Facebook could owe $5B in back taxes | Hacker News Reader

Facebook could owe $5B in back taxes

washingtonpost.com

128 pointsblawson91 comments

This looks like the story that was discussed at https://news.ycombinator.com/item?id=12193216.

When Microsoft got dragged into court for their antitrust issues, wall street pointed out that it was partially because Microsoft didn't play politics.

They didn't employ lobbiest in any meaningful way, infact they ignored Washington altogether and just went about their business.

Google and Facebook internalized this lesson and became two of the most politically connected companies and some of the biggest spenders on lobbyists in America.

It turns out one good thing about the IRS is that it doesn't care much for politics or who is running the show, it just cares that it gets paid what it thinks its owed. Say what you will about the IRS but I think it might be one of the least political organizations in Washington.

If the issue is that auditors are signing off on companies licensing its IP and trademarks way too cheaply to a wholly owned foreign subsidiary, then maybe the solution is to have auditors responsible for a portion of the taxes owed if the IRS challenges and wins. At the least it would start making auditors a more risk adverse.

Here is a list of companeis with Irish subsidiaries https://en.wikipedia.org/wiki/List_of_companies_of_Ireland

and check out the list of companies using the double Irish agreement https://en.wikipedia.org/wiki/Double_Irish_arrangement

There are alot of heavy hitters watching this case very carefully:)

> maybe the solution is to have auditors responsible

The Public Company Accounting Oversight Board (PCAOB) oversees auditors [1]. Facebook is welcome to sue its auditor if they acted negligently. The IRS is overworked - no need to additionally task them with adjudicating on auditor-client disagreements.

[1] https://pcaobus.org/Pages/default.aspx

> It turns out one good thing about the IRS is that it doesn't care much for politics or who is running the show

I beg to differ...

https://en.wikipedia.org/wiki/List_of_allegations_of_misuse_...

http://www.reuters.com/article/us-usa-tax-irs-scandals-idUSB...

http://lfb.org/the-sordid-history-of-irs-political-abuse/

> Say what you will about the IRS but I think it might be one of the least political organizations in Washington.

I would so love for that to be the case. But I haven't forgotten the massive controversy surrounding IRS red-flagging tax-exempt applications based on their conservative ideology.

[1] - https://en.wikipedia.org/wiki/IRS_targeting_controversy

The real crime is the several hundred nakedly political "tea party" groups filing as nonprofit "social welfare" organizations that got away with it. They're probably politically untouchable now and can spend all their illegally tax free money this election.

untouchable

I'm fairly sympathetic to the "Tea Party" movement in general, but I have to completely agree with this. It's actually worse: the IRS have had their chain jerked, so they will be very hesitant to go after any political group in future. Gosh, I wonder who will benefit most from unregulated tax exemptions for political entities? Perhaps Congress?

As if there aren't many on the other side of the 1D political spectrum as well.

Ok, but now you're making a specific claim.

The original claim: lots of right-wing groups organized as a type of tax-exempt group that didn't measure up under scrutiny. This has been well-documented.

Your new claim: left-wing groups do it too!! I'm sure it won't be hard for you to produce the documentation of that.

It does happen [0] http://m.washingtontimes.com/news/2013/sep/13/tina-brown-cha...

I don't think this is a left vs right issue. It's a greed issue.

Ok, that's one. The claim is that it's widespread for left-leaning groups.

First, I said "many", and how many would you require me to produce to be satisfied?

> In January 2014, the FBI told Fox News that its investigation had found no evidence so far warranting the filing of federal criminal charges in connection with the scandal, as it had not found any evidence of "enemy hunting", and that the investigation continued. On October 23, 2015, the Justice Department declared that no criminal charges would be filed.

But whatever, keep grinding that axe.

Keep reading, friend. Their BOLO (Be On The Lookout) list flagged 501(c)(4) applications which included not just "tea party", but also "open source software" as well.

Even conduct which is "a routine bureaucratic procedure meant to bundle potentially problematic applicants together for further review" can be crooked. Their shoddy practices actually had a disproportionate and damaging impact on many applications.

