The IRS Hits Symantec with a $1 Billion Tax Bill

GnoWay writes "Macworld is reporting that the IRS has charged Symantec Corporation with about a 900 million dollar tax bill due to the charge that Symantec and Veritas (purchased by Symantec last year) under-reported the value of intellectual property which they had transferred to their two Irish subsidiaries. Another $100 million is connected to Symantec's 2003 and 2004 reports."

Re:Valueing intellectual property?

[pizzaman100]

Rambus [yahoo.com] is worth 4.7 Billion, so it's definitly worth something.

Re:Valueing intellectual property?

[Daniel_Staal]

The same way you assign a value to anything else in a capitalist system: by what the market price for it is. (Or would be, if it were on the market.)

That price is influenced both by what people are willing to pay for it and what you are willing to sell it for. If the two go to far out of wack, you either get obcene profits or bankrupsy. (Depending on which way they are out of wack.) In the former case, someone else should enter the market, and start a price war. In the latter, you are being forced out.

Re:Values of Non-Physical Objects

[William_Lee]

Seriously, though, how does one value these things? For that matter, what intellectual property is this? The article is rather vague.

It's IP based off an acquistion of a company called Veritas that the public financial market valued at over $10 billion in total. What appears to have happened here is that Symantec doesn't believe that something they bought in the deal is worth anything near what the IRS is claiming it is worth. I'm no CPA but I'm guessing it's related to how Symantec is calculating the goodwill involved in the acquistion.

Symantec bought into Veritas's problems.

[black2d]

From the article the 900 million is "in connection with the Veritas claim, which covers the 2000 and 2001 Veritas tax returns" So symantec basicly got screwed in the whole deal , bought a company then has to pay their debts from 5 years ago. That sucks.

Re:News source

[toleraen]

I have no idea. [symantec.com]

Re:How did "900 million" become "1BN"?

[nigelo]

The last sentence of the summary points out the additional $100M:

"...a 900 million dollar tax bill due to the charge that Symantec and Veritas (purchased by Symnatec last year) under-reported the value of intellectual property which they had transferred to their two Irish subsidiaries. Another $100 million is connected to Symantec's 2003 and 2004 reports."

Transfer Pricing issue

[Steve Hamlin]

Transfer pricing is how companies allocate revenues and expenses across borders. Because an inter-company transaction isn't arms-length (nor at presumed fair market value), companies can play games with the prices at which goods are transfered between related parties. You try to shift income (minimize revenue, maximize expense) out of countries with high taxes, and into countries with lower taxes.

BTW, this is the same idea that underlies SALT strategizing (State and Local Tax). You move income out of states with high taxes (NY), and into states with low/no taxes (FL). That is why you'll see cost centers (backoffice) in low-tax states. The company then "charges" the revenue-generating units for use of these services, and income is shifted from the revenue units (high tax locations) into cost centers (low tax locations)

Here, it looks like Veritas licensed software (IP) to a subsidiary in Ireland, and at a transfer price that the IRS thought was too low (below market). The IRS is claiming that Vertias-U.S. should have recognized greater licensing revenue than they did, and as a result, they underreported their income. Complexities of international tax treaties aside, it could be because they wanted to leave more income in Ireland (lower expense for the Ireland sub), which might have had a lower tax rate. Or timing, or US vs IRE tax credits, or deductibility or software expensing/amortization, or witholding, or offsets with other subs, or phases of the moon, etc.

From the 8-K, "The Notice of Deficiency primarily relates to transfer pricing in connection with a technology license agreement between VERITAS and a foreign subsidiary."

From a news article: "Genevieve Haldeman, Symantec's vice president of corporate communications, ...explained that the notices related to transfer pricing of intellectual property, in effect licensing technology from the Symantec parent company to its Irish affiliate to sell outside of the Americas."

"Effectively what the IRS is saying is that separately both Symantec and Veritas undervalued the technology license that was used in the international subsidiary," she said. "They believe it should be valued at a higher rate, and given their valuation, we owe additional taxes."

Symantec claim could be much higher

[brettbum]

There's a more thorough version of this story at Red Herring http://www.redherring.com/Article.aspx?a=16541&hed =Symantec+Faces+Hefty+Tax+Bill [redherring.com]or=Industries&subsec tor=SecurityAndDefense There are two parts to this Veritas claim $900m Symantec claim $100 m That's a total of $1b If you glance at the IRS rules for calculating penalties and interest your head will spin. However the penalty for not paying is 0.5% per month for every month not paid. so Veritas if we lump it all at the end of 2001 and say they didn't pay $900 million for 2002,3,4,5, and last 3 months of 2006 So that's $45 million per month for conservative 51 months = $2,295,000,000 in penalties excluding taxes (not compounded) Plust interest at 6% per year (not compounded) - $54 million per year for 4 years + $13.5 million last three months = $229,500,000 in Interest Then you have a $100 million Symantec Tax bill based on their subsidiary setup in an Irish tax haven to tranfer profits out of the US to Ireland (not making a moralistic comment just stating the facts) This is for 2003/2004, so if we look at it like it all happened at the end of 2004 for simplicity, we have 12 months in 2005 and 3 months in 2005 for penalties Or $5 million per month for 15 months = $75 million in penalties That leaves $6 million in interest for 2005 and $1.5 million year to date for 06 in interest Add it all up Veritas tax claim $900m Veritas Penalties $2.295B Veritas Interest $229m Symantec tax claim $100m Symantec Penalties $75m Symantec Interest $7.5m Grand Total Potential claim - $3.607 Billion Reality Check Symantec will fight the tax claim and will negotiate to reduce the penalties and interest charges. However, as there is a significant amount of pressure from Wall Street, they probably need to wrap this up quickly. No matter what they'll have to cook their estimates of what they think this will really cost into their reserves to provide a provision for it and that will hit the bottom line in their quarterly(may be there already). Others have pointed out that it might have been smart of Symantec to perform a little due dilligence of Veritas. I think Symantec is getting the picture now. They just bought an open can of worms and attracted the IRS's attention to look at their other transactions as well.

