Thursday, June 10, 2021

Is this Ireland’s largest taxpayer?

Ireland’s Corporation Tax revenues are concentrated along two dimensions: by company and by country.  Concentration by company can be readily seen with the figure for the top 10 payers published in a research report by the Revenue Commissioners.

Corporation Tax Receipts Top 10 2011-2020

Over the last ten years, the share of Corporation Tax arising from the top 10 payers averaged 40 per cent.  The greatest level of concentration was seen in 2020 when the top 10 share exceeded 50 per cent for the first time. 

Since 2014, overall Corporation Tax receipts have almost trebled.  The amount that comes from the top 10 has quadrupled (though it should be noted that the top 10 is not made up of the same companies each year).

If the top 10 companies all made equal payments, then their individual payments of Corporation Tax would be just under €600 million each.  These would be very large tax payments.  However, the distribution is not likely to be uniform and it is very likely that the very top payers paid much more than this average.

The second dimension along which Irish Corporation Tax revenues are concentrated is by country.  Of the numerous unusual features of Ireland Corporation Tax revenues one of the most significant is that around four-fifths of payment come from foreign-owned companies.  As the Revenue report notes:

[F]oreign-owned multinationals paid €9,657 billion (82 per cent of net CT receipts), Irish-owned multinationals €841 million (7 per cent) and non-multinationals €1.335 billion (11 per cent).

Some of those foreign-owned multinationals have a presence here to serve the domestic markets (such as retailers, banks etc.) but most of the payments in this group come from what could be considered “the FDI sector”.  There aren’t many US companies here to serve the domestic market but they have a very large presence in Ireland.  And are making very large tax payments.

Since 2016 US MNCs who are required to do so have been filing country-by-country reports (CbCR) with the IRS.  Aggregate statistics have been published here.  For the years available, the corporate income tax paid (on cash basis) in Ireland of the US MNCs who filed CbCR reports are recorded as being:

  • 2016: $4,281.3 million
  • 2017: $5,189.7 million
  • 2018: $7,944.4 million

We cannot compare these directly with the total figures in the first table above as they are in a different currency and the time periods covered do not exactly coincide.  Taking an annual average exchange rate would give a figure of €6.7 billion.  In rough terms in looks like around 60 per cent of Irish Corporation Tax receipts in recent years was paid by US-owned multinationals. 

And the IRS data shows a further remarkable outcome: the $7.9 billion paid by US MNCs in Corporation Tax to Ireland for accounting periods ending between July 2018 and June 2019 placed Ireland as the third-highest recipient of corporate tax from US MNCs across all countries.

IRS CbCR Cash Tax Paid Chart 2018

Anyway, what we can take from this prologue is that one:

  1. The largest payer of Corporation Tax in Ireland is likely to making annual payments that now exceed €1 billion.
  2. This company is likely to be part of a US MNC.

So, now we need a few candidates.  Or maybe we just need to look at one: Microsoft Ireland Research.  In recent months there have been a number of stories about a different Microsoft subsidiary, Round Island One, which is based in Bermuda. 

That these stories did not reflect the tax outcomes for the overall Microsoft Corporation or for Microsoft’s operations in Ireland is par for the course.  There haven’t been too many stories about Microsoft Ireland Research and none that have set out its tax outcomes.

In its latest annual report, Microsoft Ireland Research describes itself as:

The principal activity of the company is licensing the rights to assets owned and developed by the company to other group companies, to enable them to sell and distribute Microsoft products.  These other group companies pay a royalty to the company under these agreements.  In addition the company is engaged in product localization and product research and development activities.

Microsoft Ireland Research is an Irish-resident company.  As noted in the annual report its “accounting records are maintained at One Microsoft Place, South County Business Park, Leopardstown, Dublin 18.”  Its operations do appear to be concentrated in Ireland, including the 500 staff it had in 2020, but the annual report does say that “the company also has a branch in Turkey.” 

