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 intangible rights out of the US. The company appraised these assets at $6.3 billion, but the IRS, applying the income method, estimated them at $19.9 billion.
Facebook challenged both the method and the assumptions employed 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.
Conversely, the IRS’s inputs were unreliable and, therefore:
- Facebook’s internal projections were used.
- A discount rate of 17.7% (EY) was adopted.
- A 13.9% cost-plus licensing alternative was applied.
- As a result, the adjusted value of the intangibles was set at $7.8 billion.
In additions:
- The 2009 regulations were validated.
- It was rejected that the Net Present Value must be positive for taxpayers in a Capital Cost Allowance.
- 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 determined that the application thereof was unreasonable due to the selection of inappropriate inputs, such as incorrect revenue projections and discount rates. Furthermore, 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 highlights the need to accurately classify contributions in CSAs and select suitable methods and inputs for appraising intangibles. Multinational companies should carefully review and document their cost-sharing agreements and associated appraisals to ensure compliance with tax regulations and avoid similar disputes.
Conclusion
The decision in the Facebook case highlights the complexity of Transfer Pricing agreements and the need for thorough tax planning. Companies must be prepared to defend their appraisals and methods before tax authorities, ensuring that they accurately reflect the economic reality of their international operations.
Need Transfer Pricing Advice?
At TPC Group, we have experts at your disposal to structure and document your intercompany operations under best practices and current regulations. Contact us for customized consulting.
Source: TPCases