When the global economy reopened after Covid-19 restrictions, the pick-up in business led to a well-documented scramble for semiconductors. One of the firms benefiting from the surge in demand was Microchip, a multinational headquartered in Arizona and listed on the Nasdaq Market.

Microchip has an office in Dublin and a small factory in Ennis, Co Clare, which it inherited from the acquisition of rival Microsemi. The Currency has chronicled their 2018 transformation into a $16 billion intellectual property centre through companies operating across Ireland and Malta; the use of amortisation charges, capital transactions and intercompany debt to turn global sales into small Irish taxable profits, ultimately surfacing in Malta; and the resulting 0.1 per cent tax rate achieved in 2021 through this double malt structure.

For the year ended on March 31, 2022, Microchip’s global sales soared by $1.4 billion to $6.8 billion. Of this revenue, more than three quarters, or $5 billion, was generated outside the US.

This is the business reported by Microchip Technology Ireland, a group subsidiary located in Dublin’s East Point business park, which posted a corresponding growth of over $1 billion in revenue to just under $5 billion for the same period.

In a typical green jersey structure, Microchip Technology Ireland buys chips from manufacturing group subsidiaries in various countries, such as Thailand, and sells them to its limited-risk distribution subsidiaries in market countries, or directly to customers. Under transfer pricing rules, the Irish company earns a margin justified by its ownership of the intellectual property rights adding value to the chips.

This gross profit amounted to $3 billion last year, but the vast majority of it went towards “administrative expenses”. A small amount, $23.2 million, went towards paying its 535 Irish staff. But the bulk of costs came from the amortisation of the intellectual property acquired in 2018, which runs over 15 years at $1.1 billion annually.

Next was a $604 million research and development expenditure, which increased faster than revenue. With only 323 employees in “production, design and development”, it is evident that nearly all this was paid to R&D group subsidiaries outside Ireland.

After recording a $374.2 million impairment on a Caribbean subsidiary as Microchip tidies up loose ends from the wind-up of its pre-2018 double Irish tax structure, the Dublin company was left with just $32.4 million in taxable profit. After various adjustments, it declared a $64.2 million corporation tax charge in Ireland.

So far, so typical for a US technology multinational. But there is another, Maltese layer to Microchip’s Irish operations.

A “fiscal unit” in Malta

The immediate parent of Microchip Technology Ireland is Microchip Technology Malta, a company incorporated in Ireland but tax-resident in Malta. A sister company, MCHP Technology Malta, is fully incorporated in the Mediterranean island and has owned intercompany debt advanced to the Irish company to fund the purchase of its intellectual property.

Until February of this year, there were two channels to shift profits from Ireland to Malta. Microchip Technology Malta owned preferred shares in Microchip Technology Ireland, which paid corresponding dividends according to a fixed interest schedule. Because of this hybrid arrangement, the dividends were regarded as debt interest repayments. In addition, the Irish company also paid debt interest to MCHP Technology Malta.

For the year ended in March, Microchip Technology Ireland paid $480 million in dividends on the preferred shares to its Malta-resident parent, and $57.7 million in debt interest to its Maltese sister, according to new accounts just filed.

Microchip Technology Malta, too, has just released annual results. They show that it generated $134 million in income from its two subsidiaries, which it almost entirely declared as profit. Along with MCHP Technology Malta, it forms a “fiscal unit”, which allows them to benefit upfront from the ultra-low 5 per cent tax rate applicable to Maltese subsidiaries of multinationals. Together, after “intra-group dividend adjustment due to fiscal unity”, they reported a tax liability of $2 million, nearly half as small as the previous year’s.

This is it. The separate holding companies attached to the acquired Microsemi business – Microsemi Ireland Holding and its Irish-incorporated, Malta-resident Microchip Malta BMD – no longer report any significant transactions and were not liable to pay any tax last year. By locating $5 billion in revenue in Ireland and multi-billion-dollar intercompany debt in Malta, Microchip paid a total of just $66.2 million in tax across the two countries.

At group level, where Microchip returned to profit last year after a loss-making period, accounts for the same period show that its overall tax rate was 13.3 per cent, much lower than the US federal rate of 21 per cent. Aside from a manufacturing tax holiday in Thailand, “The remaining material components of foreign income taxed at a rate lower than the US are earnings accrued in Ireland at a 12.5 per cent statutory tax rate,” the group reported.

An acknowledgement of Malta’s “0 per cent to 5 per cent tax rate” the previous years was removed from its latest annual report.

$260m per year now shielded from Irish tax

Just before its financial year ended – and the war in Ukraine started, sending the world into a spiral of inflation and interest rate hikes – the group made fresh changes.

As previously reported, it redeemed the preferred shares channel to repatriate interest-like dividends from Ireland via Malta last February, and Microchip Technology Ireland has now reported the full details of this transaction. “The directors of the company, being of the view that interest rates were likely to increase, agreed in February 2022 with the holder of the senior and junior loan notes to refiance those variable interest loan notes in exchange for a 8-year fixed interest (4.14 per cent per annum) loan,” they explained.

In the process, the intercompany debt was reduced by $1.5 billion and the corresponding amount distributed up the group ownership chain via Malta.

The refinanced loan now owed to MCHP Technology Malta had a balance of $6.3 billion at the end of March, representing $260 million in tax-free transfers from Ireland to Malta for each of the next eight years. “In addition, the new loan had no restrictive covenants included, thus not restricting the company’s ability to pay dividends.”

The refinance of Microchip Technology Ireland on February 16 also included the redemption of the $1.7 billion preferred shares and a further reduction in its ordinary capital, but “without the return of such capital to the members of the company”. Initially, the Irish company instead credited $11.6 billion to its distributable reserves.

The Dublin unit has since started to distribute this tax-free bonanza through its Irish-incorporated, Malta resident parent. On June 16, September 28 and December 14, it paid interim dividends totalling $1.4 billion. 

Their recipient Microchip Technology Malta, in turn, has reported paying $1.7 billion in dividends since March. This is in addition to a $527.8 million dividend paid last year.