At the end of 2017, Microsoft took possession of its new €134 million headquarters, the striking angular building’s long balconies overlooking Leopardstown racecourse in south Dublin. Two years on, all car parks at the complex display a “full” sign. More than 2,000 people from 71 countries work here.

As the company was showing off its gleaming new offices and giving journalists a taste of bread loaves with its logo imprinted in a dusting of flour at the staff restaurant, Microsoft was preparing another, more discreet major move in this country. The group’s ultimate US parent, Microsoft Corporation, had just formed a new subsidiary called Microsoft Ireland Holding. 

Suicide mission

The company was on a suicide mission, tasked with transferring tens of billions of intangible assets to Ireland before self-destructing. Its only ever set of accounts shows that Microsoft Ireland Holding issued $52.8 billion worth of shares to the software giant’s US HQ and used the proceeds to acquire all shares in Microsoft Singapore Holdings Ltd in 2018. It then proceeded to write down $3.4 billion off the value of the Asian subsidiary, generating an equivalent paper loss. Once this was done, the company was merged into Microsoft Ireland Research, the holding entity at the centre of the group’s Irish corporate structure – a transaction decided last June and completed in September.

Separately, another Irish subsidiary, Microsoft Ireland Operations Ltd, stated in its accounts that it “assumes the functions of licensor and manufacturer for the Asia Pacific region” from September 1, 2018. Microsoft Ireland Operations is the software multinational’s trading arm across Europe, the Middle East and Africa, with $27.5 billion in sales and $1.4 billion in pre-tax profit in 2018.

It also employed the vast majority of Microsoft’s staff in Ireland that year, with 1,407 employees on an average gross salary of €125,700. Its direct parent Microsoft Ireland Research had another 439 employees on an average pay of €133,600. This does not include LinkedIn (see below).

Click on the image below to see the map of Microsoft’s corporate structure in Ireland.

Click on the image to enlarge.

Was the Singapore move part of a plan to manage Microsoft’s Asian business out of Dublin, as some speculated at the time? Not really. There have been no thundering announcements of hundreds of new Irish jobs associated with product development, sales or support in that region.

Instead, the global financial statement published by Microsoft Corporation for the year ended June 30, 2019 confirms that Asian employees continue to perform these functions in their native languages and time zones. Microsoft’s world outside the Americas remains carved out as follows: “The regional centre in Ireland supports the European, Middle Eastern, and African region; the centre in Singapore supports the Japan, India, Greater China, and Asia-Pacific region.” The firm’s cloud-based services are also firmly delivered to Asian customers out of Singapore-based data centres.

What Microsoft Singapore Holdings brought to Ireland was billions of euros’ worth of intellectual property rights. The group reported that between April and June 2019, in response to the entry into force of US tax reforms, it “transferred certain intangible properties held by our foreign subsidiaries to the US and Ireland”. 

How much IP did Microsoft move from Singapore to Ireland?

The Eurostat database shows that Ireland did not report a public figure for investment in intellectual property in the second quarter of 2019, marking it “confidential”. Belgium and Cyprus are the only two other Eurozone countries who keep this data confidential, on a regular basis. 

A subtraction of figures reported by other Eurozone countries shows that the quarterly amount kept confidential by Belgium and Cyprus was never higher than a combined €6.5 billion in the past five years. When Ireland joined them in the second quarter of 2019, this figure jumped to €48 billion. 

This suggests that Irish investment in intellectual property jumped to over €40 billion in the quarter when Microsoft reported its Singapore move, compared with a five-year quarterly average of under €10 billion. Accounts to be filed this year by Irish subsidiaries may reveal exactly how much was moved here.

“The transfers of intangible properties resulted in a $2.6 billion net income tax benefit recorded in the fourth quarter of fiscal year 2019, as the value of future tax deductions exceeded the current tax liability from foreign jurisdictions and US GILTI tax,” Microsoft added, linking the move to the application of the US Tax Cuts and Jobs Act passed through Congress by the Trump White House at the end of 2017.

Under the legislation, this new category of global intangible low-taxed income (GILTI) is taxed at a similar rate to profits generated from the export of products and services derived from intangible assets based in the US. The intention of American policymakers is to remove incentives for companies to manage intellectual property and associated profits offshore, but Microsoft’s example shows that Ireland remains an attractive destination for its intangibles – more on the GILTI provisions and their impact on multinationals’ investment in Ireland in a later article.

“Microsoft consolidated their international operations around Ireland with a capital allowance for intangible assets.”

Brad Setser, Council on Foreign Relations

As of the end of June, Ireland was the only country outside the US where Microsoft held more than 10 per cent of its long-lived assets (over one year).

As previously detailed, Apple went down the Irish route as early as 2015 with its intellectual property rights, while Google recently announced it was moving them away from this country. “Microsoft and Google reached seemingly opposite decisions on their tax structure – Microsoft consolidated their international operations around Ireland with a capital allowance for intangible assets (CAIA) transaction (buying Microsoft Singapore) and will be taxed in the US under the GILTI,” said Brad Setser, an economist who follows cross-border taxation issues at the New York-based Council on Foreign Relations.

Microsoft Sandyford
Microsoft has moved billions of dollars through Ireland in response to US tax reform. Photo: Thomas Hubert

Another financial flow showing intense activity in the past two years has been Microsoft’s repatriation of dividends out of Irish-registered subsidiaries. As reported last week, Microsoft Round Island One has declared more than €90 billion in distributions to its overseas parents since the start of 2018 – second only to Apple in the dividend league of Irish-based multinational subsidiaries. 

