The starting point of this investigation is a US-headquartered group of companies reporting over €1 billion in worldwide sales of Covid-19 and other rapid diagnostics tests out of Ireland, with nearly half of this amount emerging as profit in another country where it is subject to a much lower tax rate than here.

Sounds familiar?

For over 30 years, US-headquartered multinationals used the infamous double Irish corporate structure to book international sales of products and services in Ireland. The portion of American technology and brands underpinning those revenues was placed in separate companies incorporated in Ireland but domiciled offshore in the Channel Islands or the Caribbean. Thanks to loopholes in US and Irish legislation, they extracted payments for use of that intellectual property from the Irish trading companies, shifting the bulk of profits to jurisdictions where the rate of corporation tax was zero.

Changes in US and Irish tax rules outlawed the double Irish from 2015, with a grace period for existing users until 2020. At that point, the scheme was officially dead. But was it really?

The medical testing example above shows that double Irish tax structures still exist. They are perfectly legal because successive changes to tax rules in force in Ireland, in Malta and between the two jurisdictions have failed to close old loopholes fully. 

This week-long series of articles explains what happened, how several multinational corporations continue to use the resulting opportunity to minimise their tax bills – and why it matters. To understand how the double Irish has survived in Malta, our first port of call is the business where it is most visible: the Rapid Diagnostics division of Nasdaq-listed Abbott Laboratories, one of the largest pharmaceutical corporations in the world with $43 billion in group revenue last year.

At a time when 137 countries are putting the finishing touches to an agreement brokered by the OECD to ensure multinationals pay at least 15 per cent of their profits in tax everywhere, the international arm of Abbott’s rapids diagnostics business paid less than a third of that in 2020. This helped the American-headquartered multinational achieve a 10 per cent effective tax rate at the global group level that year, citing Ireland and Malta among the jurisdictions where it enjoys “a combination of favourable statutory tax rules, tax rulings, grants and exemptions”.

“Cases like this are the kind of litmus tests we would have for the OECD deal, and how effective the minimum rate of 15 per cent is actually going to be,” said Conor O’Neill, head of policy at the anti-poverty campaign group Christian Aid, which first unveiled Abbott’s structure straddling Ireland and Malta. He spoke to The Currency in an interview to be published later this week.

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In October 2017, Abbott completed the acquisition of $5.3 billion Alere, a specialist manufacturer of point-of-care tests – products allowing medical practitioners and patients to perform diagnostics without sending samples to a central laboratory. The merger allowed Abbott to claim the number one spot in the global, fast-growing rapid testing industry. 

The purchase included an expanding office in Ballybrit, Co Galway where 150 employees then manned Alere’s “international business services centre which oversees the commercial operations of its parent company, Alere, Inc., outside the US,” according to filings by Irish subsidiary Alere International Ltd at the time. “The company’s activities include customer and technical support, finance, legal, vendor and logistics management tolling/contract manufacturing management, quality assurance and regulatory affairs. The company is also engaged in the sale of medical diagnostic products to both third parties and other Alere group companies. The company’s sales are primarily to other Alere group companies which operate as limited risk distributors for Alere International Limited.”

The deal with Abbott was in the making for the best part of two years and closed at a time when the holdings structures established by US multinationals were in a state of flux. Over the following two years, the new owner of the Ballybrit subsidiary cemented its role at the centre of international sales of point-of-care tests and renamed it Abbott Rapid DX International Ltd. It did, however, overhaul its holding and intellectual property ownership in favour of a new holding structure to be detailed tomorrow.

Through 2018 and 2019, sales were sluggish as Abbott reorganised its newly expanded rapid diagnostics division. But when Covid-19 turned into a pandemic at the start of 2020, it was ready for take-off.

This business initially included tests to detect drug and alcohol, blood levels of cholesterol or glucose, tropical diseases such as malaria, and a range of viruses including the flu and HIV.

