Facebook has been targeted in a lawsuit in which the US government said the social networking site may have undervalued intellectual property rights that it transferred to an Ireland-based subsidiary, a move which cut its tax bill.
The lawsuit, filed by the US Department of Justice, seeks the enforcement of six summonses that were handed to Facebook by the US Internal Revenue Service (IRS).
The summonses relate to a 2010 transaction where Facebook transferred IP rights associated with its businesses outside the US and Canada to an Irish subsidiary.
Ireland has a lower corporate tax rate of 12.5% compared to the US’s rate of around 35%.
According to the complaint, filed at the US District Court for the Northern District of California on Wednesday, July 6, several intangible assets were transferred to a company called Facebook Ireland Holdings.
That company then leased the rights to exploit the Facebook platform to another subsidiary, Facebook Ireland Ltd, in return for a fee. Facebook Ireland is Facebook’s main international business unit.
The US arm of Facebook, Facebook Inc, could have licensed its IP directly to Facebook Ireland but then it would have to have reported that income in the US and pay tax there.
According to IRS revenue agent Nina Stone, the IRS believes the value of the transactions, which have not been revealed, were understated by billions of dollars.
The price was determined by Facebook’s tax advisor Ernst & Young, which has not commented publicly on the lawsuit.
A spokesperson for Facebook told “Facebook complies with all applicable rules and regulations in the countries where we operate.”