Round Island One is tax-resident in Bermuda and had been accumulating indefinitely tax-deferred profits for years under the double Irish scheme, but can no longer do so from this year. The company has been channelling funds back from a variety of other offshore subsidiaries, with two units alone (Microsoft Luxembourg USA Mobile SARL and Bermuda-based MACS holdings Ltd) contributing $57.5 billion in returns of capital to its accounts in 2018.

“Our effective tax rate was lower than the US federal statutory rate, primarily due to the tax benefit related to intangible property transfers, and earnings taxed at lower rates in foreign jurisdictions.”

Microsoft Corporation

The group’s consolidated financial statement explains the impact of US tax reform on its decision to repatriate funds. On the one hand, the Tax Cuts and Jobs Act (TCJA) imposed a once-off tax on accumulated profits stashed offshore for the past three decades, including those in Microsoft’s Irish-registered subsidiaries. The rate was 15.5 per cent for cash and eight per cent for other assets. These funds are now deemed repatriated and taxed in the US. On the other hand, the main corporate income tax rate in the US has gradually dropped from 35 to 21 per cent in the past two years.

“During fiscal year 2018, we recorded a net charge of $13.7 billion related to the enactment of the TCJA, due to the impact of the one-time transition tax on the deemed repatriation of deferred foreign income of $17.9 billion, offset in part by the impact of changes in the tax rate of $4.2 billion, primarily on deferred tax assets and liabilities”, Microsoft reported. The once-off taxation of profits held in Ireland and other offshore jurisdictions caused the group’s global effective tax rate to jump to 54.6 per cent that year.

This effect stopped in the year to June 30, 2019, when the reduction in the overall US corporation tax rate meant Microsoft’s global effective tax rate fell to 10.2 per cent, well beyond the 14.8 per cent applied before the Trump reform. In addition, the company chose to book the $2.6 billion tax benefit expected from the move of intellectual property from Singapore to Ireland and the US as a deferred tax asset, boosting its balance sheet by an equivalent amount.


LinkedIn continues to recruit in Dublin

If you scour LinkedIn for job offers in Dublin, you will currently find 106 positions advertised by… LinkedIn. Some require fluent Czech, Hebrew or Spanish. There is even an opening for a “data storyteller”. 

Since its acquisition by Microsoft in 2016, the professional networking site has grown to employ nearly as many people as its parent in Ireland, and counting.  From 1,300 people at the end of 2018, the company has a target of 2,000 staff in the city this year – and that’s before it takes over buildings under development at the Wilton Park scheme next to its existing office off the Grand Canal. 

The first block, which it pre-leased in 2018, is under construction and three more are due by 2023. Developer IPUT announced last month that LinkedIn had now agreed to lease the rest of Wilton Park for a certain term of 12 years. The additional office space of 580,000sqft would dwarf Microsoft’s Leopardstown HQ. Applying the same generous ratio of 185sqft per worker, it would allow LinkedIn to increase its workforce by more than 3,100 over the next four years.

Wilton Park
The first block of IPUT’s Wilton Park under construction in Dublin. The building will host the extension of LinkedIn’s Irish office. Photo: Thomas Hubert

Nearly four years into its acquisition by Microsoft, LinkedIn Ireland has been brought into the fold of the group’s central holding Microsoft Ireland Research, but remains independently managed with separate city-centre headquarters. It delivered $2.2 billion in revenue and $85 million in pre-tax profit in 2018. It was sitting on $6.2 billion in shareholders’ funds at the end of that year, having paid an $800 million dividend to Microsoft and recommending the distribution of another $200 million.

Aside from dividends, Microsoft has been extracting wealth from LinkedIn Ireland in two ways. Firstly, Microsoft Ireland Research has been consolidating LinkedIn’s intangible assets just like those in the rest of the group, acquiring its intellectual property in 2017. This resulted in an exceptional $2.6 billion profit for LinkedIn Ireland. The company declared it had sold more intellectual property to Microsoft for $55 million since its last accounts were published. Separately, Microsoft struck a company called LinkedIn IP Holdings I Unlimited off the register last year.

Secondly, LinkedIn has been loaning cheap money to Microsoft. On June 30, 2018, it booked $6.5 billion in receivables from a short-term loan to Microsoft Global Finance, the group’s Irish-based treasury company, at the US Federal Reserve short-term deposit rate of 1 to 1.5 per cent.

Since it first established an operations centre in Sandyford for its business in Europe, the Middle East and Africa in 1985, Microsoft has been instrumental in developing the south Dublin business district as it grew its business in three directions essential to the software giant’s global success. 

Ireland has become its business centre for all time zones between the Atlantic and Indian oceans, contributing to product development as well as localising, testing, selling and supporting software across the region. Its subsidiary LinkedIn has been developing these functions here, too.

Microsoft 1985
Microsoft’s original Irish office in Sandyford in 1985. Photo: UCD Library

Irish subsidiaries also form the centre of Microsoft’s global corporate tax structure – a position strengthened by the Singapore move in 2018. “Our effective tax rate was lower than the US federal statutory rate, primarily due to the tax benefit related to intangible property transfers, and earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centres in Ireland, Singapore, and Puerto Rico,” Microsoft Corporation reported in its latest accounts. In total, Microsoft and LinkedIn companies reported tax charges of just under $2 billion in Ireland in 2018, equivalent to one sixth of the national corporation tax take that year.

Finally, along with the Netherlands, Ireland has become Microsoft’s major European data centre location as the software its sells moves to the cloud. From an original $500 million slice of Dublin’s Grange Castle server farm district in 2009, the company has added three extensions including one alongside its offices in Leopardstown. 

Microsoft was the first end-user of electricity to sign a power purchase agreement with a renewable energy generator in Ireland – GE’s Tullaheneel wind farm in Co Kerry – in 2017. As the scramble for clean power heats up among data centre operators in the country, its dedicated subsidiary Microsoft Ireland Energy will be one to watch.