I'm actually OK with the investigation concluding with no criminal charges being filed. Not everything that is wrong is necessarily criminal. Companies screw things up all the time, and the IRS is a very large bureaucracy with ~90,000 employees. All they can do is perform a thorough and impartial investigation, publish the results, apologize to the American public, tells us what they will do differently going forward, and start trying to regain our lost trust. Or destroy evidence, cover it up, and plead the 5th.... but yeah, something like that.

So what are you saying? Initially you were replying to a comment saying they are non political, claiming they targeted conservative groups. Then you point out they targeted "open source software" as well, and if you read the wikipedia article it says

"progressive", "occupy", "open source software", "medical marijuana", and "occupied territory advocacy"

were all targeted keywords. So do you think it was political or not?

Oh it certainly was political. I did not mean to imply that they only targeted conservative groups, but they absolutely did not fairly assess all "social benefit" applications without regard for political sentiment.

Unfortunately, their evaluations were political when they should not have been. They tried to fix a problem with "social benefit" applications in general, but keywords were the wrong way to do it. This is not currently a job for automation, they must evaluate all applications fairly. Or to put it differently, the optimal solution for the problem of fraudulent applications does not include a PR disaster and FBI investigation. Hopefully they do better next time.

I think the perspective people miss on this, is that mistakes were made, but it wasn't personal. The system broke, but not in a criminal intent kind of way. Maybe the best way to say it, is the IRS stuck their foot in politics, and then tried to shake it off and hopefully clean their shoes.

I don't mind continuing the discussion, but I'm sorry for the flame-bait. I volunteer the thread for detach-and-mark-off-topic.

Your use of the word political here is incorrect: http://www.oxforddictionaries.com/definition/english/politic... - typically in situations such as this, motive is ascribed to it, and the findings were that there was no motive for influencing politics through this misstep.

There is quite a difference between political actions and poor processes, which the Wikipedia article seems to confirm in its entirety.

One thing I never figured out was why Open Source and Firefox was on their radar in particular. Companies only pay taxes on profits, right?

The FBI also said it wouldn't recommend prosecution against Hillary, and the DOJ isn't prosecuting, but everyone under the sun knows Hillary broke the law. The FBI's inaction isn't indicative of an absence of criminality.

Not everyone under the sun knows that.

Her negligence is worthy of disciplinary action, sure. If this had been discovered while she was still Secretary of State, she may have been fired. But she wouldn't have been sent to prison over it.

Lots of relevant discussion here: https://www.quora.com/Are-Republicans-right-to-be-outraged-t...

Something to keep in mind: Quora users, especially ones that respond to political discussions, trend towards liberal intelligista, so you are not exactly getting an unbiased discussion when browsing any topic which may be influenced by politics.

The bias is a fair point, but it still goes to show that arguments for not incriminating do exist.

That might be because smarter people tend to be progressive.

I guess I should just apologize to HN for every post between my first and here, inclusive. Sorry I brought it up.

Please don't do this here.

The silliest part about all this is that we trust these folks to investigate each other.

"Hey FBI, please investigate your likely future boss and friend of your current boss and be honest please!"

"Hey DOJ, I'm the president, your boss, and I appointed you, but will you investigate this other person I also appointed, even though we're all friends and in the same party? Oh, and please don't be biased."

The opportunity for corruption is just too great when an administration investigates itself.

What do you suggest as a better option?

Nope. Innocent until proven guilty. It's not just a saying, it's a way of life.

That's a legal idea. It doesn't bind citizens to not come to their own conclusions. We're not actually jurors.

If only we locked up all the guilty. The world would be behind bars.

The important thing is that everyone at least knows, or could know if they educated themselves, what she did. The next important thing is whether or not given that information, she will become the next President.

So not to spell out the obvious... but, either she's the next President, and very clearly not a felon, or she is not the next President, and exactly one Administration will have a chance at proving she is a felon, until the statue of limitations runs out.

Personally, I think it's a crazy bet Hillary is taking. Her life is on the line with this election. The best thing Obama could have done for Hillary is charge Hillary himself, and not let her take this risk, and then pardon her if necessary. When she ultimately sees her day in court, you probably want that to happen under a friendly Administration. Some sort of plea agreement perhaps. Double jeopardy is required for Hillary to be safe from a long statue of limitations.

I don't think the President can pardon someone who hasn't been charged yet. So even if she wins this election, she could still be charged by the next administration.