A 2012 report for the US Senate Subcommittee on Investigations contained this summary for Microsoft Ireland Research:

Microsoft coordinates all of its consumer product sales for Europe, the Middle East, and Africa (EMEA), out of a group of entities in Ireland. One key entity called Microsoft Ireland Research (MIR) is a cost share participant with Microsoft Corporation, sharing 30% of the costs of Microsoft’s world-wide research and development expenses in exchange for the right to sell finished products in EMEA. MIR, which is located in Ireland, is a wholly-owned disregarded CFC of Round Island One, a wholly owned Microsoft CFC which operates in Ireland but is headquartered in Bermuda. The bulk of the research and development that MIR helps finance is performed in the United States at Microsoft Corporation, with MIR responsible for conducting less than 1% of the company’s total R&D.

Filings for Microsoft Ireland Research with the CRO show that the performance of the company in recent years has been very strong. Here are the profit and loss accounts since 2017.

Microsoft Ireland Research Income Statement 2017-2020

Turnover has increased from $11.6 billion in 2017 to €33.5 billion in 2020 with operating profit rising from $5 billion to $14 billion.

Although the company describes its turnover as being derived from royalties the CSO does not seem to do the same.  Ireland’s royalty exports do not match the figures shown above.  It is likely the CSO put the revenue of this company into its “computer services” export category.  These are now running at an annual total of more than €125 billion.

Services Exports Computer Services and Royalties 2013-2021

In its International Accounts releases, the CSO notes for the Computer Services category that this:

Covers exports and imports of software that were not incorporated as part of computer hardware or physical media but separately transmitted by electronic means. The value of sales and purchases of additional software licences is also included.

The licenses sold by Microsoft Research Ireland are covered by the second sentence.  Our primary interest here is in the company’s tax payments.  We can see from the profit and loss accounts that Microsoft Ireland Research’s tax charge has gone from $628 million in 2017 to $1,803 million in 2020.  This is not out of line with the aggregate figures set out at the start of this piece.

But a company making a tax charge on its income statement is not necessarily the same as a company making a cash tax payment to a tax authority.  The payment of the tax charge could be deferred leading to a deferred tax liability on the balance sheet or the charge could be offset against an existing deferred tax asset on the balance sheet.  In both instances the tax charge would not be matched by a tax payment.  However, the balance sheet for Microsoft Ireland Research does not show substantial amounts of either deferred tax assets or liabilities.

We can get further insight if we look at the tax reconciliation statement.

Microsoft Ireland Research Tax Recon 2017-2020

And there isn’t really a whole lot that stands out here.  There is reference to the impact of capital allowances which further reduces concern about deferred tax assets.  The second item with the increase from effect of different ROI tax rates on some earnings reflects the 25 per cent Corporation Tax rate that applies to non-trading income such as interest in this case. 

The effect of foreign tax rates is very small indicating that almost all of the profit is subject to tax in Ireland.

The effective tax rate bounces around a bit but that is likely because of the inclusion of income that is not subject to tax in profit before tax.  It is possible that income from shares in group undertakings and gains on the liquidation or disposal of subsidiary would not trigger a tax liability.  As a result of that looking at the tax charge relative to operating profit may be a more reliable gauge.

Microsoft Ireland Research ETR 2017-2020

It is not the definitive word on effective tax rates but, given the aggregate figures in the profit and loss account, does seem to give a consistent indicator of what is going on.  The impact of the 25 per cent rate on non-trading income (which itself is not included in operating profit) likely accounts for the difference in recent years to the standard 12.5 per cent rate.

Using an average exchange rate would give a figure of around €1.6 billion for the 2020 tax charge which is included in the accounts in US dollar terms.  The time periods don’t coincide, and assuming the vast majority of the tax charge is paid to Ireland, then Microsoft Ireland Research could be responsible for 10-12 per cent of Ireland’s overall Corporation Tax revenues.  Such a share for the highest payer would not be out of line with the finding from the Revenue Commissioners that the top 10 companies were responsible for 50.5 per cent of payments in 2020.

