On May 22, 2025, the United States Tax Court issued a landmark decision in Facebook, Inc. & Subsidiaries v. Commissioner (164 T.C. No. 9, Docket No. 21959-16), setting a significant precedent in transfer pricing and cost sharing agreements (CSAs).
Background
In 2009, Facebook entered into a cost-sharing agreement with its Irish subsidiary, transferring rights to intangible assets outside the US. The company valued these assets at USD 6.3 billion, but the IRS, applying the income method, estimated them at USD 19.9 billion.
Facebook challenged both the method and the assumptions used by the IRS, arguing that both parties contributed non-routine intangibles and that the IRS’s projections were inflated.
The Tax Court ruled that:
- The income method was appropriate, as only the US parent contributed non-routine intangibles.
However, the IRS’s inputs were unreliable and were therefore adjusted:
- Facebook’s internal projections were used.
- A discount rate of 17.7% (EY) was adopted.
- A 13.9% was applied as a cost-plus licensing alternative.
- As a result, the adjusted value of the intangibles was set at USD 7.8 billion.
In addition:
- The 2009 regulations were validated.
- It was rejected that the NPV must be positive for taxpayers in a CCA.
- The IRS’s approach of projecting profits in perpetuity to calculate the cost share was accepted as reasonable, although subject to corrected inputs.
Court Decision
The Tax Court upheld the IRS’s use of the income method but found that the application of this method was unreasonable due to the selection of inappropriate inputs, such as incorrect revenue projections and discount rates. In addition, the Court concluded that only Facebook US made a non-routine platform contribution, thus allowing the application of the income method rather than the residual profit split method (RPSM).
Implications for multinationals
This ruling emphasizes the importance of correctly classifying contributions in CSAs and selecting appropriate methods and inputs for the valuation of intangibles. Multinational companies should carefully review and document their cost allocation agreements and associated valuations to ensure compliance with tax regulations and avoid similar disputes.
Conclusion
The Facebook decision highlights the complexity of transfer pricing agreements and the need for meticulous tax planning. Companies must be prepared to defend their valuations and methods before tax authorities, ensuring that they accurately reflect the economic reality of their international operations.
Do you need advice on transfer pricing?
At TPC Group, we have experts who can help you structure and document your intercompany operations in accordance with best practices and current regulations. Contact us for a specialized consultation.
Source: TPCases