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News : Irish Economy Last Updated: Feb 11, 2014 - 3:17 PM


Foreign government requests Bermuda to investigate Microsoft's Irish-linked subsidiaries
By Michael Hennigan, Finfacts founder and editor
Feb 1, 2014 - 3:32 PM

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Enda Kenny, taoiseach/ prime minister, meets Tim Cook, Apple's CEO, at its Cork campus, January 31, 2014

A foreign government has requested Bermuda to investigate three of Microsoft's subsidiaries in theisland nation that are in effect Irish offshore shell companies linked to the software giant's companies in Ireland, and are used for corporate tax avoidance and maybe evasion.

The OffshoreAlert newsletter services picked up this information from a handwritten record that had been inadvertently made public by the Bermuda Supreme Court two weeks ago. The information was published this week in the United States by The Huffington Post.

The government of Bermuda was responding to a Tax Information Exchange Agreement (TIEA) request (the foreign government wasn't identified), which is part of an international monitoring system, established by the Organisation for Economic Cooperation and Development (OECD), which Bermuda assented to in 2005.

David Marchant of OffshoreAlert reported on January 16 that "filings at Bermuda Supreme Court...suggest that US-based computer giant Microsoft Corporation is being investigated for suspected tax offenses involving three offshore subsidiaries, Flat Island Company, Round Island One, and RI Holdings."

“Each application was clearly entered into the cause book, and therefore the public domain, by mistake, as evidenced by the fact that as soon as OffshoreAlert publicized their existence, they were quickly removed,” David Marchant told the Bermuda Sun newspaper.

He added: “I monitor Bermuda court filings on a weekly basis and I’ve done so for years. I cannot recall ever seeing TIEA-related applications before. I believe the standard is to file such things under seal.”

Flat Island Company and Round Island One are Irish companies and RI Holdings appears to also be another non-tax resident Irish company.

In 2005, The Wall Street Journal brought attention to Microsoft's efforts to route for example profits on sales in Germany to Dublin on which the software firm paid Ireland at less than the low headline tax rate of 12.5%. The Journal said a subsidiary, Round Island One Ltd., operated from the offices of a Dublin law firm and was one of the country's biggest companies, with gross profits of nearly $9bn in 2004 but it had no direct staff. Now Google and Facebook are following on Microsoft's trail.   

The Journal said much of Round Island's income was licensing fees came from copyrighted software code that originated in the US. Some of the rights to these lucrative assets ended up in Ireland via complex accounting rules on intellectual property

Through a key holding, dubbed Flat Island Co., Round Island licensed rights to Microsoft software throughout Europe, the Middle East and Africa. Thus, Microsoft routed the license sales through Ireland and Round Island paid a total of just under $17m in taxes to about 20 other governments that represented more than 300m people and $300m in taxes to a country of just over 4m.

WSJ report [pdf; free]

Following the WSJ report, Microsoft had changed the Irish companies, headquartered in Bermuda, to 'unlimited status' in Dublin, thereby shielding information from the public - - the Irish Companies Registration Office does not even have the names on its publicly available companies database.

The HP says that at the centre of Microsoft's web of offshore subsidiaries are two of the company's top in-house lawyers, Keith Dolliver and Benjamin Orndorff, who work at headquarters in Redmond, Washington State. Dolliver and Orndorff serve as the chairman and vice chairman, respectively, of four Bermuda-based shell companies, including the three tied up in the inquiry. Dolliver and Orndorff also serve on the boards of more than a half-dozen Dublin-based companies with names like Microsoft Ireland Capital, Microsoft Research Ireland and Microsoft Ireland Operations. They also both served on the board of Skype Ireland Technologies Holdings, a Dublin-based subsidiary created following the Microsoft-Skype deal.

In 2012, a report by the US Senate Permanent Committe on Investigations, detailed how Round Island One was also used for tax avoidance in the Americas.

Microsoft Operations Puerto Rico (MOPR) pays for the right to sell Microsoft products in the Americas. MOPR makes digital and physical copies of Microsoft software and handles sales throughout the United States and the rest of the Americas.

MOPR is owned by a Bermuda-based entity, MACS Holdings, which in turn is owned by Round Island One, a fully owned Microsoft subsidiary that is based in Bermuda but is an Irish company but does not pay taxes in either Bermuda or Ireland.

The subcommittee report said:

Microsoft chose to establish MOPR with funds from a wholly-owned Irish affiliate, Round Island One. This decision ultimately gave ownership of MOPR to Microsoft’s Irish group. To effectuate this plan, the US group established two entities. Microsoft created MOPR as well as a Bermuda entity called MACS Holdings (MACS) to serve as the sole owner of MOPR. After the entities were established, ownership of MACS was transferred from the US group to the Irish incorporated entity, Round Island One, in a non-taxable transaction under section 368 of the Internal Revenue Code. MOPR was seeded with $1.6bn  in equity funding, supplied by its Irish parent, which paid for the construction of the Puerto Rican manufacturing facility and MOPR’s obligation under its research and development cost share agreement. MOPR ran deficits during its first two years of operations, after which time it generated enough income to pay its obligations."

Senate panel report:EXHIBITS FOR 9/20/12 HEARING »

The Huffington Post says that in the UK, Microsoft came under fire in December 2012, when it was revealed that the company paid no British tax on £1.7bn from British software sales.

Bermuda is officially designated a British Overseas Territory, but it operates with significant autonomy and it has no corporate profits tax.

Round Island One of Ireland and Bermuda owns the two main Microsoft operations companies in Ireland: Microsoft Ireland Operations Limited (MIOL) and Microsoft Ireland Research (MIR) - -  and the software giant used the “Double Irish Dutch Sandwich” tax avoidance scheme before Google and Facebook took advantage of it.

Apple

Ireland's non-tax resident companies, which are technically 'controlled' elsewhere but are in practice are mailbox shell entities, are available for multinationals to facilitate corporate tax avoidance and evasion.

In May 2013, the US Senate Permanent Committe on Investigations revealed that Apple viewed such Irish legal entities as 'stateless' -- in effect not subject to any tax jurisdiction.

Late last year, the Irish Government made a slight amendment to the existing facility by requiring companies to state where such shell operations are controlled from.

Tim Cook, Apple CEO, was at the giant's Cork campus on Friday where over 4,000 are employed in an administration services facility that has a majority of European staff because of language requirements.

Enda Kenny, taoiseach/ prime minister, met Cook there and later Kenny said he re-assured Cook that Ireland operated “a very transparent, statutory based rate of 12.5%” and that would continue.

Apple gets about 60% of its revenues outside the US and in its 2012 fiscal year, its tax rate was 1.9% and 3.6% in 2013 -- Cook is not interested in paying at a 12.5% rate.

“My point is that our rate is 12.5% and we don’t do specific deals with companies and clearly the company themselves are always in contact with the Revenue Commissioners about any changes in structures that they may wish to discuss with the Revenue Commissioners.”

He suggests that the Irish companies in such tax havens in Bermuda are not Ireland's responsibility!

Recent Finfacts tax reports:

Corporate Tax: Kenny reassures Facebook but Ireland's rate is too high

G-20 Australian presidency focuses on tax "leaking bucket"; Ireland still in denial?

US company profits per Irish employee at $970,000; Tax paid in Ireland at $25,000

Corporate tax reform and the biggest tech tax havens

Ireland's new International Tax Charter: More political kabuki

Ireland's tax man for Silicon Valley

Corporate Tax 2014: UK's revenues plunge; France considers reform

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