Social networking major Facebook may face a huge blow to its finances if it loses a tax liability case related to shifting of its global operations to Ireland in 2010.
The Internal Revenue Service (IRS) has sent a notice of deficiency to the company for $3bn to $5bn.
The notice was based on the agency’s audit of valuations of Facebook’s assets during its transfer of operations to Ireland.
While the company is planning to challenge the notice in federal tax court, the liabilities are estimated to have an adverse impact on its balance sheet.
The Social media giant said in a regulatory filing: “In addition, the determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment by management, and there are many transactions where the ultimate tax determination is uncertain.”
The IRS has asked a federal magistrate judge in California to compel the company to provide detailed internal corporate records related to the value of the assets moved to Ireland.
Facebook spokeswoman Bertie Thomson was quoted by Bloomberg as saying: “Facebook complies with all applicable rules and regulations in the countries where we operate.”
According to court filings, the agency alleged that Facebook’s tax adviser Ernst & Young undervalued the company’s assets as they were transferred to Facebook Ireland Holdings.
After receiving documents related to transfer of Facebook’s licenses and assets, the IRS started probing the transaction in 2013.
The document contained the details about agreements related to the division of users and marketing, the online platform and cost sharing.
After carrying out an investigation, IRS officials identified that EY’s followed a conflicting method of measuring the value of Facebook’s assets.
The court filings show that Facebook rejected a preliminary presentation given by tax official in April 2015, the publication reported.
Following the rejection, the IRS stepped up its investigation to establish that projections made by E&Y were “flawed”.
In June, the officials filed a request to access the company’s records by issuing court summons.
The court filing said that Facebook did not appear on 17 June and 29 June at the IRS’s offices in San Jose, California.