Facebook tax loophole draws fire

A man holds a sign in front of the NASDAQ stock exchange prior to Facebook IPO opening, at on Times Square in New York, on May 18, 2012. Facebook shares saw an opening pop fade Friday as the wildly popular social network made its long-anticipated market debut. The shares, priced at $38 in the largest-ever initial public offering (IPO) for a technology company, jumped 12 percent to $42.55 in the opening Nasdaq trades before enthusiasm faded. The shares dropped back all the way to the $38 offering price before showing modest gains at midday. EMMANUEL DUNAND/AFP/GettyImages

(MoneyWatch) Newly public technology titan. Cultural icon. Tax-dodger? Even as Facebook (FB) today lifted the curtain on its initial public offering, the Internet company is already being accused of seeking to avoid paying its fair share in taxes.

On the eve of Facebook's stock offering, Sen. Carl Levin, D, Mich., said Thursday that the social networking firm plans to claim tax deductions worth $16 billion, or the same sum the company raised in the IPO. A Facebook regulatory filing confirmed that the company intends to take the huge deduction. That would enable Facebook to collect a $500 million tax refund spanning the last two years and effectively zero out its 2012 tax bill, the Michigan Democrat said in remarks from the Senate floor.

Facebook also plans to capitalize on its massive deductions to create a "net operating loss" -- a legal corporate bookkeeping maneuver under which companies may use past financial losses to offset future taxable income -- to reduce its taxes for years to come, Levin said in attacking what he described as a gigantic tax loophole. Facebook did not immediately respond to a request for comment.

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U.S. tax law allows Facebook to deduct hundreds of millions of dollars' worth of stock options that the social networker has issued to CEO Mark Zuckerberg and other top company executives, Levin contends. In its accounting, that means Facebook can record the value of these options at only a few cents per share.

The tax savings come down the road when Facebook files its taxes and books the options at closer to their market value, which hovered around $38 in afternoon trading Friday. The company could then deduct that larger amount, according to the Sunlight Foundation, a Washington advocacy group for government and corporate transparency.

"As with so much of our tax code, it is not the lawbreaking that shocks the conscience, it is the stuff that is allowed... . Facebook's $16 billion tax deduction brings the issue into sharp focus," Levin said. "This profitable corporation will stop paying any federal corporate income taxes simply because it gave hundreds of millions of stock options to its executives. It will go from a corporate citizen that paid its taxes, to one that not only pays no taxes to Uncle Sam on its profits, but gets a tax refund." 

Martin Sullivan, chief economist at publisher Tax Analysts, notes that companies are allowed under the law to deduct the value of their expenses. But he agrees that the deductibility of stock options amounts to a loophole. In essence, Facebook is allowed to take a tax deduction that may not match up with its future income. "The problem is that Facebook isn't paying any taxes on this incredible accumulation of value," he said. "The company is now worth somewhere north of $100 billion, and they should be paying taxes on that increase in value."

Facebook has also recently drawn fire over reports alleging that company co-founder Eduardo Saverin had renounced his U.S. citizenship and moved to Singapore to escape paying federal income tax. Saverin, a native of Brazil who helped Facebook get off the ground while a classmate of Zuckerberg at Harvard University, ended his professional relationship with the company years ago. 

Saverin pushed back this week against the claim that he had left the country to dodge taxes, telling The New York Times that he will owe "hundreds of millions of dollars" in taxes to the U.S. government. But that has not stopped lawmakers in Washington from blasting Saverin. Sens. Charles Schumer, D.-N.Y., and Bob Casey, D-Pa., have introduced a bill that would "presume" that any U.S. expatriate with a net worth of at least $2 million and an average income-tax bill of at least $148,000 over the last five years has renounced their citizenship specifically to avoid taxes.

"We simply cannot allow the ultra-wealthy to write their own rules," said Sen. Casey in a statement Thursday in presenting the measure. "Mr. Saverin has benefited greatly from being a citizen of the United States but he has chosen to cast it aside and leave U.S. taxpayers with the bill. Renouncing citizenship to simply avoid paying your fair share is an insult to middle-class Americans, and we will not accept it."

A divided Congress means the law is unlikely to pass anytime soon, if ever. But the tough talk underscores the new political complexities confronting Facebook now that it is public. Like Apple (AAPL), GE (GE), Google (GOOG), and other U.S. multinationals accused of dodging taxes in recent years, Facebook is now an open book required to disclose how it does business. And because its popularity is central to the company's business model and growth, Facebook's reputation as a good corporate citizen is likely to matter more than ever.

For now, such concerns are unlikely to discourage the millions of investors eager to buy a piece of Facebook, said Bill Allison, editorial director of the Sunlight Foundation. But with shareholder activism growing as investors seek greater influence in managing companies, that could change. "There's potential for shareholders to push companies in a different direction," he said.

  • Alain Sherter On Twitter»

    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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