Not all improper behavior is a crime you know. Even less is provably a crime.

One of the IRS agents involved pled the fifth, which you can only do if an honest answer would incriminate you.

> One of the IRS agents involved pled the fifth, which you can only do if an honest answer would incriminate you.

https://en.wikipedia.org/wiki/Fifth_Amendment_to_the_United_...

To "plead the Fifth" is to refuse to answer any question because "the implications of the question, in the setting in which it is asked" lead a claimant to possess a "reasonable cause to apprehend danger from a direct answer", believing that "a responsive answer to the question or an explanation of why it cannot be answered might be dangerous because injurious disclosure could result."

i.e. "This is a political witch hunt and my answer will get twisted no matter what I say" is a perfectly valid reason to plead the Fifth. It is not evidence of guilt - if it were, it'd be a useless right.

I like this part even better, "The privilege serves to protect the innocent who otherwise might be ensnared by ambiguous circumstances."

Describes exactly any federal investigation into another federal agency.

What??? You can plead the fifth whenever you like, not only when you're guilty.

We're taking the invocation of Constitutional rights as evidence of guilt, now?

incrimination is not the same thing as guilt, though. If you have legitimate concern that your words could be misconstrued and used against you, it is perfectly justifiable for you to refuse testimony.

The IRS did nothing wrong there; conservatives just thought they could fraudulently register a bunch of 501s and get away with it.

Turns out, they couldn't.

Except that's not what happened. It even states as much in the Wikipedia article you linked.

Would most of the companies on those lists be affected similarly? Did they also transfer IP and likely undervalue it at the time of transfer, as FB is alleged to have done here?

I feel like this is similar to an "allowance for bad debts" in Facebook's accounting. A risk of doing business.

Actually it sounds to me like the IRS is reneging on its advance pricing arrangements.

Your entire supposition is invalid.

I've re-read your comment 3 times and I still can't figure out what you are trying to say.

Are you saying that Facebook and the IRS had already agreed on an Advance pricing agreement and then the IRS retroactively cancelled it?

If so where is this agreement? I haven't seen any indication of one being signed when searching through my terminal.

And what exactly do you think my supposition is? :)

I am assuming the IRS did agree and articles say the IRS is disputing the price of assets that Facebook originally claimed, most likely in APAs

People want this to be a story of multinational tax evasion, but this is yet another story of state sanctioned tax avoidance for the wealthy

Unlike small businesses and individuals, most S&P 500 companies, like Facebook, pay less in income taxes than the official corporate income tax rate of approximately 35% implies, by doing things like booking profits abroad in specially created subsidiaries domiciled in jurisdictions like Ireland and Singapore, and never repatriating those profits, thereby deferring tax payments forever.

A couple of years ago the NY Times published an eye-opening interactive chart showing the actual tax rates paid by S&P 500 companies: http://www.nytimes.com/interactive/2013/05/25/sunday-review/... (Related article: http://www.nytimes.com/2013/05/26/opinion/sunday/who-will-cr... )

Regardless of whether you think corporate income taxes should be higher or lower, it's dysfunctional to have a system in which large companies and super-wealthy individuals can avoid paying headline tax rates but small companies and individuals don't have a choice.

The IRS, understandably, wants to stop this charade.

Great links and good perspective here. I agree completely that it is unfair that big companies can perform these maneuvers while small-businesses (and even profitable start-ups) would struggle to. There are so many scale-asymmetries in business, but this is a particular egregious modern example.

I've read that similarly for individuals American real income tax rates are roughly flat, since richer people tend to make use of more exemptions.

Facebook paid a 36% income tax rate for Q2 2015 to Q1 2016 (I didn't look up the most recent quarter). $7.31b in income before tax, and $2.64b in income tax.

That's very high compared to most of the world. The only other corporations I'm aware of that pay such a high rate, are oil companies like Exxon and Chevron.

SP500 companies don't pay anything while Joe in montana whom gets by with his family on 40K a year pay 35% or whatever the bracket is.

law is the law and they are not breaking it but its time the IRS crackdown on this practice.

40K pays an effective rate of 11%, in case you were wondering.

11% effective federal, some state taxes, some property taxes, some sales taxes, etc... I'm not saying it is by any means 35% but just quoting 11% is not entirely true.

