Monday, October 4, 2021

Outbound royalty payments head for €100 billion

One notable aspect of the presence of US MNCs in Ireland is the scale of outbound royalty payments. These are payments their Irish subsidiaries make for the use of technology developed elsewhere (mainly in the US itself).

Royalty Imports to All Countries 2008-2021

The latest figures to the end of Q2 2021 put the four-quarter sum of outbound royalty payments from Ireland at €95.6 billion.  It is likely that the total for the 2021 calendar year will exceed €100 billion. 

While the overall total of outbound royalties has exhibited a fairly steady increase in recent years, the  destination of those payments has changed markedly. 

Royalty Imports by Region 2011-2021

In the five years to 2019, the United States was the recipient of around 10 per cent of the outbound royalty payments from Ireland.  The 18 months has seen a huge shift and the latest figures from Eurostat show that the US was the recipient of almost 80 per cent of the outbound royalties from Ireland in the 12 months to the end of June 2021.

The chart shows the large drops in payments going to Offshore Financial Centres (Bermuda, Cayman etc.) and the Euro Area (which mainly went to The Netherlands before been subsequentlty directed to OFCs).  These payments were linked to “double-irish” type structures where US MNCs located licenses to use their technology in markets outside the Americas.

The Irish subsidiaries paid for the technology they were using (patents for pharmaceuticals, online platforms for ICT companies etc.).  This technology was almost wholly developed in the US but the US tax code facilitated US MNCs in putting the licenses to use the technology in no-tax jurisdictions where they had no substance.  This allowed the companies to benefit from the deferred payment of the US tax due on the profits those licenses were generating.

Changes in recent years have targeted these structures.  The US has moved from a worldwide system with deferral to a quasi-territorial system with payments due as the profit is earned. 

For many companies, most notable ICT companies, this has resulted in them moving the licenses for their technology back to the US. And now the payments that leave Ireland are flowing to the US.

Is this “stepping up action to address features of the tax system that facilitate aggressive tax planning, including on outbound payments” as required per the European Commission’s most recent set of Country Specific Recommendations (CSRs) to Ireland?

But if it is, what has changed? Very little.  There has been no change in the market countries being served by international HQs in Ireland.  The payments they make for the services provided by the ICT companies still flow to Ireland.  Royalty payments continue to be made from Ireland but are now being directed to the US, where the technology is developed, rather than Offshore Financial Centres.

The only place the end of the “double irish” has had any noticeable impact is in the United States.  This is not a surprise as the tax that was impacted by the structure was US tax (with companies benefitting from deferral on profits kept offshore).  Now the income flows direct to the US and is subject to immediate tax that – albeit at significantly reduced rates courtesy of the Tax Cuts and Jobs Act of December 2017.

Ireland Balance of Payments data is showing €75 billion of royalties flowing to the US in the 12 months to the end of June.  The equivalent figure two years earlier was €8 billion.  As the chart above shows this huge increase is clearly evident in the Irish data. 

But evidence of these payments remains absent in the data published by the US Bureau of Economic Analysis which show no increase in receipts of “charges for the use of intellectual property”.

Table 1 shows that total service exports from the US are around $800 billion a year so the changes noted here for payments from Ireland should have had a noticeable impact, at least in the relevant category. 

And even in the context of the entire US economy these payments are equivalent to something like 0.2 or 0.3 per cent of US GDP.  These things get huge focus when they come to attention in Irish national accounts. Will the US get to avoid such scrutiny for amounts of the same value because the relative scale will be 100 times smaller?

No comments:

Post a Comment