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There has been widespread coverage of the striking bottom line in the latest set of accounts filed by Microsoft in Ireland – the $3 billion pre-tax profit posted by its main trading company here, Microsoft Ireland Operations, which employs over 2,000 workers at its Leopardstown campus in south Dublin.
The same sum, however, emerges from the filings as a more crucial piece of information for Ireland at a time of renewed strain on the state’s coffers – the total of tax charges declared by Microsoft group companies in Ireland in the past year, too, was $3 billion.
The Currency analysed the accounts of 13 related companies incorporated and domiciled by the group in Ireland, of which seven reported a domestic tax charge on their income.
Their combined tax liability for the year ended on June 30, 2021 (or December 31, 2020 for the two LinkedIn subsidiaries) was equivalent to €2.5 billion at last year’s average US dollar exchange rate. This accounts for a 35 per cent year-on-year increase in the total tax charge reported by Microsoft companies in Ireland, worth an additional €656 million in Exchequer revenue.
Compare this to the total corporation tax take in 2021, which came in at €15.3 billion (much higher than the €12 billion forecast by the Department of Finance). Microsoft alone now accounts for one sixth of this resource for the state.
The growth in the amount of corporation tax paid by Microsoft in Ireland was faster than that of its Irish profits. The group’s largest subsidiaries here, Microsoft Ireland Operations and its parent Microsoft Ireland Research, saw their pre-tax profit increase by 19 per cent and 8 per cent respectively.
This is explained by the continuing reorganisation of international assets within the group, especially intellectual property, with these two Irish companies playing an increasingly central role. This was illustrated by the shrinking share of taxable profit attributable to LinkedIn subsidiaries as the intellectual property underpinning their business moved into Microsoft’s central holding structure.
Microsoft was an early mover in the use of the so-called green jersey tax structure onshoring intellectual property to Ireland, in replacement of the double Irish whereby associated profit was domiciled in a Bermuda tax-resident Irish company. We don’t know how the previous double Irish structure operated, because the unlimited companies involved were exempt from filing public accounts under Irish law until 2018.
What we do know is that the Irish-registered portion of the group emerged from those first public filings for 2018 with a top holding company – Microsoft Round Island One – still resident in Bermuda but no longer declaring any trading activity or associated taxable income.
In the years since, its role has been to distribute dozens of billions of profits accumulated in its tax-free offshore domicile and to provide an ownership vehicle for the new Irish structure. Microsoft Round Island One became tax-resident in Ireland at the start of 2021. Despite a $30 billion profit last year, it is not liable to pay tax because it only centralised and redistributed dividends from profits already subject to tax in other group companies.
Meanwhile, its immediate subsidiary Microsoft Ireland Research (which had gone underground after filing its last accounts as an investment holding company under a different name in 2004) re-emerged in 2018 as fully-fledged Irish-resident intellectual property centre with over $30 billion worth of intangible assets on its balance sheet.
The Currency reported on the tail end of this corporate restructuring in 2020, when Microsoft’s now Irish-domiciled base for Europe, Africa and the Middle East also took on the role of holding intellectual property and booking a large share of profits for its Asian business.
Now Microsoft Ireland Research stands at the centre of the group’s activity outside the US, with a steady $30 billion worth of intellectual property still on its books as regular additions replenish amortisation costs, which in turn come in deduction of its profits taxable in Ireland – $2 billion worth last year. The company also remits some of its income back to Microsoft research and development centres in the US to support the creation of future technologies under a cost-sharing arrangement that shaved another $6.8 billion off Microsoft Ireland Research’s Irish profit.
Still, these profits have been rising as Microsoft’s international business grows – by $1.4 billion last year alone, to reach $19 billion.
Its subsidiary Microsoft Ireland Operations, meanwhile, continues to be the central seller of Microsoft products and services across the non-American world. Its revenue jumped by nearly $10 billion in 2021 to reach $56 billion as businesses and families increasingly used its cloud-based software during the pandemic, from Teams to Xbox games. Yet most of this was swallowed up by payments to Microsoft Ireland Research for use of its intellectual property.
Still, the company’s pre-tax profit topped $3 billion last year, adding to the tax bill owed in Ireland.
Last year, Microsoft placed its entire Irish-based international structure under a new holding company, Microsoft Ireland Investments. The move appears to cut out any remaining intermediary holdings in Bermuda between Microsoft's headquarters in the US and the overseas business in Ireland. It will take another year for Microsoft Ireland Investments to file details of its exact role.
$86 billion in US government bonds
The final significant piece of Microsoft’s increasing contribution to the corporation tax take came from Microsoft Global Finance, a treasury management subsidiary that became tax resident in Ireland in January 2021. Its main function is to park Microsoft cash in safe investments for future use, a job previously carried out from its tax residency in Bermuda.
Out of nearly $100 billion in assets, it had placed $86 million in US government bonds by last June. Despite the poor returns of such low-risk investments, it still generated a $2.6 billion profit and became liable to pay tax in its new Irish domicile to the tune of $204 million.
However, Microsoft Global Finance also booked a revaluation in its investments outside its profit-and-loss account that would cancel out last year’s profit and booked a corresponding $224 million deferred tax credit, so the company may yet recover its early tax bill over the coming years if its estimates based off the bond market prove correct.
Between these companies and its two additional LinkedIn subsidiaries, Microsoft has reported the highest contribution to date to 2021’s record corporation tax collections in Ireland. It files accounts earlier in the year than others due to its unusual June end of year, but we are unlikely to see larger numbers for any other individual taxpayer.
Software giants with operations of comparable size in Ireland, such as Google and Facebook, have repatriated their intellectual property to the US, resulting in smaller taxable profits in Ireland. Other multinationals such as Apple, Intel and Pfizer may have similar or larger tax bills in Ireland, but they don’t publish disaggregated accounts isolating their activity in this country.