Does that vary by e.g. family size?

Somewhat. Dependency deduction is relatively small.

I think this article helps illuminate the issue and provides more context: http://www.wsj.com/articles/facebook-gets-tax-notice-over-tr...

Curious what others think about this. All for tax optimization in whatever ways the rules allow, but this rule seems silly. Transferring intangibles like IP to a "headquarters" in a low-tax territory in order to avoid domestic taxes doesn't seem right. On a first principles basis, what seems fair is to pay sales/vat taxes on revenue in whatever territory it's generated in and to pay income taxes at whatever the domestic rate is in the country you're actually headquartered in. It's silly that FB is clearly headquartered here (along with many other US-based companies that utilize this loophole) but tries to claim these substantial IPs are housed elsewhere. Alternatively, I could see a system wherein your net income is taxed proportionally in each territory where you actually have expenses. So, if 80% of your expenses (payroll, etc) are generated in the US, you'd pay US corporate income tax on 80% of your net income, and the remaining 20% could be taxed ratably in each jurisdiction where you have associated expenses.

In any case, yet another example of an overly complicated and clearly suboptimal, subjective system that ultimately costs billions in overhead and legal fights to adequately resolve.

>I could see a system wherein your net income is taxed proportionally in each territory where you actually have expenses.

More straightforwardly, you could proportionally tax the territory itself. Preferably through some kind of land-value tax. This neatly avoids needing to dissect companies for revenue that can easily be booked in whatever jurisdiction they want it. Instead, just look at the boundary points where Facebook interacts with America: paying for the right to use American land and citizens.

Wouldn't the change of rule you are suggesting just lead to Facebook moving HQ to Singapore?

I mean, if they actually did move their HQ (ie majority of costs, execs, etc) to Singapore, then sure. And that'd be totally fair.

What maybe doesn't seem fair (haven't thought about it deeply enough to say for sure) is pretending your HQ is where you really just have a satellite while the core of your IP creation, expenses, exec decision making etc is in the US. It's like you're getting the benefits of being in the US (whatever you think they are), but not paying the full price for those benefits.

What I hate about rules like this is that it basically forces you to follow them. You have a fiduciary duty to shareholders as an officer and/or director, and so you have hard time justifying not using a technique like this.

That's a common strategy, but not quite so simple to pull off. One approach is through M&A: https://en.m.wikipedia.org/wiki/Tax_inversion

Twitter made this same threat with San Francisco when it extorted us for corporate welfare. In reality we should have a tax system which rewards job creation and creates very stiff penalties for trying to sneak out of paying for the infrastructure which makes their profits possible.

Just stop taxing labour and capital, and tax land. Land can't move overseas.

That would be amusing; would Eduardo meet them at the airport?

Who's Eduardo?

Eduardo Saverin, one of the co-founders of Facebook. Back from when him and Mark was at Harvard.

The issue here is not related to off-shoring, but to "the transferred intangibles may have been undervalued by billions of dollars."

It's a tricky question how to value IP. In many ways web companies' entire businesses are extensions of their IP. Where do you draw the line between idea and execution.

My wife is a CPA and former auditor at E&Y, and mentions that transfer pricing is one of the trickiest things in corporate accounting (relying on "judgment calls" rather than binary decisions).

It comes as no surprise that the IRS and Facebook are having a tussle over transfer pricing. Many companies have the same beef with the IRS (not just tech companies) including her employer LVMH based in Paris. It'll just be a matter of negotiation and litigation.

We need tax reform in this country. This is so unpatriotic. Companies who turn their backs on the country that has been so good to them should be tariffed the amount of the tax savings. I hate this greed and we should fix it with legislation.

Facebook owes probably considerably more, 5 bln. $ is what the IRS thinks it can get.

What it owes is what the IRS can get, there's not some abstract "just" amount that it should pay.

Isn't this confusing the "free" market with the tax code?

Why is Facebook's tax liability some arcane figure that can only be determined by IRS clout, Facebook lobbying/marketing/lawyers and the revolving door between the private and public sector?

It depends on the value of an intangible asset. Who do you propose set the price?

I agree that there are difficulties in assessing the value of some of the assets (like the article mentions).

