Unless you’re in the business of designing computer chips and other electronic devices, you’ve probably never used Cadence’s software or even heard of this US technology firm. Yet this is the latest multinational to reveal another multi-billion intellectual property asset transfer to Ireland.

New corporate filings show that a subsidiary, Cadence Design Enablement Unltd, merged into Cadence Design Systems (Ireland) Ltd, the group’s central trading and holding company in this country, at the end of March. 

As part of the merger, directors of the surviving company made a declaration that it was able to cover the liabilities of its absorbed related party. The supporting evidence came under the form of figures from Cadence Design Systems’ balance sheet at the end of 2019 carrying $5.4 billion in assets, against $3.7 billion in liabilities.

The latest detailed accounts published by the company to the end of 2018 show that it had just $725 million in assets and $638 million in liabilities. It therefore acquired $4.7 billion worth of assets last year, for which details have yet to be reported. But how?

The explanation is to be found in the annual accounts filed a few weeks earlier by the group’s parent Cadence Design Systems, Inc in San Jose, California. “During the fourth quarter of fiscal 2019, Cadence completed intercompany transfers of certain intangible property rights to its Irish subsidiary, which resulted in the establishment of a deferred tax asset and the recognition of an income tax benefit of $575.6 million,” the company reported.

Cadence has joined a select – but growing – list of US tech multinationals locating multi-billion intangible assets in Ireland in recent years, alongside the likes of Apple, Dell, Oracle, Symantec and Microchip. 

A double Irish tax structure via Bermuda and Barbados

In previous years, Cadence used a double Irish structure to extract value out of its intellectual property. Accounts for 2018 show that Cadence Technology Ltd, a company registered in Ireland but tax resident in Barbados, owned software intellectual property rights and generated $433 million in revenue by charging other group companies for their use.

Cadence Technology was tax resident in Bermuda until 2016. It was formed in Ireland in 1997 and became non-tax resident in 2000. It was the first of a string of companies registered as the group established the routing of its non-American business through Ireland. Irish accountant John Wall, now senior vice president and chief financial officer of the Cadence Group, has led this process since the very start. 

According to his corporate biography on Cadence’s website, “Wall previously served as corporate controller and in other positions for more than 20 years, starting in our Dublin, Ireland office before moving to our San Jose Headquarters in 2015. At the beginning of his tenure with Cadence, Wall implemented the company’s international corporate structure, and was instrumental in the creation of several of the company’s sales models and its transition to a recurring revenue model”.

“I worked cross-functionally with the corporate tax department to implement the company’s international tax structure, with the result of dramatically reducing Cadence’s effective tax rate.”

Cadence CFO John Wall

On his LinkedIn profile, Wall adds: “I established the first Cadence office in Ireland, setting up the Dublin office in 1997. I was directly responsible for proposing and implementing a shared services model at Cadence in early 1998, which in turn led to my promotion to European controller in July 1998, a role, in which I worked cross-functionally with the corporate tax department to implement the company’s international tax structure, with the result of dramatically reducing Cadence’s effective tax rate.”

Until recently, the group’s Irish trading subsidiary Cadence Design Systems was ostensibly the customer paying royalties to offshore IP vehicles as it made $761 million selling software and services across Europe and Asia, but had huge costs leaving it with a pre-tax profit of just $39 million. Its 51 Irish-based staff hardly generated over $700 million in operating costs. They were more likely made up by payments for use of IP by the Irish company and its 18 subsidiaries interacting with customers around the world.

This left the Irish company with a corporation tax bill of $7.3 million in 2018. Meanwhile, in Barbados, Cadence Technology posted a pre-tax profit of $94 million and paid $553,000 in income tax. Dividends trickled up that year allowed the group’s top Irish holding company, Castlewilder Global Unltd, to distribute $508.5 million to its US parent. A cascade of intercompany loans also moved funds up the group structure under the form of debt.

Cadence Technology’s IP rights had a net book value of $55 million at the end of 2018 and were on track to near full amortisation this year. It will be interesting to see what happens to its assets and its very existence when the company files fresh accounts in the coming months.

With the end of the double Irish here this year and the US tax reform in force since the end of 2017, the rules of the game are changing – and so is Cadence’s corporate structure. 

A central position comforted by the green jersey

The merger of Cadence Design Enablement (which held a small amount of IP rights) into Cadence Design Systems means that the group’s Irish trading company is now also an intellectual property vehicle. Future filings will reveal whether it also retains ownership of Jasper Holdings Ltd, a Cayman-registered subsidiary involved in “financing the group’s business activities” – the intercompany loans mentioned earlier. 

The IP rights that inflated its balance sheet by $4.7 billion at the end of last year comfort Cadence Design Systems as the centre of the group’s business outside America. Thanks to the capital allowance for intangible assets (CAIA) regime available in Ireland, it may deduct those assets’ depreciation and borrowing interests from up to 80 per cent of its taxable profit through their useful life. The corresponding profits can, in turn, benefit from a reduced tax rate under the new global intangible low-taxed income (GILTI) scheme in the US. This combination, known as the green jersey, accounts for the $575.6 million tax benefit booked by the group’s US parent earlier this year.

“Cadence expects to be able to realize the Irish deferred tax asset in future years and did not provide for a valuation allowance. Cadence considered all available positive and negative evidence, including its past operating results, forecasted earnings, future taxable income, and any prudent and feasible tax planning strategies in making this determination,” the group reported.

Yet it didn’t wait for “future years” to include the tax benefit in its income statement. From 35 per cent in 2017 (the standard rate of corporate tax in the US at the time), its effective tax rate had already dropped to 8 per cent in 2018 as advantages in US President Donald Trump’s tax reform kicked in. Then last year, Cadence allocated the full $575.6 million deferred tax asset from its Irish IP move to annual income. The group’s effective tax rate was minus 106 per cent – the tax benefit more than doubling its pre-tax profit to a net income of nearly $1 billion.

“We involved valuation professionals with specialized skills and knowledge.”

KPMG auditors

Before rubberstamping last year’s accounts, auditors at KPMG flagged that they had probed the Irish IP transaction as one of two “critical audit matters”, with “a high degree of auditor judgement” required to assess whether the tax benefit booked by Cadence resulted from a sound valuation of both the intangible assets onshored here, and the company’s future taxable income in Ireland against which they would be amortised.

To verify the book value of IP rights, auditors checked the internal methods used by Cadence, but this wasn’t enough. “We involved valuation professionals with specialized skills and knowledge,” KPMG added, to compare the discount rate used with industry benchmarks and provide their own independent estimate.

“We also tested certain internal controls over the assessment of the recoverability of the resulting deferred tax asset, including controls over the determination of future taxable income in Ireland,” auditors declared. Again, they had to draft in the experts – this time “income tax professionals with specialised skills and knowledge” – to verify company forecasts.

“The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole,” KPMG concluded, giving Cadence the green light to claim tax deductions from its multi-billion Irish IP onshoring.