US software giant Microsoft has taken steps to shield from the public, the value of Tax Haven transactions of two Irish-registered subsidiaries that have enabled it to save billions of dollars in US taxes.
The company applied to the Irish Companies Office on Monday to re-register its Round Island One and Flat Island Company subsidiaries as companies with unlimited liability. Unlimited companies have no obligation to file their accounts publicly. The two companies operate from the Dublin offices of corporate lawyers Matheson Ormsby Prentice.
|Ha'penny Bridge, Dublin - Microsoft's Round Island One is Ireland's biggest company. It operates from the offices of corporate lawyers and reported €3.23 billion ($3.88 billion) in fiscal 2004 pretax profit and paid $308 million in Irish corporate tax.|
The move to change the legal status of the subsidiaries follows a November 2005 report in The Wall Street Journal and weeks after the US Treasury Department said it was developing new rules to prevent US groups transferring intellectual property and patents abroad as a way of minimising their exposure to US tax.Last November, The Wall Street Journal wrote that "a law firm's office on a quiet downtown street [in Dublin, Ireland ] houses an obscure subsidiary of Microsoft Corp. that helps the computer giant shave at least $500 million from its annual tax bill. The four-year-old subsidiary, Round Island One Ltd., has a thin roster of employees but controls more than $16 billion in Microsoft assets. Virtually unknown in Ireland, on paper it has quickly become one of the country's biggest companies, with gross profits of nearly $9 billion in 2004."
Flat Island Company made a profit of $802.4 million in 2004 on sales of $2 billion, but paid no tax. It issues licences for software in Europe, the Middle East and Africa.
Ireland's low corporate tax rate of 12.5% on trading profits has been a magnet for multinational companies who are responsible for 90% of Irish exports and a significant contributor to the success of the modern Irish economy, commonly known as the Celtic Tiger.
In addition, an Irish tax exemption on patent income, has promoted the parking of US multinational company overseas profits in Ireland, through transfer pricing and other accounting measures. Ireland is the most profitable location of US multinationals and in the period 1998-2002, the profits of US companies with Irish facilities doubled.
Ireland's annual corporate tax revenue is about €5.3 billion ($6.3 billion). The Wall Street Journal said in its report that a Microsoft Dublin-based company that is used for routing patent a royalty income from overseas operations, paid the Irish Revenue $300 million in taxes last year.
Up to 50% of Irish corporate tax revenue may relate to taxes paid on income earned by US multinationals outside Ireland.
Microsoft's effective global tax rate fell to 26 percent in its last fiscal year from 33 percent the year before. Nearly half of the drop was attributed to "foreign earnings taxed at lower rates," Microsoft said in a Securities and Exchange Commission August filing. Microsoft leaves much of its profit in Ireland, including $4.1 billion in cash, avoiding U.S. corporate income taxes. But it still can count this profit in its earnings.
Microsoft did not explain why it chose to re-register the two subsidiaries when questioned about the move. "As part of our strategy to facilitate and support future business growth, Microsoft is re-organising some of its legal entities within the group," it said in a statement to The Irish Times. "Microsoft Ireland Operations Limited (MIOL) is the primary operating legal entity in Ireland, employing over 1,200 people in four operations based in Sandyford. MIOL remains unaffected by any changes and will continue to publicly file its financial statements."
IRELAND TOP LOCATION OF US MULTINATIONALS' PROFITS
Ireland is the world's most profitable country for US corporations, according to analysis by US tax journal Tax Notes. In a study by the journal's Martin Sullivan that was published in 2004, it was found that profits made by US companies in Ireland doubled between 1999 and 2002 from $13.4 billion to $26.8 billion, while profits in most of the rest of Europe fell. In his analysis Sullivan termed Ireland a 'semi-tax haven' for US firms, because firms are involved in real productivity in contrast with locations such as Bermuda.
Between 1999 to 2002, US multinational corporations increased profits in countries with no taxes or low rates by 68% while sharply reducing profits recorded in countries where they engage in substantial business activity, the study published in the journal Tax Notes shows.
In 2002, US companies reported $149 billion of profits in 18 tax-haven countries, up 68% from $88 billion in 1999, according to Tax Notes, which analyzed the most recently available Commerce Department data. This compares with a 23% increase in total offshore profits earned by US multinationals during the same period-total profits of US multinationals’ foreign subsidiaries around the world stood at $255 billion in 2002.
How US Multinationals Profit from Tax Havens - Ireland top Location for US Multinationals' Profits
US Multinationals Overseas Profits: Ireland's patent income tax-exemption may fund over 5% of Irish Government annual spending in 2006