Effective September 15, 2010, Facebook, Inc. (Facebook US) and two Irish affiliates (Facebook Ireland Holdings Unlimited and Facebook Ireland Limited, collectively referred to as Facebook Ireland) entered a Cost Sharing Arrangement (CSA).
The CSA required Facebook US and Facebook Ireland to engage in a PCT, compensating each other for the value of any platform contributions made. Pursuant to the PCT, they granted each other the right to use any existing online platform technology in their respective territories: the United States and Canada for Facebook US and the rest of the world for Facebook Ireland.
Facebook Ireland made payments to Facebook US on the basis of Facebook US’ valuation of these agreements at a September 10 net present value of $6.3 billion. In addition to a PCT payment to compensate Facebook US for its upfront PCT contributions, Facebook Ireland was required by the regulations to make CST payments to compensate Facebook US for ongoing intangible development costs (IDCs) in proportion to its RAB share from exploiting the cost-shared intangibles. For 2010, the Company reported a RAB share of 44% for Facebook Ireland.
The IRS argued that the NPV of the assets Facebook US contributed to the CSA was $19.945 billion, as opposed to the Company’s valuation of $6.3 billion. The IRS also calculated Facebook Ireland’s RAB share to be 53.5% for 2010, which would result in an increase in costs to Facebook Ireland and a reduction in costs for Facebook US.
The Court addressed whether Facebook Ireland made a non-routine platform contribution. Facebook had argued that the IRS overlooked non-routine platform contributions, revenue projections and Facebook’s realistic alternatives. The Court concluded that only Facebook US made a non-routine platform contribution and that the income method was the best method for valuation in this case. Furthermore, it was determined that applying the income method on an aggregate basis for the Facebook online platform technology, user community rights, and marketing intangibles was the most reliable measure.
However, Judge Pugh stated that the IRS used erroneous inputs when applying the income method. The primary incorrect inputs identified were the financial projections and discount rates. Utilising revised inputs, the Court estimated a PCT payment of $7.786 billion, which surpasses the $6.3 billion value originally reported by Facebook.
The IRS calculated the RAB share for the CST payment using the NPV of projected gross profits into perpetuity. The Court found this consistent with the regulations and deemed it to be the most reliable estimate when using the appropriate inputs. The IRS calculated Facebook Ireland’s RAB share to be 53.5% for 2010.
Judge Pugh has directed the parties to recompute the CST Payment in Rule 155 computations using the corrected inputs.