When Covid-19 spread, this division expanded its offering to rapid PCR and antigen tests for the new coronavirus. As a result, Abbott reported that revenue in this segment more than doubled: 

“In Rapid Diagnostics, sales increased 112.3 per cent in 2020, excluding the effect of foreign exchange, due to strong demand for Abbott’s point-of-care Covid-19 molecular test on its ID NOW platform and its BinaxNOW Covid-19 Ag Card test in the US as well as international demand for Covid-19 rapid tests on its Panbio system and increased testing in the first quarter for the flu in the US. These increases were partially offset by the unfavorable impact of Covid-19 on routine diagnostic testing. Rapid Diagnostics Covid-19 testing-related sales were $2.593 billion in 2020.”

The chart above represents all sales of rapid diagnostics products by Abbott outside the US, as reported by the group’s parent. When Covid-19 demand triggered an explosion of this international revenue stream in 2020, the bulk of these sales were reported in Ireland.

During that year, Abbott’s non-US revenue from rapid diagnostics products came in at $1.8 billion, equivalent to €1.4 billion. Over the same period, turnover at Ballybrit-based Abbott Rapid DX International topped €1 billion.

The Irish company not only benefited from the worldwide surge in demand for the group’s point-of-care tests. After the corporate restructuring completed in 2019, the share of Abbot Rapid Diagnostics’s international revenue booked in Ireland also doubled. From one third in 2018 and 2019, it jumped to 70 per cent in 2020.

In the notes to its newly filed 2020 accounts, Abbott Rapid DX International describes itself as “an international business service centre providing customer and technical support, finance, legal, vendor and logistics management, contract manufacturing management, quality assurance and regulatory affairs services to companies of the Abbott Laboratories group outside of the US. The Company is also engaged in the sale of medical diagnostic products to both third parties and other Abbott group companies.”

Like many American multinationals, Abbott Rapid Diagnostics does not manufacture or ship products out of Ireland but its sales, distribution and administration workforce in Ballybrit, which had grown to 240 by 2020, handle the flow of products marketed by so-called limited-risk distributors in destination countries. The Irish company owns over 30 of these subsidiaries from Canada to South Africa and from Brazil to Malaysia.

In some cases, local subsidiaries buy rapid tests from the Irish company and resell them to customers in their country. In other cases, Abbott Rapid DX International books the final sales itself. It has provided direct guarantees to state agencies involved in customs or pharmaceutical procurement in the UK, the Netherlands, Italy, Nepal and Ethiopia. A spokesperson for Abbott declined to provide the breakdown between the two channels when asked by The Currency.

The gap between Abbott’s €1.4 billion in rapid diagnostics sales outside the US and the Irish company’s €1 billion revenue can, in part, be explained by the expenses of these limited-risk distributors.

Abbott Rapid Diagnostics France, for example, saw its revenue grow seven-fold to €112 million in 2020, which it attributed to sales of Covid-19 tests. Although it bought €100 million worth of products from its Irish parent, it had local costs including a €6 million payroll bill and €1 million in French corporation tax. It also kept a €2.2 million profit in reserve.

Accounts seen by The Currency for other limited-risk distributors show similar allocations of margins in the low- to mid-single digits. This explains a portion of the €400 million in international rapid diagnostics sales that do not emerge in Ireland, but not all of it. Let’s park this missing revenue for now, we’ll come back to it later.

Ballybrit books sales – then funds move on

So, what did Abbott Rapid DX International do with the €1 billion in revenue landed in Ballybrit in 2020? It paid its employees, of course – an average of €67,000 in gross salary each plus benefits. It had other distribution and administrative costs totalling a few dozen million euro.

The bulk of its expenses, however, was €960 million in cost of sales – in other words, acquisition of the Abbott tests it distributed around the world. This places the Irish company itself in the limited-risk distributor category. 

Between this expense and a €24.9 million once-off impairment on the disposal of overseas subsidiaries as part of ongoing group restructuring, Abbott Rapid DX International ended 2020 with a €14 million loss despite the exponential growth in its business. As a result, it was liable for just €829,000 in corporation tax in Ireland in respect of non-deductible expenses. After adjustments for prior years, its total Irish tax charge in 2020 was under €3 million.

Although the Irish company’s enormous cost of sales was not fully detailed, it included a curious €632 million charge for “stock recognised as an expense”. This has been the highest cost in the Irish company’s annual accounts since before Abbott’s acquisition of Alere. 

