Facebook, the social network giant on the verge of a huge initial public stock offering, pays an unusually high tax rate, but that is likely to change soon, analysts said.
At 41 percent on an effective basis, Facebook's tax rate is well above rates paid by larger, more mature high-tech groups, and above the top U.S. corporate income tax rate of 35 percent.
But the exercise by investors of millions of stock options after the IPO, along with the opportunity for Facebook to shift more earnings overseas like other tech firms, will pull down its tax rate almost immediately, experts said.
This is going to be a temporary thing, this high rate. That will go away quickly, said Robert Willens, author of the Willens Report, a publication about tax and accounting.
Facebook attributed its high tax rate to losses outside the United States which were not tax deductible and to non-deductible share-based compensation.
Post-IPO Facebook will get an instant tax break when its employees and other shareholders exercise non-qualified stock options. When that happens, the option holder pays tax on the proceeds, while the option issuer books a compensation expense.
That expense translates into a deduction from corporate taxes, said Tom Porter, a vice president with NERA Economic Consulting, and a former staff member at the Financial Accounting Standards Board, the U.S. accounting rulemaker.
Depending on the stock price at the time, if all 187 million of Facebook's vested non-qualified options were exercised in 2012, that could generate a corporate income tax deduction somewhere over $1 billion, according to the Facebook IPO filing.
That alone could wipe away its 2012 tax bill and still leave deductions to offset taxes paid in the two prior years.
BIG REFUND SEEN
Facebook executives could not make any comment on their tax rate beyond what is in the filing due to restrictions on communicating during the period leading up to a stock sale, a spokeswoman for the company said.
In its filing, Facebook said the impact of exercising the options could produce a tax refund of up to $500 million and payable to us during the first six months of 2013.
The company's current 41 percent effective tax rate far exceeds that of firms such as Yahoo! Inc, at 29 percent for 2011; Google Inc, at 21 percent for 2011; and Apple Inc, at 24.2 percent for fiscal 2011 ended in September.
Even some new firms pay lower rates, including game designer Zynga Inc, which reported a 2010 tax rate of 28.7 percent, according to its December 15 registration statement.
One major reason for that difference is Facebook's unusual balance of foreign and U.S. earnings.
Many technology companies that have successfully cut their tax rates, including Apple and Google, attribute it to their substantial earnings in overseas markets with lower tax rates. Over time, those earnings build up.
Today Apple holds $54 billion in profits outside the United States, according to its most recent annual report.
Google has $24.8 billion in gains overseas.
If either company were to bring that money back to the United States to invest here, it would have to pay U.S. corporate income tax at that time.
But as long as those profits stay abroad, only the host country's tax is due. No U.S. income tax must be paid on them.
Facebook had significant non-U.S. revenue of $1.6 billion in 2011, but the filings show the company had a net tax benefit, or refund on its operations abroad each of the past three years.
Only $348 million of its $3.9 billion in cash and securities is held outside the United States, and the company has paid U.S. tax on that global cash already, it said.
OVERSEAS LOSSES CITED
Investors will push the company to find legal ways to lower its bill, and the company already has a significant unit in low-tax Ireland, where many rivals operate as well, Willens noted.
For technology firms, drug makers and others with valuable intellectual property, it is fairly standard to house new technologies in low-tax countries and license it to operations in high-tax countries, like the United States, he said.
It is possible that other factors could increase the company's taxes down the line, but there will be a lot of pressure on them to bring that tax rate in line with peers, said Willens.
(For more tax and accounting coverage please visit http://blogs.reuters.taxbreak/)
(Reporting by Nanette Byrnes; Editing by Kevin Drawbaugh and Richard Chang)