I just don't believe "what they can get" should be one of our options.

Ideally, there would be an impartial entity responsible for settling these valuation disputes (how do we handle this between corporations?). Heck, I'd even take using market valuations (which isn't the same thing as whatever the IRS can get from FB).

Transactions between corporations are generally voluntary. They agree on a price, or there's no exchange. The impartial entity in this case is the court system.

All transactions are voluntary but they are also verified by 3rd parties to prevent tax avoidance and other shenanigans. For example if I want to leave a property to some one if I gift it to them they (or I) will have to pay tax on it just like on any other transaction the value of the property would be assessed and it will be taxed. This happens regardless of the sum of the transaction so I can't just sell it to them for 1$ so effectively no tax would be paid, in these kinds of transactions they usually tax the value of the transaction unless it was substantially lower than the estimate (most government estimates are some what low balled).

If I report a transaction for a value considerably lower than the estimate they'll investigate it which usually would result in a new estimation and if that one is as well differs considerably than the transaction amount there would be an investigation regarding possible tax evasion.

Corporations aren't different when they exchange assets the valuation figures are reported to the authorities if the regulatory body thinks the estimates were set higher or lower than their actual value they can choose to open an investigation and if need be fine or prosecute the offending parties.

Not commenting on this specific case, but there is such an amount. There's a difference between what's actually just and what can be proven in court.

No two people are going to agree on what that "just" amount is, and there's no way to otherwise empirically determine it.

In other words, it doesn't exist.

Just because you cannot precisely identify the location of an electron, that does not imply that it does not exist.

In fact, an electron does not have a precise location. We can, however, detect electrons' presence based on their observed effects.

There are no equivalent "observed effects" of some hypothetical "just" amount that Facebook should owe to the IRS.

Tax law is so complicated and vague that there isn't even an objective measure of what an individual owes, let alone a corporation. There's a lot of discretion in the deductions. I believe over the past ~10 years the IRS has really been cracking down on home office deductions, for instance, and it was all interpretation of existing laws, not new ones. And that's just one example.

So let me guess, you think OJ didn't do it?

What an absurd ontology, truth by legal procedure. There's a difference between the process we use to ascertain facts for purposes of administering force, and what the actual truth is.

In the scenario of "What a company owes to the IRS", the outcome of legal procedure is the absolute source of truth. There's no definition of that amount outside of any legal context.

OJ killing his wife is an event that occurred independently of the existence of our legal system. A company owing taxes to the IRS is a matter that literally only exists within the context of the United States legal code.

Good. I wonder if Zuck could PR his way out of this?

Unfortunately they will probably negotiate their way down to $500m.

    Facebook gets Moxie to do end to end encryption on whatsapp.
    Google haven't done something similar.
    American public servants hate end to end encryption because they want to spy on everything.
    IRS makes this claim against facebook but not a similar one for google.
    Google and Facebook both aggressively minimize taxes with various offshore schemes.

Are these events as totally and wholly unrelated as they should be? What do people think around here?

Didn't Google also partner with Open Whisper/Moxie on E2E encryption for their new Allo chat app? [0]

0. https://whispersystems.org/blog/allo/

Seems a bit paranoid. I also think you're giving too much credit to the government by thinking they're able to competently coordinate this across major agencies (IRS + NSA).

The IRS absolutely does work with the FBI, CIA and NSA. This isn't a secret.

But I agree this isn't about encryption.

> the IRS absolutely does work with the FBI, CIA and NSA. This isn't a secret

Source?

https://www.eff.org/deeplinks/2013/08/dea-and-nsa-team-intel...

http://www.reuters.com/article/us-dea-sod-idUSBRE97409R20130...

There is a lack of any evidence showing that those events are related.

I don't think you have been paying attention to a bunch of major companies using techniques like Facebook to avoid taxes. [1] Basically all of these companies do this to avoid double taxation [2] . I think the US government should discourage this tax avoidance and the way it could do that is either reforming the tax code or going after companies that do this. 1. http://visualeconomics.creditloan.com/double-irish-deception... 2. http://www.investopedia.com/terms/d/double_taxation.asp

Yes, yes, they are. Contrary to popular believe, both corporations as well as the US government are neither vast conspiracies nor petty children seeking revenge.

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