In accounting terms, stocks are recognised as an expense when they are sold later and taken off the company’s balance sheet. There were, however, only €45 million worth of stocks on Abbott Rapid DX International’s books at the end of 2019. A similar discrepancy has been repeated year after year. 

Abbott did not reply when asked by The Currency for its current definition of “stock recognised as an expense”. It was, however, explained for the last time in the stocks accounting policy disclosed by its Irish subsidiary in accounts for 2017, when this accounting method inherited from Alere was already in place:

“Stocks are measured at the lower of cost and estimated selling price less costs to complete and sell. Stocks are recognised as an expense in the financial year in which the related revenue is recognised.

“Cost comprises the cost of purchase and cost of conversion to current location and condition. Cost is determined using the FIFO [first-in, fist-out] method. Cost comprises the purchase price, including taxes and duties and transport and handling directly attributable to bringing the stock to its present location and condition. The cost of manufactured finished goods and work in progress includes raw materials, direct labour and a systematic allocation of direct costs and production overheads (based on normal operating capacity of the production facility).”

This suggests that products enter stocks at the fair value of the materials and manufacturing used in their production, which typically involves the assembly of relatively cheap plastics and chemicals; but their sale out of stocks is recorded at market value, which reflects customers’ demand for the technology enabling the tests to deliver trusted results. 

This leads us to the key asset at the core of Abbot Rapid Diagnostics’ financial flows through Ireland and the taxation of resulting profits – intellectual property.

Although Abbot Rapid DX International does not disclose transactions with related parties, there was a close match between its mysterious €632 million in “stock recognised as an expense” and the €643 million in intercompany sales of goods reported by its direct parent, Abbott Rapid Diagnostics International Unltd. Abbott did not reply when asked by The Currency whether all sales by this company registered in Ireland in 2019 were made to its subsidiary in Ballybrit. There are no other apparent buyers for its products in the group structure.

This represented the near entire turnover of Abbott Rapid Diagnostics International, which reports its principal activity as “the sale of medical diagnostic products to other Abbott group companies”. Its latest annual filing added: “The company is the principal operating company for the infections disease emerging markets (IDEM) business unit of the Abbott Rapid Diagnostics division of Abbott group companies, consolidating business operations, ownership of the intellectual property (IP) and supply chain flows”.

This was despite hiring its first-ever employee in 2020 and Malta not being listed among Abbott’s “global locations and contacts” on the group’s website at the time of writing.

In addition to the sale of goods reported as turnover, Abbott Rapid Diagnostics International reported another revenue stream. “Other operating income relates to the transfer of commercial returns from fellow group undertakings that arise in respect of sales made by those group undertakings of products in respect of which the Company holds contractual interests,” it reported. In its 2019 accounts, the company had disclosed that such income was “profit earned in respect of intellectual property”. 

This “other operating income,” was worth €113 million in 2020. It increased in proportion to Abbott’s overall international rapid diagnostics sales and was reported separately from a small royalty income of less than €4 million.

Abbott did not reply when asked by The Currency which “group undertakings” had made these payments to Abbott Rapid Diagnostics International. However, it is likely that they flowed from its distribution subsidiaries, either Abbott Rapid DX International in Ireland or its limited-risk distributors around the world.

Remember we parked a portion of the €400 million in revenue that appeared to get lost in the Irish distribution company earlier – this appears to be one of its destinations. Meanwhile, the French limited-risk distributor reported a €1.6 million expense on “other purchases and external charges” in 2020, which was not detailed and suggests that local subsidiaries may also contribute to Abbott Rapid Diagnostics International’s “other operating income”.

In any case, it appears that Abbott Rapid Diagnostics International holds the right to extract a portion of final sales under a contract backed by intellectual property that is not recognised – nor taxed – as a traditional royalty agreement.

Between this and straight product sales, Abbott Rapid Diagnostics International received €760 million in revenue from its subsidiaries in 2020. This represented more than half of the group’s sales of rapid diagnostics outside the US. Where, in turn, did this money go?

