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Archived updates for Thursday, November 10, 2005

Tax Policies Promoting Irish Tech Investment

According to Glenn R. Simpson writing for the Wall Street Journal on November 7, 2005 (via the PTP Blog), Microsoft's Round Island One intellectual property holding company paid the Irish Government more than $300 million in taxes, or about 3.3%, on $9 billion in profits. Microsoft reportedly routes its licensing fees for Microsoft software in Europe, the Middle East, and Africa through the Irish company so that its taxes paid to Ireland amount to about $77 for each of Irelands 4 million citizens.

The scheme relies on so-called "cost sharing arrangements" where related corprate entities will agree to share the costs and risks of intangible development in proportion to their reasonable expectations of benefit from the separate exploitation of the developed intangibles.

A common device is to take successful, patented American ideas and then develop
new generations of them -- with help from an offshore research division. The
ownership of the new version (and profits on licensing it) can then legally be
shared between the U.S. parent company and the offshore unit.

Suppose a U.S. company develops a new, easy-to-use computerized day planner, and it's a global hit. All the royalties must go to the U.S., where it was invented, and be taxed at the U.S. corporate income tax rate of 35%. But if the company builds a new
and improved version, adding features created partly by its offshore R&D team, the intellectual property rights of day planner 2.0 can be shared between the U.S. and the foreign unit -- as can the profits. Day planner 1.0, of course, disappears.

U.S. law explicitly permits this practice. The controversy comes in valuing the contribution made by the offshore unit. Did it pay a fair share of the development cost? And did it pony up a reasonable price to the parent company to be able to share the rights to the original invention, a price an arm's-length party would pay?
U.S. companies seek to meet the test by creating "cost sharing arrangements" between them and the foreign unit. "R&D cost-sharing agreements within corporate structures can minimize the tax payable in the parent country," notes Ireland's government in a development paper.


However, tax authorities in the U.S. and other jusridictions are watching these arrangements closely. The underlying concern is that American companies rely on the U.S. education system and other tax-supported infrastructure to produce a highly creative work force, then move the fruits of that labor abroad without due compensation to American society.

Yet multinational corporations still face strong tax disincentives when they try to move these profits back into R&D facilities in higher tax-rate jusrisdictions like the U.S. According to the American Shareholders Association, this year's one-time discount for such tax liabilities under the "Invest in USA" Act has repatriated about $200 billion from multinational corporations at an effective U.S. tax rate of about 5.25 percent.

Of course, the other option for cash-rich multinationals is to simply reinvest those profits in the low-tax jurisdictions where they are collected. In fact, when combined with access to the EU market and a highly-educated, English-speaking workforce, Ireland’s low corporation tax rate has created a large multinational presence with unprecedented economic growth. According to a brochure from the Irish law firm that reportedly shares its address with Round Island:
[S]mall, sparsely populated and largely undeveloped havens like Cayman lack "the
necessary economic infrastructure to which value and ultimately profits can
justifiably be attributed." But Ireland has the people and physical
infrastructure to permit "construction of profit-generating centres defensible
by reference to functions, risks and tangible assets of the Irish operation."
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1 Comments:

Blogger shelly said...

Oh!! It is really a informative news about Microsoft's Round Island company which paid the Irish Government more than $300 million in taxes, or about 3.3%, on $9 billion in profits. Microsoft reportedly routes its licensing fees for Microsoft software in Europe, the Middle East, and Africa through the Irish company so that its taxes paid to Ireland amount to about $77 for each of Irelands 4 million citizens. I am surprised to read this article..
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