Facebook failure to share with IRS could backfire

Published Wed, Aug 3 20165:00 AM EDT

Breakingviews

Sara Silver

Facebook isn't sharing. The $360 billion social network ignored seven summonses from U.S. tax investigators seeking information about how it manages its finances across borders. Now it says it could owe up to $5 billion if the Internal Revenue Service prevails. The trouble is, too many inter-jurisdictional tax games are legal. The IRS is looking into whether Mark Zuckerberg's company undervalued assets it transferred to its Irish subsidiary in 2010, reducing subsequent U.S. tax bills. In a filing last week, Facebook disclosed a potential liability of $3 billion to $5 billion, plus interest and penalties, if the position taken by the tax enforcers holds up. Other tech giants including Amazon , Coca-Cola and Microsoft have been under scrutiny, too. But none has demonstrated the hubris of Facebook in failing to satisfy a series of court-backed requests to turn over specific documents, records and data. More from Breakingviews : BMW's big electric car gamble begins to pay off Facebook has given some ground. In March it agreed to book sales to major UK clients through its local entity, rather than in lower-tax Ireland. Last year, the British government enacted a new tax on profit that's artificially shifted offshore, amid a vociferous campaign arguing that multinationals, also including Starbucks and Google parent Alphabet, don't pay enough UK taxes. It's a global problem, involving multinationals of all origins and tax havens from Bermuda to Luxembourg. That demands, as far as possible, a global solution. One idea is to tax multinationals as if they were a single firm – but this would require abandoning the notion that companies can operate through different subsidiaries in different jurisdictions. Another solution would be for nations to harmonize tax rates, which would require a global effort, perhaps led by the United Nations. The OECD's arguably more realistic push involves trying to tax companies where the relevant business is conducted. That would address the kind of mismatch – like Apple's ability to report profit in Ireland that's disproportionate compared with its activities there – that Nobel Prize-winning economist Joseph Stiglitz last week called "fraud." That, though, is the point: It isn't fraud unless governments change their tax laws to make it so. Maybe Facebook's seeming arrogance will hasten a tax revamp at home and abroad. For more independent commentary and analysis from Reuters Breakingviews, visit breakingviews.com

Chris Ratcliffe | Bloomberg | Getty Images

The IRS is looking into whether Mark Zuckerberg's company undervalued assets it transferred to its Irish subsidiary in 2010, reducing subsequent U.S. tax bills. In a filing last week, Facebook disclosed a potential liability of $3 billion to $5 billion, plus interest and penalties, if the position taken by the tax enforcers holds up.

Other tech giants including Amazon, Coca-Cola and Microsoft have been under scrutiny, too. But none has demonstrated the hubris of Facebook in failing to satisfy a series of court-backed requests to turn over specific documents, records and data.