Twitter Inc. today (May 3rd) released its Form 10-Q for the quarter ended March 31, 2016. Buried inside the 10-Q, Twitter disclosed its IRS audit has not been completed. Twitter Inc. is being audited for the tax years of 2011, 2012, and 2013. Based upon SEC filings, the audit has been going on for over a year.
Tax Man, Oh Yeah. Twitter first disclosed the Federal tax audit in the third quarter of 2014. At the time the IRS was only look at the tax year of 2012. But then in the next quarter, the fourth quarter of 2014, the IRS expanded the audit by examining the prior tax year of 2011. Finally, in the first quarter of 2015, Twitter disclosed that the IRS was also looking at the tax year of 2013.
Twitter has not had taxable income in its history. In fact as of December 31, 2015, Twitter has tax loss carry forwards of $3.37 billion. That amount can be used to reduce any future taxable income. Said another way, Twitter will not owe any Federal income taxes for long time.
Lucky Charms. So the IRS could be looking into other tax issues. For example, the IRS may be interested in the tax strategy which allows companies to shift domestic income overseas. This strategy is common among tech companies such as Google, Apple, Microsoft, and others. Taxable income is sent to other places with lower tax rates than the United States such as Ireland.
It easy, especially for tech companies, to execute this tax strategy due to intellectual property. Here how it can work: a U.S. tech company transfers a patent to a subsidiary in Ireland. The Irish subsidiary then charges the U.S. parent a royalty to use the patent. The payment by the U.S. company reduces the its taxable income. And the royalty income received by foreign Irish subsidiary is taxed at low rate.
As long as the cash received by subsidiary stays in Ireland, the income is never subject to U.S.taxes. This is one reason tech companies hold so much of their cash overseas. It is another reason why Apple issued bonds to pay dividends to shareholders; otherwise, by bringing the back the cash to the U.S., Apple would have been required to pay more in Federal taxes.
Jack in a Box? All this brings us back to Twitter. Twitter established and currently has an Irish subsidiary. Twitter move its international operations to Dublin in 2011. Twitter also disclosed in the recent 10-Q, that it had overseas cash of $160 million, that if return to the U.S. would be subject to taxation.
One can only speculate why the IRS is looking into Twitter. And it could only be coincidence that the IRS is expanded its audit from 2012 into 2011; the same year Twitter established a presence in Ireland. For example, upon auditing the tax year of 2012, the IRS could have discovered something which caused them look into the prior year of 2011.
Twitter’s tax audit is important because it come mean the IRS is taking a closer look into the tax practices of tech companies as happen with Google, also in 2011.
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