7 ms·

Is this actually illegal though? Or is it just clever exploitation of the rules? Tax avoidance is not the same as evasion.

ColanR 7y ago
It's definitely a worthwhile question - whether facebook actually broke the rules, or whether the IRS just wants blood.
teej 7y ago
It sounds like a standard “double Irish” tax scheme. It’s possible FB did the same thing as everyone else and the IRS is just going after one of the big fish to get case law in their favor. If that were to happen, they’d potentially get to go after everyone else who has done it, like Microsoft, Apple, etc.
cbanek 7y ago
Well, I guess it depends on the interpretation of the rules. The point of contention seems to be the valuing of assets, which of course FB has incentive to not value highly: > 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, a move common among U.S. multinationals. Ireland has lower corporate tax rates than the United States, so the move reduced the company’s tax bill. The value of intellectual property is kind of a murky thing, especially before it is fully monetized. So I guess the question comes down to: Did FB executives knowingly undervalue the assets to save money on taxes? Is there a paper trail to that effect?
- SilasX 7y ago
  Part of the problem is, it’s not a legit, best price, arm’s-length, market price. Facebook:Ireland is just a sock puppet for Facebook:USA, and the latter has no intention of selling it to a true outsider. OTOH, if FB:USA sold the rights to FB:I for $1, knowing it would pay billions to license those rights the next year, I don’t get how that can be a proper valuation, even without a clear price discovery mechanism.
  - AnthonyMouse 7y ago
    The real issue is that "market price" legitimately has an amount of slop in it that can eat the company's entire profit. Suppose it costs $50M in salaries to create intellectual property which is then licensed to customers for $500M. Which one is the "market price"? It was sold for both prices, once by the employees to the company and then by the company to the customers. But the difference is a factor of ten. More than that, the difference can be justified. When the $50M is paid, you don't know whether anybody will buy it. Maybe you'll make a billion dollars, or maybe you'll make nothing and just flushed $50M down the toilet. Or maybe you'll make a profit but the profits are spread over future years whereas the work was paid for immediately, so in an arms length market transaction you would expect the price paid to be discounted for the time value of money. So they pay $50M for something they go on to sell for $500M. Which one is the market price? Both of them. This obviously leaves more than enough slack for chicanery.
    - gamblor956 7y ago
      That is not how IP valuation works. The internal cost is not the measure; the potential or actually sales/licensing value of the IP is the measure.
      - AnthonyMouse 7y ago
        What measure? It's two different transactions that occur under different terms at different times. Suppose some code is written by an independent contractor instead of your employees. The contractor is in San Francisco. The San Francisco office pays the contractor, then does nothing more than immediately sell the rights to the code to the Ireland office for approximately the same amount. You just demonstrated that that was the market price -- the contractor was willing to accept it in an arms length transaction with an independent third party. The Ireland office could have just as well paid the contractor directly. What value is the San Francisco office supposed to be adding that justifies being awarded a significant fraction of the total revenue?
        7y ago
- gimmeThaBeet 7y ago
  IANAL, Retroactively going after the valuation of assets based on success years on is awkward at the least, and dangerous at the worst. FB is right, they were still pretty unproven in 2010. It took nearly 1.5 years after their IPO before they convinced people they could make money. I agree, it seems like they would be looking for evidence of undervaluing. But like, let's say you are discount potential cash flows. I don't even know if FB was profitable in 2010, what kind of projected cash flows are you going to have? I just think that if the governments cared about this so much, they would actually fix this. The double irish is going away, but while the US had a chance to fix stuff in 2018, there's still incentive to offshore IP, and in fact, reinforces the advantage of offshoring production.
  - james1071 7y ago
