The U.S. Internal Revenue Service is examining Facebook Inc over its transfer of various rights associated with its worldwide business to a holding company in Ireland, according to court papers.
The U.S. Justice Department filed a lawsuit on Wednesday in federal court in San Francisco seeking to enforce IRS summonses served on Facebook and to force the world's largest social network to produce various documents as part of the probe.
The lawsuit said the documents relate to an IRS examination of the company's tax liability for 2010, when Facebook's tax return reported royalty income from transfers of intangible property to Facebook Ireland Holdings Unlimited.
"Facebook complies with all applicable rules and regulations in the countries where we operate," Anteneh Daniel, a spokesperson for the company, said in a statement on Thursday.
Facebook transferred to the Irish company rights associated with its worldwide business, with the exception of the United States and Canada, the lawsuit said.
Facebook reduces its tax bill by having non-U.S. clients pay advertising fees directly to an Irish subsidiary called Facebook Ireland Ltd.
This subsidiary reported revenues of 4.8 billion euros in 2014, the last year for which accounts are available.
But Facebook Ireland Ltd reports low taxable profit, of just 13 million euros in 2014, because it pays a significant chunk of its revenue to another Irish-registered company called Facebook Ireland Holdings, in return for the use of the Facebook platform.
The lawsuit said Facebook retained accounting firm Ernst & Young to value the transfers for tax purposes, but noted that information gathered by the IRS to date suggested that the valuation approach was "problematic."
(Reporting by Nate Raymond in New York and Tom Bergin in London; Editing by Bernadette Baum and Richard Chang)
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