Just as representatives of the EU’s 27 countries agreed on the implementation of a global 15 per cent minimum corporation tax rate this week, new company information from Irish subsidiaries of the IT multinational Dell showed that most of them were technically loss-making last year, together generating more tax credits than charges.

The financial year ended on January 28, 2022 was a good one for Dell. At the global level, accounts reported to the New York Stock Exchange show the group grew revenue by nearly 17 per cent to top $100 billion, and more than doubled its pre-tax profit to $5.9 billion. Last year was the last one when VMware, a provider of crucial software to run large cloud computing systems, sat in the Dell group. Its spin-off into a separate company became effective on November 2021.

Just over half of Dell’s revenue came from outside the US. So, how did the group’s performance translate in Ireland, where Dell books much of these international sales?

Dell’s “client solutions” division is the workhorse of the group, supplying PCs, laptops and accessories such as monitors around the world. This accounted for $61.5 billion in revenue and $4.4 billion in operating profit last year. Subsidiaries selling those products as so-called limited-risk distributors in Europe, the Middle East and Africa all channel their sales back to Dell Products Ltd in Ireland. The company’s revenue jumped by $3 billion to $18 billion in the same period.

However, Dell Products itself is somewhat of a limited-risk distributor. There isn’t much original technology in the mass dispatching of standardised computer products from manufacturers to resellers around dozens of countries – just a well-oiled logistics and accountancy machine.

Once Dell Products had paid for the products themselves and its own costs, including $262.1 million in salaries and benefits to an Irish workforce that crossed the 2,000-employee mark last year, the company was left with a pre-tax profit of $152.8 million. After adjustments for taxes paid in other countries, it reported a corporation tax bill of $15.8 million.

EMC intellectual property to shrink tax for the rest of this decade

The other business division currently active in the Dell group is “infrastructure solutions”, which posted slower growth at the global level last year, attaining $34.4 billion in sales or one third of the group’s revenue. It was, however, a lot more profitable than client solutions, generating nearly as much operating profit ($3.7 billion). That’s because the infrastructure solutions division deploys much more innovative technologies to design and install the server farms powering the cloud.

In Ireland, this business sits in EMC Information Systems International Unltd, based in Ovens, Co Cork. This subsidiary books infrastructure sales for the group outside North America and, in response to the end of the double Irish tax scheme, has owned the corresponding intellectual property rights since 2019.

Despite growing revenue marginally to just under $5 billion last year, EMC Information Systems International saw its costs increase faster and its margin drop, despite a 125-employee drop in its headcount to 2,378. Already loss-making in the previous year, the company ended with a pre-tax loss of $465.3 million in the period ending on January 28.

Instead of paying corporation tax, EMC Information Systems International booked an $82.4 million tax credit, boosting the deferred tax asset on its balance sheet to $245.4 million. This is tax it won’t have to pay on future profits when they materialise.

This, however, may not be used until the next decade – for the moment, the company is making full use of the tax-deductible amortisation of the $7.5 billion worth of intellectual property it brought into Ireland in 2019, which is scheduled to run for 11 years. Last year, this contributed to reducing the company’s taxable profit by $614 million, essentially explaining its entire taxable loss and more. 

Another significant tax-deductible cost is the interest EMC Information Systems International pays on the intercompany debt it formally raised to acquire this intellectual property. Last year, the Irish company paid $226.7 million in such interest to EMC Group 2, another group subsidiary registered in Bermuda.

As EMC Information Systems International amortises the value of its intellectual property, the company has now begun to write off this paper debt. “On 27 April 2022, the Company made a partial repayment in the amount of US$1 billion of the US$7.5 billion promissory note held by another group company, EMC Group 2, by way of an offset and assignment of a receivable held by the Company in the same value”.

VMware’s 30-year tax shelter

For its last year as part of the Dell group, VMware, too, made maximum use of the so-called green jersey scheme it has used to offset intellectual property amortisation against taxable profit since 2019. The cloud software business locates non-US sales and the intellectual property underpinning them in its subsidiary VMware International Unltd in Ballincollig, Co Cork (pictured).

Its revenue rose by over 13 per cent to $6.3 billion last year, primarily driven by European sales growth. Operating profit increased three times faster, to $138.1 million, after paying a growing Irish-based workforce of 974. Yet on a pre-tax basis, VMware International incurred a massive loss of $1.3 billion. Why?

“The Company’s loss was driven by the interest expense of $1,487.4 million (2021: 1,715.7 million) arising on the loan notes issued to finance the purchase of IP rights and also by the amortisation of intangible assets of $1,393.5 million (2021: $1,384.9 million). As the full beneficial owner of the IP rights, the directors expect revenue growth will return the company to profitability in the longer term,” their latest report states.

This may not be imminent as VMware International had $37.1 billion worth of IP “rights and licenses” on its balance sheet to be amortised over five to 30 years, and $21.9 billion in associated intercompany debt at 6.1 per cent interest. Once any profits make it past this mountain of deductions, any corporation tax liability arising then would only start to eat into the $554.6 million in deferred tax credits accumulated by the company so far.

VMWare also developed a recently established Irish customer-facing subsidiary, VMware International Marketing, with branches and subsidiaries in various countries outside the US. Its 81 employees generated $13.9 million in revenue. After collecting dividends from subsidiaries, it returned a $16 million pre-tax profit. But thanks to the effect of “double taxation relief” on profits already declared abroad, instead of paying any tax in Ireland, it ended the year with a $10.2 million credit from the Revenue.

The only VMware company declaring a tax charge last year was VMware Pembroke Heights DAC, a new cash-pooling subsidiary for the group, which reported a $240,253 pre-tax profit and a corresponding $48,004 expense on corporation tax.

Overall, the main Irish subsidiaries of the Dell group including VMware booked nearly $30 billion in revenue in the year ended on January 28, 2022, and we know from their accounts at the global level that the corresponding business divisions returned healthy profits.

Deductions from amortisation and interest payments linked to intellectual property, however, resulted in the same companies posting an overall loss and enjoying a combined net tax credit of $135.1 million in Ireland over the same period. While some of the resulting profit-shifting ultimately generates tax payments in the US, the tax deductions obtained along the chain were estimated to represent a net gain of $4.9 billion over time, according to filings made after the 2019 IP transfers to Ireland.

This is what is now reflected year after year in documents filed by the group’s Irish subsidiaries, and will continue to minimise the overall tax bill of the Dell group and that of VMware’s new owner, Broadcom.