    You don't need to be a lawyer to understand what this is all about and it certainly isn't hindsight, as you have suggested. The reason why the IRS are challenging FB is that Apple's Irish tax arrangements became public and were very embarrassing to the US authorities, which were revealed not to be applying US law. Now, to the matter of hindsight. The essential point is that the transactions have to be a sham to work. There is precisely no point in selling IP from a US subsidiary to one in Ireland at a fair price. That would just trigger an immediate taxable event in the US for no benefit whatsoever. The transaction is by design intended to sell IP at a large undervalue and the game was to satisfy the US and Irish authorities, both of which were happy to play along.
    - gimmeThaBeet 7y ago
      >There is precisely no point in selling IP from a US subsidiary to one in Ireland at a fair price. That would just trigger an immediate taxable event in the US for no benefit whatsoever. Apparently there is if you want to book your international operations in Ireland without the IRS dragging you to court saying you lowballed them a decade ago. Facebook had a funding round in mid 2009, and mid 2010. The 2009 valuation was $9.8B, and $13.8B in 2010. And this case is solely about their ex-US operations, which they're saying basically didn't exist at the time. I mean it's like if you join a startup, how much are your equity options worth? Does the IRS go back and say your options were worth way more because it turns out you were working at the next Netflix or something?
andrepd 7y ago
It's an exploitation of the rules which isn't illegal but should be, but isn't because of lobbies and special interest groups.
Marsymars 7y ago
I think that if there’s no legitimate business purpose to a particular business activity other than avoiding taxes, it qualifies as tax evasion. If that’s not illegal in your particular jurisdiction, that just means you have legalized tax evasion.
- deleted 7y ago
  [deleted]
- TheSpiceIsLife 7y ago
  I understand what you’re trying to say here. And there’s an argument to be made in the other direction too: everyone should be doing everything they legally can, and where it makes financial sense to exert the effort, to avoid paying any more tax than they have to... because giving money and power to politicians is like giving whisky and car keys to teenage boys.
  - asveikau 7y ago
    > And there’s an argument to be made in the other direction too: everyone should be doing everything they legally can, and where it makes financial sense to exert the effort, to avoid paying any more tax than they have to... I hear this a lot and I kind of disagree with the sentiment. I think it's rooted in petty selfishness. If you have enough money, as these companies surely do, good for you, ok. The attitude that sees any additional proceeds as wasted if they "needlessly" go to governments where it gasp might give other people useful public services ... Seems to have priorities in the wrong place. One must have proper perspective when you see financial success. Petty greed over small percentages of huge incomes is not the way to go. There is value in seeing how lucky you are and being happy with what you have, then subsequently seeing your role in our social system as paying some of that back.
    - Sabinus 7y ago
      Apparently some firms used to be like that. Benevolent societies rather than money making machines. Then globalisation happened and those companies were competed out of the market by aggressive multinationals or low wage countries.
keanzu 7y ago
There's no way to know for sure. If it was clearly illegal and Facebook's lawyers thought they were going to lose they'd settle with the IRS. If it clearly wasn't illegal the IRS wouldn't pursue the case. The courts are needed in the fuzzy area to interpret the law and answer the question - was it actually illegal? Other alternatives: If, for example, the IRS has been pressed into the case by public or political pressure they may pursue an unwinnable legal case to win in the court of public opinion or to give other corporations with fewer legal resources than Facebook pause before they engage in similar.
paulddraper 7y ago
> Is this actually illegal though? At the risk of sounding reductive, that is exactly why it is in court: to figure out if it was illegal.
mikorym 7y ago
> Is this actually illegal though? Or is it just clever exploitation of the rules? Tax avoidance is not the same as evasion. IMO illegality has a human and personal component too. I understand your question is about whether what they did was legal or illegal. But let me give you an example of something that is "clearly wrong" but sometimes legal. Let us assume that you buy something (or are paid cash) and the amount is $100. If you pay $20 tax, then we say you are taxed at 20% and the amount becomes $80. So far so good. Now let's suppose that you claim back that $20 and you put it in your pocket. You still have the $80 (or the item you bought). So you net is at $100 whether in cash fully or $20 cash and something worth $80. Now, let us suppose that