To those mentioning that Facebook's revenue is $70b: their net income is only around ~$18b.
This would be half of Facebook's net income for an entire year, which is substantial. It's a big deal to them.
This would be half of Facebook's net income for an entire year, which is substantial. It's a big deal to them.
Even if everyone in the room is aware that facebook is practicing avoidance, avoidance is still legal and categorically different than evasion.
Now- The right way to figure out whether this was a crime seems to be by examining the fair value of the intellectual property sold to Facebook's Irish subsidiary. I hope the discussion here can center around this.
You -- or in this case, Facebook -- has one interpretation of what is legal, the enforcement agency has another. The court decides and everyone goes forward from there.
You and I can have opinion on whether these various international schemes are legal ways to avoid taxes, but ultimately the law going forward will be the precedent set by this case, and its appeals.
"The IRS argues that Facebook understated the value of the intellectual property it sold to an Irish subsidiary in 2010 while building out global operations"
That is what IRS is trying to sue, on the ground that Facebook Ireland is now collecting substantially large revenue compare to what it was priced.
To me, trying to compare 2010 Facebook patents cost on revenue generated in 2020 is simply absurd. Patents are per user an per revenue based. Facebook 2020 is way bigger than Facebook 2010.
If it could be shown that facebook intentionally undervalued it in order to make this scheme work better for them, wouldn't the IRS have a case?
There aren't any "correct" way to measure it, but most of these IP are likely on percentage based. Sort of like 5G patents where they collect percentage of revenue. So the value I guess they did in 2010 were calculated based on ( projected ) 2012 ( its IPO ) figure. I think judging by majority of comment most people forgot how Facebook perform after its IPO, how its growth wasn't there, how Facebook Gaming Saved it, and how Mobile Internet ( aka Smartphone ) really took off, how they went to Mobile ( App ) First before the term was hyped by SV, and how it has grown possibly beyond most people would imagine. And that is not just Facebook itself, but also Instagram.
That is why I said comparing the value in absolute terms and not on relative terms doesn't make any sense.
At least that is judging from the limited amount of information given out by this FoxBusiness article. So again lots of assumption involved.
So, I can imagine if you (as the IRS) can demonstrate that they used on method of doing this sort of thing for some stakeholders, but another for the sale to Irish subsidiary with no real justification ... you might just have an argument this was for tax avoidance purposes.
Also I didn't mean to suggest that absolute value comparison was the right way to do this. Just that it is entirely plausible the FB intentionally lowballed the sale. It's clearly the reason these companies are in Ireland at all. Cases like this I suppose are about defining the line between "fair play" and not.
Fill in a suitable analogy with "selling IP to a shell company for a song".
To me this is the flaw in corporate taxation. I don't think you can ever work around this as long as you allow free trade. It just makes sense to tax them in other ways instead and perhaps simply get rid of corporate taxation itself.
A VAT style tax probably solves that right? It doesn't care how much money you actually make so you can't slip profits out the back door as costs.
If facebook.fr sells adverts to (say) local realtors, and spends a lot of that on its own people, servers, etc, is VAT collected on the entire sales price? (I'm really asking, I don't know how this works.)
Completely agree that for physical goods, collecting tax where they are physically sold to end-users sounds like a great way of avoiding this game of deciding which branch of a company made the profit.
I assume (don't know for sure) that in the case of FB ads FB just adds on the VAT rate to the cost of ads and that is then paid to the government. In the EU VAT has to be paid to the country where the purchase originates from. So if a French company buys ads then France should get the VAT.
Then, Toyota should only pay taxes in Japan? Or Volkswagen?
I imagine it would allow the rate to be drastically lower since the tax base would be so much larger. And while megacorps would obviously grumble, it would still be a profitable decision to pay the tax and remain in the US market given how lucrative it is. It would end all these country-to-country shell games once and for all, and would also provide some natural advantage to smaller homegrown companies that haven't gone international yet.
If something similar were applied to the tax on corporate profits, then it would not change much, as the US rate (21% I think) is pretty low by world standards. But there are exceptions, like Ireland (6-12%, IIRC).
But isn't the Irish company a different entity anyway? How far down the chain of ownership / authorized-importer-relationship would such a rule go?
