Facebook Ordered to Comply With U.S. Tax Probe of Irish Unit

(Bloomberg) -- Facebook Inc. must allow a U.S. judge to inspect documents it has avoided showing the Internal Revenue Service as part of an investigation into the company’s use of an Irish subsidiary for tax purposes.

U.S. Magistrate Judge Laurel Beeler ordered Facebook on Tuesday to let her review a selection of records it has claimed are protected by attorney-client and tax-practitioner privilege. The IRS said the social network was improperly withholding the documents, “which relate to decisions made by Facebook to establish an overseas headquarters in Dublin" as part of a tax strategy, according to a memorandum filed last month.

The probe, which could cost the company as much as $5 billion in additional tax liability, is adding to Facebook’s woes amid public outcry over its privacy practices. The social network has become the target of a wave of lawsuits following revelations that profile information was harvested without user permission on behalf of a research firm that worked for President Donald Trump’s campaign.

Facebook said in December that it was changing its tax structure to avoid funneling money through its Irish unit. The company said it will move to a “local selling structure” in countries where it has an office to support sales to local advertisers. Menlo Park, California-based Facebook shifted its international business operations to Ireland in 2010.

A spokeswoman for the company, Nora Chan, declined to comment. Facebook didn’t object to the judge’s review of the documents "if the court deems it necessary," according to Tuesday’s order.

The materials the IRS is seeking relate to the transfer of “core intangible assets” offshore, and may show whether the transaction was conducted at an appropriate "arm’s length price," according to the Justice Department’s tax division. They include dozens of emails between Facebook executives, outside lawyers and representatives from Ernst & Young LLP regarding business structures and tax exposure analysis.

The case is U.S. v. Facebook Inc. and Subsidiaries, 3:16-cv-03777, U.S. District Court, Northern District of California (San Francisco).

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