in this scenario the cash was paid to you (I am specialising away from the case where you are buying something). You thus have $100, and effectively there was no tax. Now assume you go back to the tax office and you tell them that you are reclaiming another 20% on top of the 20% you paid and then reclaimed. Now, suddenly you have $120. You got $40 in tax reclaims but only ever paid $20. This is essentially the cum-ex scandal. [1] Once with and once without. The with part is the tax you reclaimed; the without is the tax you reclaimed with no base for it at all. Note that these are not tax credits, it's hard cash! The cum-ex tactic is not always illegal, and this is why I say that legality is sometimes dubious (but not always). The reason why they could steal 50 BILLION EUROS from the German tax office is exactly because 1) the banks were and are in on it and 2) they lobbied for and blurred the lines of legality. Apparently the German tax office still thinks, even today, that claiming $40 after only ever paying $20 somehow makes sense. [1] https://cumex-files.com/ https://cumex-files.com/
- salawat 7y ago
  Mmmm. There must be some epic level shenanigans going on somewhere to make that kind of tax liability recording even possible. A stock can only have a single holder of record, and only one dividend payment should ever be made to whoever the holder of the stock was at the time of the payment. https://www.bloomberg.com/news/articles/2019-09-02/the-german-tax-case-putting-the-entire-finance-industry-on-trial https://www.bloomberg.com/news/articles/2019-09-02/the-germa... If that article is to be believed, I'd suspect there was a bank who needs some serious auditing; because there is simply no way there should be any ambiguity as to who the stockholder of record is at that time; and the issuance of a multitude of "tax certificates" to multiple individuals implies they fundamentally mishandled that particular taxation event. Transactions are atomic, and serial in nature as far as finances go. Automated or manual. They must resolve down to chronological order. This is also part of the reason the Feds hate structuring, and will stamp it out in any form they can get enough information about in order to recognize it. Don't be like these people ever. There is no moral or fiscal imperative to commit or concoct structures/mechanisms capable of becoming or facilitating tax fraud. Hell, this exact kind of chicanery is why AML/KYC/tax law ends up making normal financial service providing such a slog; because every link in the chain is yet another gear in the machine. If it seems like you're having to go through lot of hoops to do a relatively straightforward transfer of value, odds are, you may be taking part in some form of either structuring or other financial engineering. If you think that's a tenable of affairs, have fun, but when it comes back around, don't be surprised if there isn't much sympathy to be found.
MarkMc 7y ago
It should be illegal. The company has a strong incentive to undervalue the asset, and 98% of the time IP assets are transferred to a related overseas party it is to minimize tax. Countries would be better off if they simply did not allow IP assets to be transferred to a subsidiary in a different country. The IP stays in the country where it was created, or else sold on the open market.
tialaramex 7y ago
Some countries have GAAR a General Anti-Avoidance Rule. Exactly how these rules work varies but e.g. the English law version uses a trick called the Double Reasonableness test. This says avoidance is legal IF a reasonable person (such as a juror) thinks that any reasonable person (here a different hypothetical person that the juror may well not agree with) might think that there was some other reason to do what was done besides to avoid tax. For example, tax free savings accounts are often mentioned as "avoidance" in this context, to suggest that it's somehow nonsense to criminalise avoidance. But saving money is a reasonable thing lots of people might want to do anyway even if there was no tax advantage. On the other hand, a scheme in which rich people pay somebody else to pointlessly buy and sell cars at a loss makes no sense - except that they then claimed a large tax discount as second hand car dealers... One of the cleverest parts of the English scheme is that tax advisers, who sell such schemes to the rich for lots of money, are insulated from any penalty for doing so... As long as they tell the tax authorities how their scheme is supposed to work.
DyslexicAtheist 7y ago
tax avoidance is tax evasion for the rich. the only difference is barrier of entry which starts at around 1MM for avoidance (very low). if you're below that and still insist on playing this game, the tools at your disposal will almost always fall under evasion (and be considered a crime).