I'm not an expert, but my understanding is that unless there's a tax treaty specifying otherwise (which we do have with many countries), all personal income over the "foreign earned income exclusion" (roughly 100k) is subject to income tax just like US-derived income would be. (Edit: just saw your edit about Form 1116... thanks, I didn't know about this. But I guess my point still applies in that, tax credit aside, you are still considered to be under the authority of the IRS even if your life and all your income are elsewhere.)
"If something similar were applied to the tax on corporate profits, then it would not change much, as the US rate (21% I think) is pretty low by world standards. But there are exceptions, like Ireland (6-12%, IIRC)."
Right, but if we taxed all international profits, it could probably be very low (maybe < 5%?) while still generating as much or more revenue, since there would be no way to avoid it. And it would be a naturally progressive tax since it would by definition hit multinationals the hardest.
"But isn't the Irish company a different entity anyway? How far down the chain of ownership / authorized-importer-relationship would such a rule go?"
My thinking is that perhaps we should end this silly game of international subsidiaries being treated like separate entities for tax purposes and just tax the aggregated profits of the parent entity, regardless of where in the world or under what subsidiary they are realized.
Here's another idea though: Arrange things so that the taxes owed depend on the goods sold, not on any ownership structure. Don't sell goods in the US? No problem. Sell mostly in the US? Who cares about your office in the Bahamas. This probably means abolishing the tax on corporate profits, as where these occurred seems to be basically an accounting fiction. Which is fine, we also don't tax windows anymore.
Extradition is also imperial, but without it you effectively offer impunity to anyone who can get out of the country before they're caught. We don't offer this type of criminal impunity, so why are we offering tax impunity to the wealthiest and most powerful entities in the world?
The VAT idea is interesting and sounds a lot better than what we have now, but still seems like it could be subject to shell games in terms of what gets spent where. Wouldn't it also be extremely complex from a reporting perspective?
I think the recent reductions in the US tax are moves in this direction, which is good. And what else to tax, lots of countries administer VAT, it's not so difficult, and seems quite hard to dodge. But there are lots of other taxes, too. Income tax + 401k starts to sound like a consumption tax, too, only paid on what you spend right now, like VAT. We can adjust that however we like. And before the profits in Ireland can be turned into a bigger yacht for any owner, they have to be paid as dividends (or by selling shares) by some real person who lives somewhere, and we can tax that.
Well, you run into that kind of issue when you allow spontaneous incorporation. If anything, incorporation should likely be handled a bit more like immigration in the sense you recognize an entity incorporated somewhere else instead of whipping up a brand new separate legal fiction, Company X,<Your Country edition>.
This would create a mechanism through which issues of taxation could be resolved through tracing the "heritage" of a corporation, then leaving the divvy up of tax extracted value to be sorted out by internation tax agreement.
It certainly sets up a pleasing symmetry in process between dealing with Corporations and people by my estimation, and cuts down on the attractiveness of creating corporate hierarchies with the direct intent to play shell games with your taxes.
With fairly commonsense questions like:
- Was the company formed at Megacorp's behest?
- Is there direct coordination between Megacorp and company leadership?
- Do Megacorp and the company share business infrastructure?
- Does the company share information that would normally be private with Megacorp?
- Does the company take actions that advantage Megacorp over the company itself?
You could at least make it a serious pain in the ass with many potential pitfalls to avoid responsibility in this way.
I can't even phantom how hairy a report detailing the above would look like, how long it will take to make and how long it will take to check said report.
You could also argue that is almost impossible to fully check the situation. The people with the skills to check such a report are either working for Facebook, or for a Facebook competitor. Bias either way.
>“Facebook Ireland and Facebook’s other foreign affiliates - not Facebook US - led the high-risk, and ultimately successful, international effort to sell Facebook ads,” the company said in a pre-trial memorandum.
What a fraud.
If they had to, they could scrounge up the $9b.
Turning over a profit of 9Bn, its still after this fine..
Thats still huge. Given their assets, cash on hand etc. I don't think they will lose much sleep.
Anyway they will get away with it. They can afford to.
They will be "expected" to discontinue the behavior the IRS is suing them for. If they do it again, the IRS presumably has cause to sue again.
In a similar vein when a rogue multinational bank is fined up to a yearly profit for some dirty shit, and people celebrate.