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I doubt facebook committed a crime here. The right way to address tax avoidance is to change the law, not to punish companies that comply with the law through a

I doubt facebook committed a crime here. The right way to address tax avoidance is to change the law, not to punish companies that comply with the law through arbitrary levels of complexity. 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.

saalweachter 7y ago
Legal precedent is a portion of the law. 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.
- ksec 7y ago
  There is nothing in the case suggest the international schemes are illegal. Even the IRS is not trying to push for that. "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.
  - ska 7y ago
    You latter point doesn't really make sense to me. Isn't it true that a sale of IP should model the value of the IP over its lifetime in some reasonable way? And that would include a growth model for FB, no? 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?
    - ksec 7y ago
      >Isn't it true that a sale of IP should model the value of the IP over its lifetime in some reasonable way? 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.
      - ska 7y ago
        Agreed, of course there isn't a "right" way. But companies should be internally consistent in how they do these things. 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.
  - saalweachter 7y ago
    It's also legal to claim your home office as a business expense, but most accountants will tell you to be really certain you don't use your home office for non-business use, because of the copious precedent for people getting in trouble when it turns out that their home office was really more of a guest bedroom / sometimes home office / sometimes gaming den. Fill in a suitable analogy with "selling IP to a shell company for a song".
rtkwe 7y ago
I think there's room to argue that intentionally shipping all your IP to a lower tax country then charging the main company (that developed that IP in the first place) high fees to use that IP as a way to shift profits from higher tax areas to lower tax areas could constitute fraud. Either they sold/transferred the IP for way to little or they're charging themselves way too much because it's advantageous for taxes.
- Mirioron 7y ago
  Here's the million/billion/trillion dollar question: how much is a brand worth? Clearly it is worth something. Facebook can do the most inane thing, but if they put their brand on it then it will have some value. 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.
  - rtkwe 7y ago
    That is the tough bit for sure in trying to tell up front if an IP transfer is just a setup for tax avoidance. You can tell after the fact though just by seeing how much the company claims it's worth to use. 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.
    - iguy 7y ago
      How well would VAT work for services like this? 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.
      - Mirioron 7y ago
pbalau 7y ago
It gets even more complicated than that. Not even close to all FB IP was developed in US. There is a great deal of custom integrations built across the world, in smaller offices dedicated to a particular market. Then you have things built in UK (say, Workplace). Then you have the even more complex case when a piece of tech is first developed in US, makes or not some money, then is taken over by an UK team, which tweaks, extends, rebuilds, whatever and makes some more money, then returns to an US team and so on. 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.

saalweachter 7y ago

Legal precedent is a portion of the law. 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.

ksec 7y ago
There is nothing in the case suggest the international schemes are illegal. Even the IRS is not trying to push for that. "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.
- ska 7y ago
  You latter point doesn't really make sense to me. Isn't it true that a sale of IP should model the value of the IP over its lifetime in some reasonable way? And that would include a growth model for FB, no? 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?
  - ksec 7y ago
    >Isn't it true that a sale of IP should model the value of the IP over its lifetime in some reasonable way? 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.
    - ska 7y ago
      Agreed, of course there isn't a "right" way. But companies should be internally consistent in how they do these things. 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.
- saalweachter 7y ago
  It's also legal to claim your home office as a business expense, but most accountants will tell you to be really certain you don't use your home office for non-business use, because of the copious precedent for people getting in trouble when it turns out that their home office was really more of a guest bedroom / sometimes home office / sometimes gaming den. Fill in a suitable analogy with "selling IP to a shell company for a song".

rtkwe 7y ago

I think there's room to argue that intentionally shipping all your IP to a lower tax country then charging the main company (that developed that IP in the first place) high fees to use that IP as a way to shift profits from higher tax areas to lower tax areas could constitute fraud. Either they sold/transferred the IP for way to little or they're charging themselves way too much because it's advantageous for taxes.

Mirioron 7y ago
Here's the million/billion/trillion dollar question: how much is a brand worth? Clearly it is worth something. Facebook can do the most inane thing, but if they put their brand on it then it will have some value. 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.
- rtkwe 7y ago
  That is the tough bit for sure in trying to tell up front if an IP transfer is just a setup for tax avoidance. You can tell after the fact though just by seeing how much the company claims it's worth to use. 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.
  - iguy 7y ago
    How well would VAT work for services like this? 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.
    - Mirioron 7y ago

pbalau 7y ago

It gets even more complicated than that. Not even close to all FB IP was developed in US. There is a great deal of custom integrations built across the world, in smaller offices dedicated to a particular market. Then you have things built in UK (say, Workplace). Then you have the even more complex case when a piece of tech is first developed in US, makes or not some money, then is taken over by an UK team, which tweaks, extends, rebuilds, whatever and makes some more money, then returns to an US team and so on. 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.