Asset valuation appraisal methods

[Steve Hamlin]

Generall, experience valuation practitioners use 3 separate ways to value assets, or indeed, enterprises.

(1) Cost - what it cost you to create. More applicable to tangible, long-lived fixed assets in mature industries. Less so to IP, or to companies.

(2) Market - what it costs for comparable assets on the market. Very good if you can find similar comps. For IP, you'd look to licensing rates, for enterprises, you'd look to market transactions of similar companies.

(3) Income - the present value of a stream of future cash flows that arise from that assets. Depends a great deal on the assumptions that go into the model (market adoption of your IP, enterprise revenue and expense growth and the discount rate used)

You take these amounts, weight them according to the type of asset you are valuing, and give a range of probable value.

See also my post above [slashdot.org] about transfer pricing in this case. The IRS would use the above valuation techniques to figure out the appropriate transfer price.

Nah, I'm reasonably certain.

[hey!]

No, they won't. You're under the misapprehension that companies have wealth. They do not. Only people hold wealth and property (this includes shareholders, by the way). Therefore, if the IRS hits Symantec with a $1 billion charge, you and I (as consumers and/or shareholders) will foot the bill.

Not unless Symantec has a monopoly on anti-malware. Otherwise, the market determines what they can charge. Given the price will not change much, then the shareholders are first in line for pain. Next the employees. Customers only come into the picture this way: as the company trims its workforce, customers can expect the rate of new features to be slowed down. This is not necessarily the end of the world. Prices may tick upwards very slightly.

Never let the class-warefare rhetoric let you forget that every time a company pays a fine or pays taxes, you as the consumer of that company's goods are actually paying that fine.

"Class-warfare rhetoric" is class-warfare rhetoric. At least in this case. Nobody is saying Symantec should pay taxes because they're fat cats. They pay taxes because we all pay taxes. Nothing could be fairer. Furthermore, if they tried to shelter income, and the shelter wasn't legal, they should pay the difference, plus interest. Just like you or I would.

The only way "class warfare" might come into the picture is if the size of the penalties were disproportionately large. However since we're talking about the better part of a billion dollars proportionate penalties will have a lot of zeros on the end. The news isn't that the government is on a crusade against people who produce wealth. The news is that somebody at Symantec made a mistake on their tax returns large enough to be news.

Re:Is $900mil a big deal for SYMC?

[nuzak]

> Symantec has yearly revenue of what... $20bil?

John Thompson would be squealing like a gleeful schoolgirl if that were true.

Try 2.58 billion. It's as easy as sticking SYMC into google.

Re:Ouch...will they sell off Norton?

[smbarbour]

Yes, their home products suck, but before upgrading to a newer version of corporate AV, we had to switch some of our users to the home version of NAV because the software that we wrote that printed reports made in Crystal 8.5 would cause Norton to blue screen the computer whenever they printed.

Oh yeah, their Personal Internet Firewall is such a "great" product that even though I have told it that such and such program is safe, it continues to block it. Microsoft might suck, but at least XP's built-in firewall will do what it is supposed to do.

Well Done!! See IRC Sec. 482

[ahbi]

Well done.

Now for those wishing extra reading, Google for "Transfer Pricing for Intangible Property under Section 482"

That is Internal Revenue Code (IRC) Sec 482 (26 U.S.C. 482) [fourmilab.ch].
Explained in more depth in Treasury Regulation 1.482-1(a)(1), et al. [gpo.gov] (scroll down).

It should be noted that Sec 482 covers both tangible and intengible proprty, & domestic and international transfers. Also, note that the US is odd in that it taxes citizens and corps on theiir worldwide (not just domestic) income (see IRC Sec. 61, "from whatever source derived").

Re:FAIRTAX

[d_54321]

I'd rather have some huge crapware business pay taxes than me.
Right now, with our current tax system, both you and the business are paying taxes. Except with corporate income taxes, the corporations raise their prices to foot their bill, passing their tax burden on to you. The FairTax removes corporate income taxes. Then market competition will force them to lower their prices.Then you stop paying for corporate income taxes.

in general, a consumption based tax is <i>regressive</i>
In general, yes. Not with the FairTax, because of the prebate you mentioned, the FairTax is a system that is progressive.

the brunt of the tax will be felt by the middle class
Read up a little more on who are the winners and losers [fairtax.org] of the FairTax

The more money you make, the more you save[. T]he more you save, the less you consume.
There is a flaw in your logic. If the more money you make is greater than what you plan to save, then you can both save more and consume more. Also read up on what increased saving does to interest rates and how that benefits the whole economy.

A good, clean, progressive income tax (without all these exceptions) is what we need
A common point against the FairTax is that it's a good idea, but it'll never happen. I agree that the likelihood (and more to the point, ease) of getting the FairTax passed isn't its strongest aspect, but it is way more likely than hoping Congress will go thru our current system and plug up all of its thousands of holes. The current system is a whopping steaming piece of shit. It needs to be scrapped an replaced.