Microsoft’s tax outcomes attract some attention but very little of that is directed to the tax payments made by Microsoft Ireland Research.  A Microsoft subsidiary based in Bermuda, Round Island One, makes up for it though as can be seen in the search results for each

There has been some coverage of the outturns for Microsoft Ireland Research.  This May 2019 piece focused on a dividend payment it made.  There are a few mentions in pieces on The Currency including this April 2021 piece that went though some possible implications for Microsoft’s operations in Ireland of the Biden administration proposals for taxing US MNCs. And while this piece also from April 2021 again focused on dividend payments it did set out the financial outturns for the company:

The firm recorded $33.4 billion in turnover in 2020, up from $25.7 billion. Profit at the firm stood at $15.7 billion, down from $21.2 billion in 2018.

Microsoft Research Ireland employed an average of 524 staff per month in 2020, the vast majority of whom worked in localisation and product development. The average wage at the firm was more than €130,000.

But there is one thing absent from them: a sentence setting out the tax outcomes for the company.  This April 2020 piece from The Currency got tantalizingly close when it said the following about Microsoft Ireland Research: 

Its pre-tax profit nearly doubled to $22.5 billion, largely as a result of a $17 billion gain on the absorption of a liquidated Dutch subsidiary. Its corporation tax charge, by contrast, dropped by $200 million as a result of a $1.4 billion “decrease from effect of expenses not deductible in determining taxable profit”.

The $200 million drop in the tax charge made the cut but that this was a drop from $1.4 billion in 2018 to €1.2 billion in 2019.  And a subsequent piece featuring the company did not squeeze in the $600 million rise in 2020.  The tax charges across the last three years for Microsoft Ireland Research sum to almost $4.5 billion but they remain hidden from the reader in the few pieces that actually examine the company.

For a country that has seen a trebling of corporate tax revenues since 2014, is the third-largest recipient in the world of corporate taxes from US MNCs and with payments so concentrated that last year just ten companies were the source of half of all payments there has been very little interest in setting out who is actually making those payments.  Indeed, one could say there have been efforts to avoid doing so.

Could one company have paid €1.6 billion in tax in 2020?  The degree of concentration in the payments suggests that is possible.  Could that company have been Microsoft Ireland Research? The company’s financial accounts would suggest it was.  And if it was there is unlikely to be have a company with a larger tax payment. 

And that itself is not the end of Microsoft’s tax payments in Ireland.  Another Irish-resident subsidiary, Microsoft Ireland Operations Limited, had a 2020 tax charge of $342 million and a similar analysis to the above would indicate that pretty much all of that was also paid to Ireland.

Does Microsoft even pay $2 billion of tax in total, never mind only to Ireland?  Here is the consolidated income statement of Microsoft Corporation for the past five years.

Microsoft Income Statement 2016-2020

Certainly, plenty of scope for $2 billion of tax payments there.  Indeed in 2020, Microsoft had a provision for income taxes of $8.6 billion (16.5 per cent of its $53 billion pre-tax profit) and cash paid for income taxes was $12.5 billion.  Timing differences mean provisions and payments don’t always coincide.

But maybe all this tax was paid to the US. It wasn’t.  Here’s a table taken from Microsoft’s annual 10K report for 2020 showing the split of its tax provision into domestic (i.e., US federal, state and local taxes) and foreign taxes.

Microsoft Provision for Income Taxes

The one-off distortions caused by the Tax Cuts and Jobs Act and other factors seem to have been worked out for the 2020 tax provision.  The table shows that the $8.8 billion tax provision for 2020 was almost equally divided between domestic and foreign taxes.  Indeed, for the three years shown, Microsoft had a provision for foreign taxes exceeding $4 billion in each year – so a $2 billion tax bill in Ireland cannot be ruled out. 

So, a definitive case that Microsoft Ireland Research is Ireland’s largest taxpayer has not been laid out.  But the evidence is clearly pointing in that direction.

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