ColanR 7y ago

It's definitely a worthwhile question - whether facebook actually broke the rules, or whether the IRS just wants blood.

teej 7y ago

It sounds like a standard “double Irish” tax scheme. It’s possible FB did the same thing as everyone else and the IRS is just going after one of the big fish to get case law in their favor. If that were to happen, they’d potentially get to go after everyone else who has done it, like Microsoft, Apple, etc.

cbanek 7y ago

Well, I guess it depends on the interpretation of the rules. The point of contention seems to be the valuing of assets, which of course FB has incentive to not value highly: > 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, a move common among U.S. multinationals. Ireland has lower corporate tax rates than the United States, so the move reduced the company’s tax bill. The value of intellectual property is kind of a murky thing, especially before it is fully monetized. So I guess the question comes down to: Did FB executives knowingly undervalue the assets to save money on taxes? Is there a paper trail to that effect?

SilasX 7y ago
Part of the problem is, it’s not a legit, best price, arm’s-length, market price. Facebook:Ireland is just a sock puppet for Facebook:USA, and the latter has no intention of selling it to a true outsider. OTOH, if FB:USA sold the rights to FB:I for $1, knowing it would pay billions to license those rights the next year, I don’t get how that can be a proper valuation, even without a clear price discovery mechanism.
- AnthonyMouse 7y ago
  The real issue is that "market price" legitimately has an amount of slop in it that can eat the company's entire profit. Suppose it costs $50M in salaries to create intellectual property which is then licensed to customers for $500M. Which one is the "market price"? It was sold for both prices, once by the employees to the company and then by the company to the customers. But the difference is a factor of ten. More than that, the difference can be justified. When the $50M is paid, you don't know whether anybody will buy it. Maybe you'll make a billion dollars, or maybe you'll make nothing and just flushed $50M down the toilet. Or maybe you'll make a profit but the profits are spread over future years whereas the work was paid for immediately, so in an arms length market transaction you would expect the price paid to be discounted for the time value of money. So they pay $50M for something they go on to sell for $500M. Which one is the market price? Both of them. This obviously leaves more than enough slack for chicanery.
  - gamblor956 7y ago
    That is not how IP valuation works. The internal cost is not the measure; the potential or actually sales/licensing value of the IP is the measure.
    - AnthonyMouse 7y ago
      What measure? It's two different transactions that occur under different terms at different times. Suppose some code is written by an independent contractor instead of your employees. The contractor is in San Francisco. The San Francisco office pays the contractor, then does nothing more than immediately sell the rights to the code to the Ireland office for approximately the same amount. You just demonstrated that that was the market price -- the contractor was willing to accept it in an arms length transaction with an independent third party. The Ireland office could have just as well paid the contractor directly. What value is the San Francisco office supposed to be adding that justifies being awarded a significant fraction of the total revenue?
      - 7y ago
gimmeThaBeet 7y ago
IANAL, Retroactively going after the valuation of assets based on success years on is awkward at the least, and dangerous at the worst. FB is right, they were still pretty unproven in 2010. It took nearly 1.5 years after their IPO before they convinced people they could make money. I agree, it seems like they would be looking for evidence of undervaluing. But like, let's say you are discount potential cash flows. I don't even know if FB was profitable in 2010, what kind of projected cash flows are you going to have? I just think that if the governments cared about this so much, they would actually fix this. The double irish is going away, but while the US had a chance to fix stuff in 2018, there's still incentive to offshore IP, and in fact, reinforces the advantage of offshoring production.
- james1071 7y ago
  You don't need to be a lawyer to understand what this is all about and it certainly isn't hindsight, as you have suggested. The reason why the IRS are challenging FB is that Apple's Irish tax arrangements became public and were very embarrassing to the US authorities, which were revealed not to be applying US law. Now, to the matter of hindsight. The essential point is that the transactions have to be a sham to work. There is precisely no point in selling IP from a US subsidiary to one in Ireland at a fair price. That would just trigger an immediate taxable event in the US for no benefit whatsoever. The transaction is by design intended to sell IP at a large undervalue and the game was to satisfy the US and Irish authorities, both of which were happy to play along.
  - gimmeThaBeet 7y ago
    >There is precisely no point in selling IP from a US subsidiary to one in Ireland at a fair price. That would just trigger an immediate taxable event in the US for no benefit whatsoever. Apparently there is if you want to book your international operations in Ireland without the IRS dragging you to court saying you lowballed them a decade ago. Facebook had a funding round in mid 2009, and mid 2010. The 2009 valuation was $9.8B, and $13.8B in 2010. And this case is solely about their ex-US operations, which they're saying basically didn't exist at the time. I mean it's like if you join a startup, how much are your equity options worth? Does the IRS go back and say your options were worth way more because it turns out you were working at the next Netflix or something?

