplaying the monetary value of its intellectual property in an offshore Ireland deal originally made in 2010. The IRS says that Facebook allegedly understated the value to avoid paying taxes in the United States.
At the time, Facebook claimed that the value of the property was around $6.5 billion — which was a decade ago — but the IRS insists that the real value was close to $21 billion. If the IRS successfully convinces the United States Tax Court to rule against Mark Zuckerberg's massive enterprise, Facebook will owe a hefty $9 billion to the bureau.
Facebook stands its ground — Selling intellectual property to offshore subsidiaries is a pretty common move made by American multinational firms. Especially when it comes to Ireland, where corporate taxes are significantly lower than the rates in the United States, companies turn to this route in order to have lower tax bills.
The company's spokesperson Bertie Thomson told Reuters that Facebook stood by its 2010 deal since it "had no mobile advertising revenue, its international business was nascent, and its digital advertising products were unproven."
Could Facebook win? — The company might win the trial if it is able to convince the judge that its evaluation in 2010 was based heavily on the risks that come with foreign expansion and that Facebook Ireland, not Facebook United States, ultimately succeeded in increasing ad revenue for the company.
That's a big "if." On the flip side, if Facebook is unable to win the judge over, the company's $52.3 billion cash reserves could take a major hit not only in the form of a massive tax bill but also penalties, fines, and account interest. All of this is hypothetical. The fate of the beleaguered company will become clearer in the next three to four weeks.