The continuation of the double Irish tax structure via Malta by the US-based semiconductor manufacturer Microchip, revealed by The Currency last month to be one of the multinationals exploiting this “double malt” loophole, showed its true benefits last year.

The group continued to streamline the structure during its accounting year ending on March 31, 2021 and used it to shield a growing volume of business from tax both in Ireland and in market countries, new documents show. 

For the first time, the filings made in recent days by Microchip companies in Ireland and in Malta, give the full picture of the assets and financial flows located by the group across the two countries, making use of perfectly legal provisions maintaining aspects of the supposedly abolished double Irish and single malt schemes.

As previously reported, the Arizona-headquartered group with a small factory in Ennis, Co Clare transferred an initial $16 billion worth of intellectual property (IP) in 2018 to its Irish subsidiary Microchip Technology Ireland from a previous double Irish structure where they were placed in a Caribbean-resident company.

By March 2021, subsequent moves had increased the total IP acquired by the Irish company to $17.6 billion, while its carrying value had decreased to $13.6 billion. The $4 billion difference was mostly due to $3 billion in amortisation charges declared in deduction of profits taxable in Ireland to the tune of $1.1 billion each year.

In fiscal year 2021, Microchip Technology Ireland grew its turnover by 11 per cent to $3.8 billion, “largely driven by the integration of the company’s supply chain from previous acquisitions”. One such acquisition was that of rival Microsemi, which came with the Ennis factory. Legacy structures from that deal are increasingly streamlined as Microchip Technology Ireland becomes the central hub for sales of the group’s integrated circuits in Europe and Asia.

Billions in margin – but still no profit

The Irish company improved its margin by shrinking costs of sales marginally despite increasing volumes, and returned a gross profit of $2.1 billion. Yet it was loss-making – as it had been in previous years – because of a corresponding increase in administrative expenses, which were not fully detailed. Only a small part of growing operating costs was explained by the doubling of its workforce to 517 employees, with total payroll costs of $18.6 million.

The largest reported increase in costs was the doubling of its research and development expenditure to $432 million. This represented half of Microchip’s R&D budget for the entire world last year, only a fraction of which actually took place in Ennis or Dublin. Most of these funds were likely paid to other group companies overseas, where the bulk of new products is developed.

The bottom line is that Microchip Technology Ireland returned a $483.5 million pre-tax loss, paying no tax in Ireland – and instead adding to its stash of deferred tax assets. It now has nearly $200 million in such credits to offset against any future tax liabilities in this country.

The Irish company also booked $97.4 million in intercompany debt interest and $112 million in preference share dividends (a hybrid equity instrument where dividends fell due at a rate calculated in a similar way to debt interest). These finance costs played a large part in Microchip Technology Ireland having no taxable income in Ireland.

Instead, these sums surfaced in two related companies that are tax-resident in Malta. Microchip Technology Ireland’s immediate parent, Microchip Technology Malta, is registered in Ireland but states that “its effective place of management and control is Malta with effect from 16 March 2018,” making it tax-resident in the Mediterranean island. 

Accounts just filed by Microchip in Malta show that its 2021 tax rate in that country was 0.1 per cent.

The November 2018 agreement between the Irish and Maltese tax authorities to restrict the use of so-called single malt cross-border structures did not affect the residency of this particular company because, as previously detailed, restrictions apply only where such structures are used to pay no tax at all.

Instead, accounts just filed by Microchip in Malta show that its 2021 tax rate in that country was 0.1 per cent.

Microchip Technology Malta posted a $3.2 billion pre-tax profit last year, which came entirely from “investment income” generated by its subsidiaries. As we have seen, its Irish subsidiary is not profit-making and did not return dividends beyond that due under its preference shares.

But Microchip Technology Malta also has another subsidiary, MCHP Technology Malta, which was incorporated in November 2019 as a fully Maltese entity and has just filed accounts there for the first time. MCHP Technology Malta is a “financing company” which lends money to sister companies in Ireland and in Germany, with $7.8 billion outstanding at the end of March 2021.

While transactions with Microchip’s German unit are in the millions of dollars, those involving Microchip Technology Ireland are in billions. Nearly all the intercompany debt held in Malta is owed from Ireland.

One part of MCHP Technology Malta’s business is to collect intercompany debt interest directly, which generated its $135.6 million profit during the first 16 months of its existence. The company paid out most of this profit in dividends to its Irish-registered, Malta-resident parent.

A much larger part, however, consists in performing capital transactions with related companies in Ireland, Malta and elsewhere. Shortly after its formation, MCHP Technology Malta received from its parent a contribution in the form of $9.3 billion in debt owed by Microchip Technology Ireland and $7.4 million in accrued interest.

This was repackaged over the course of 2020, resulting in a $1.6 billion distribution to its parent Microchip Technology Malta.

Then in February of this year, MCHP Technology Malta again refinanced the debt owed by Microchip Technology Ireland. It distributed another $1.5 billion to its parent, while the Irish company owed the remaining $6.3 billion to its Maltese sister at a 4.14 per cent fixed interest rate until 2030. If used in full, this represents a potential $260 million to be deducted from profits taxable in Ireland and instead resurfaced in Malta for each of the next seven years.

Also in February, Microchip Technology Ireland redeemed the preference shares previously used to channel systematic dividends to its parent, leaving the debt repayment route via Malta as the main way of extracting profits from Ireland.

Further transactions have simplified the structure as updated above, cutting off links between Microchip Technology Ireland and legacy entities, such as the former Microsemi entity Microchip Malta BMD and a previous intermediary holding in the Netherlands typical of the old double Irish scheme (the so-called “Dutch sandwich”). Those have seen their assets and financial flows decrease substantially.

In December 2020, the two Malta-resident companies in Microchip’s double malt structure also elected to form a “fiscal unit” under new local legislation. Instead of paying corporation tax at the Maltese standard rate of 35 per cent and getting 30 per cent back when paying dividends overseas, they can now enjoy a five per cent tax rate upfront on their consolidated profit.

For 2021, Microchip Technology Malta posted a $3.2 billion pre-tax profit. It was not liable to pay any tax thanks to the effect of “income not remitted to Malta” – the billion-plus distributions from its Irish subsidiary Microchip Technology Ireland that were, in turn, destined for distribution to overseas parents and not regarded as taxable under Maltese rules.

Meanwhile, MCHP Technology Malta was liable to pay just five per cent on the $135.7 million in profit generated by loans to its Irish sister. 

Overall, after various adjustments, the fiscal unit formed by Microchip Technology Malta and MCHP Technology Malta declared a tax liability of $3.8 million last year. This was the full amount of tax payable by the Microchip group across Malta and Ireland for 2021. 

Despite being profitable for the past three years at the global level, the Microchip group did not report any consolidated tax charges and instead booked tax benefits over the entire period. Aside from a manufacturing tax holiday in Thailand, its 2021 accounts reported: “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 and earnings accrued in Malta at a 0 per cent to 5 per cent tax rate.”

Further reading on the double malt

Part one: How a pandemic boost to a multinational’s Irish sales left a half-billion profit taxed at 4%

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”