andrepd 7y ago

It's an exploitation of the rules which isn't illegal but should be, but isn't because of lobbies and special interest groups.

Marsymars 7y ago

I think that if there’s no legitimate business purpose to a particular business activity other than avoiding taxes, it qualifies as tax evasion. If that’s not illegal in your particular jurisdiction, that just means you have legalized tax evasion.

deleted 7y ago
[deleted]
TheSpiceIsLife 7y ago
I understand what you’re trying to say here. And there’s an argument to be made in the other direction too: everyone should be doing everything they legally can, and where it makes financial sense to exert the effort, to avoid paying any more tax than they have to... because giving money and power to politicians is like giving whisky and car keys to teenage boys.
- asveikau 7y ago
  > And there’s an argument to be made in the other direction too: everyone should be doing everything they legally can, and where it makes financial sense to exert the effort, to avoid paying any more tax than they have to... I hear this a lot and I kind of disagree with the sentiment. I think it's rooted in petty selfishness. If you have enough money, as these companies surely do, good for you, ok. The attitude that sees any additional proceeds as wasted if they "needlessly" go to governments where it gasp might give other people useful public services ... Seems to have priorities in the wrong place. One must have proper perspective when you see financial success. Petty greed over small percentages of huge incomes is not the way to go. There is value in seeing how lucky you are and being happy with what you have, then subsequently seeing your role in our social system as paying some of that back.
  - Sabinus 7y ago
    Apparently some firms used to be like that. Benevolent societies rather than money making machines. Then globalisation happened and those companies were competed out of the market by aggressive multinationals or low wage countries.

keanzu 7y ago

There's no way to know for sure. If it was clearly illegal and Facebook's lawyers thought they were going to lose they'd settle with the IRS. If it clearly wasn't illegal the IRS wouldn't pursue the case. The courts are needed in the fuzzy area to interpret the law and answer the question - was it actually illegal? Other alternatives: If, for example, the IRS has been pressed into the case by public or political pressure they may pursue an unwinnable legal case to win in the court of public opinion or to give other corporations with fewer legal resources than Facebook pause before they engage in similar.

paulddraper 7y ago

> Is this actually illegal though? At the risk of sounding reductive, that is exactly why it is in court: to figure out if it was illegal.

