Value Walk: Facebook Inc (FB) Tax Refund: A Reason To Celebrate, But Wait..

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By Nicholas Maithya

Facebook Inc (NASDAQ:FB) will not pay any taxes on its $1.1 billion profits reported in FY12. On the contrary, the company will receive a $429 million refund. This news comes at a time when the President recently called for comprehensive tax reforms, and one would wonder how lucky Facebook is following the announcement of profits in excess of $1 billion. But Facebook is not the only company benefiting from the comprehensive tax reforms, targeted at ending claims that “companies that choose to stay in America get hit with one of the highest tax rates in the world.”

According to reports, Facebook’s tax benefit came as a results of a loophole in the tax system that allows company issue executives with tax deductible stock options and later claim tax refund. “Facebook’s income tax refunds stem from the company’s use of a single tax break, that is the tax deductibility of executive stock options. That tax break reduced Facebook’s federal and state income taxes by $1,033 million in 2012, including refunds of earlier years’ taxes of $451 million,” Citizens For Tax Justice reported.

But this creates a paradox to the initial statement on “heavy tax burden”. In fact, it raises eyebrows as to what the future holds, if companies continue exploiting this loophole. President Obama and most Republicans in Congress continue to insist that before any discussion of closing tax loopholes commences, a tax reform proposal must first and foremost include a major reduction of the official corporate tax rate.

Facebook Inc (NASDAQ:FB) now joins the likes of Pepco Holdings, Inc. (NYSE:POM), General Electric Company (NYSE:GE) and Verizon Communications Inc. (NYSE:VZ), among other companies, who enjoyed this benefit between 2008 and 2010. Large multinationals continue to exploit the existing loopholes at the expense of small U.S based companies who do not have much of the means to replicate the same.

Indeed this has been exhibited in the manner in which the companies account for their cash over the last decade. U.S multinationals have been accused of stashing billions overseas in an attempt to avoid the burden associated with U.S tax laws. More specifically, the technology industry pitting the likes of Apple Inc. (NASDAQ:AAPL), Hewlett-Packard Company (NYSE:HPQ), Google Inc (NASDAQ:GOOG), Oracle Corporation (NASDAQ:ORCL) and Intel Corporation (NASDAQ:INTC), among other major tech giants, have been on the microscope with Federal Reserve on foreign cash holdings.

But yet again, crying foul is not enough if necessary steps to seal the loopholes are not taken. The rich will continue getting richer while the poor struggle to survive. That said, Facebook has all the reasons to smile as only titans reports profits in billions and escape without having to give the Fed a cent. The Social networking giant also seems to be on the right path following the news, which should cement its current rally back to $38 and beyond.

I believe next time everyone would be watching out for such stock options, as they align themselves to take various positions on the social media company.

Facebook Inc (NASDAQ:FB) opened on Tuesday, February 19th, at $28.38 per share, up $0.06, or 0.21 percent increase from the previous close.