IP at the centre: royalties and cost-sharing agreements

Abbott Rapid Diagnostics International’s accounts included €186 million in cost of sales – mostly intercompany product purchases, but also €28 million in royalties paid to a third company incorporated in Ireland in 2019, called Abbott Rapid Diagnostics International Subsidiary Unltd. This latter IP holding subsidiary had no other business and most of the royalties collected translated into its €22 million pre-tax profit for 2020.

Abbott Rapid Diagnostics International’s second-highest cost was €125 million in “administrative expenses”, which was only partly explained by a €17 million amortisation charge for the intellectual property it owns. 

The difference is likely to include payments under a cost-sharing agreement, a typical arrangement under which overseas subsidiaries of US multinationals that own some of their international IP rights make a contribution to group units where R&D staff continue to develop new technologies and brands.

While Abbott Rapid Diagnostics International did not detail its transactions with related parties for 2020, it had done so for the previous year. In 2019, over one third of its administrative expenses went to “research and development expenditure and global business unit (‘GBU’) costs” paid to ten other Abbott group companies, mostly in the US and Japan.

By the end of that year, as the Covid-19 threat emerged, the German subsidiary Abbott Rapid Diagnostics Jena GmbH had the largest amount outstanding in such R&D costs owed by Abbott Rapid Diagnostics International. (Abbott Rapid Diagnostics Jena is now the registered manufacturer of Abbott’s flagship Panbio Covid-19 antigen test.)

A similar cost-sharing arrangement applied to the smaller Abbott Rapid Diagnostics International Subsidiary. These intercompany R&D and GBU costs can be expected to have absorbed a significant amount of the two companies’ administrative expenses again in 2020.

This left Abbott Rapid Diagnostics International with a comfortable pre-tax profit of €451 million. Added to the €22 million posted by Abbott Rapid Diagnostics International Subsidiary, the overall bottom line of Abbott’s rapid diagnostics international business came to €473 million. It was time for the two Irish-registered IP holding companies to pay tax for their Covid-19 windfall year.

Neither Abbott Rapid Diagnostics International nor Abbott Rapid Diagnostics International Subsidiary did, however, submit returns to the Revenue Commissioners in Ireland. Both profit-making companies reported that they were “resident in Malta for corporation tax purposes”. Their directors were Maltese or American, with just one Irish national joining them last year. Both companies’ principal place of business is a serviced office in the Verdala Business Centre, an unmarked building in the Maltese suburban town of Birkirkara.

The two companies and their immediate owner – another Irish-registered, Maltese-resident non-trading holding entity called Abbott Rapid Diagnostics International Holdco – took advantage of new legislation in Malta to form a “fiscal unit” and consolidate their corporation tax liability at the corresponding 5 per cent rate. 

When all was said and done, their tax accounts consolidated by Abbott Rapid Diagnostics International showed a current tax charge of less than €18 million on profits for the year 2020. Other once-off tax figures complicate the picture in relation to the reversal of previous deferred tax credits, but they don’t relate to 2020 income and we will explore them later.

Considering the bumper year 2020 alone, the current tax levied on €473 million in profit represented a current tax rate of 3.78 per cent for Abbott’s international rapid diagnostics business. Even if we consolidate this with the €14 million loss and €825,000 tax charge reported by the Irish trading company Abbott Rapid DX International, the resulting current tax rate was just above 4 per cent.

This was just the beginning – the group results for 2021 reported at the beginning of this article show that this structure channelled much larger revenues and profits last year as Abbott continued to roll out new rapid diagnostics tools to combat Covid-19, with full details yet to be reported by each company.

By making use of Malta, the US multinational has achieved what few thought possible: Revive the double Irish and, through the use of a cascade of IP holding companies, shift profits away from Ireland’s already low 12.5 per cent corporation tax rate into a jurisdiction where it is much lower. 

Further reading in the double malt series

Part two: The double Irish is alive and well, and it officially lives in Malta

Part three: How Microchip, Tencent and Lufthansa cut their tax bills via Ireland and Malta

Part four: “Structures like these siphon revenue from some of the poorest countries in the world”