mikorym 7y ago

> Is this actually illegal though? Or is it just clever exploitation of the rules? Tax avoidance is not the same as evasion. IMO illegality has a human and personal component too. I understand your question is about whether what they did was legal or illegal. But let me give you an example of something that is "clearly wrong" but sometimes legal. Let us assume that you buy something (or are paid cash) and the amount is $100. If you pay $20 tax, then we say you are taxed at 20% and the amount becomes $80. So far so good. Now let's suppose that you claim back that $20 and you put it in your pocket. You still have the $80 (or the item you bought). So you net is at $100 whether in cash fully or $20 cash and something worth $80. Now, let us suppose that in this scenario the cash was paid to you (I am specialising away from the case where you are buying something). You thus have $100, and effectively there was no tax. Now assume you go back to the tax office and you tell them that you are reclaiming another 20% on top of the 20% you paid and then reclaimed. Now, suddenly you have $120. You got $40 in tax reclaims but only ever paid $20. This is essentially the cum-ex scandal. [1] Once with and once without. The with part is the tax you reclaimed; the without is the tax you reclaimed with no base for it at all. Note that these are not tax credits, it's hard cash! The cum-ex tactic is not always illegal, and this is why I say that legality is sometimes dubious (but not always). The reason why they could steal 50 BILLION EUROS from the German tax office is exactly because 1) the banks were and are in on it and 2) they lobbied for and blurred the lines of legality. Apparently the German tax office still thinks, even today, that claiming $40 after only ever paying $20 somehow makes sense. [1] https://cumex-files.com/ https://cumex-files.com/

salawat 7y ago
Mmmm. There must be some epic level shenanigans going on somewhere to make that kind of tax liability recording even possible. A stock can only have a single holder of record, and only one dividend payment should ever be made to whoever the holder of the stock was at the time of the payment. https://www.bloomberg.com/news/articles/2019-09-02/the-german-tax-case-putting-the-entire-finance-industry-on-trial https://www.bloomberg.com/news/articles/2019-09-02/the-germa... If that article is to be believed, I'd suspect there was a bank who needs some serious auditing; because there is simply no way there should be any ambiguity as to who the stockholder of record is at that time; and the issuance of a multitude of "tax certificates" to multiple individuals implies they fundamentally mishandled that particular taxation event. Transactions are atomic, and serial in nature as far as finances go. Automated or manual. They must resolve down to chronological order. This is also part of the reason the Feds hate structuring, and will stamp it out in any form they can get enough information about in order to recognize it. Don't be like these people ever. There is no moral or fiscal imperative to commit or concoct structures/mechanisms capable of becoming or facilitating tax fraud. Hell, this exact kind of chicanery is why AML/KYC/tax law ends up making normal financial service providing such a slog; because every link in the chain is yet another gear in the machine. If it seems like you're having to go through lot of hoops to do a relatively straightforward transfer of value, odds are, you may be taking part in some form of either structuring or other financial engineering. If you think that's a tenable of affairs, have fun, but when it comes back around, don't be surprised if there isn't much sympathy to be found.

MarkMc 7y ago

It should be illegal. The company has a strong incentive to undervalue the asset, and 98% of the time IP assets are transferred to a related overseas party it is to minimize tax. Countries would be better off if they simply did not allow IP assets to be transferred to a subsidiary in a different country. The IP stays in the country where it was created, or else sold on the open market.

tialaramex 7y ago

Some countries have GAAR a General Anti-Avoidance Rule. Exactly how these rules work varies but e.g. the English law version uses a trick called the Double Reasonableness test. This says avoidance is legal IF a reasonable person (such as a juror) thinks that any reasonable person (here a different hypothetical person that the juror may well not agree with) might think that there was some other reason to do what was done besides to avoid tax. For example, tax free savings accounts are often mentioned as "avoidance" in this context, to suggest that it's somehow nonsense to criminalise avoidance. But saving money is a reasonable thing lots of people might want to do anyway even if there was no tax advantage. On the other hand, a scheme in which rich people pay somebody else to pointlessly buy and sell cars at a loss makes no sense - except that they then claimed a large tax discount as second hand car dealers... One of the cleverest parts of the English scheme is that tax advisers, who sell such schemes to the rich for lots of money, are insulated from any penalty for doing so... As long as they tell the tax authorities how their scheme is supposed to work.

DyslexicAtheist 7y ago

tax avoidance is tax evasion for the rich. the only difference is barrier of entry which starts at around 1MM for avoidance (very low). if you're below that and still insist on playing this game, the tools at your disposal will almost always fall under evasion (and be considered a crime).