Microsoft Canada’s Irish ownership offers a glimpse into multinationals’ tax strategies

Microsoft Canada MSFT-Q became owned by an Irish affiliate in its 2021 fiscal year, according to documents that offer a rare glimpse at how its multinational parent company has taken advantage of Ireland as a tax haven.

Such a structure could drive down the taxes that the Outlook, Word and Excel software giant pays on any profit it generates in Canada, experts say, by letting Microsoft Canada transfer profits to the lower-tax country with techniques such as royalty payments to the Irish parent company.

Many jurisdictions, including Canada, put little pressure on large multinationals to disclose the finances of their local subsidiaries. But financial statements recently published by Ireland’s corporate registration office show that a Microsoft Corp. branch called Microsoft Round Island One UC became tax resident there as of Jan. 1, 2021.

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In Microsoft’s 2021 fiscal year, which ended that June 30, the documents show that the subsidiary took ownership of Microsoft Canada from a separate, unidentified branch of the company.

That entity then transferred Microsoft Canada to another Irish subsidiary called Microsoft Ireland Research UC, whose filing says it licenses the rights to Microsoft’s products to other segments of the multinational.

It is common for multinational companies to establish subsidiaries in tax-friendly Ireland, which has not yet implemented a multilateral promise to boost its corporate-profit tax rate to 15 per cent from 12.5 per cent. But it is rare to get a sense of exactly how these multinationals’ country-specific subsidiaries are shifted around to more tax-friendly jurisdictions within a labyrinthine corporate structure.

Microsoft sells staple software around the world for consumers, governments and companies alike, while the company is also one of the world’s most prominent cloud-computing providers. It had a global profit of US$61.3-billion in its fiscal 2021 year – the same one described by its Irish filings – and saw that figure grow 19 per cent, to US$72.7-billion, a year later.

Multinationals often license rights to software or intellectual property such as for logos or other trademarks, from one subsidiary to another in exchange for payments, sometimes in the form of royalties – which can reduce profits in higher-tax countries and boost them in lower-tax countries.

Ireland’s tax treaty with Canada exempts some royalties paid to related Irish companies from withholding tax, while the country’s 12.5-per-cent rate on corporate profits is 2.5 percentage points less than the Canadian federal rate – and close to half the total corporate tax rate of most Canadian jurisdictions once provincial corporate taxes are lumped in.

It is not clear how much profit or loss Microsoft Canada books, nor is it clear how much it reduces any profits through payments to its Irish parent. Though some cross-border royalties are taxable, Geoffrey Loomer, an associate dean at the University of Victoria’s law faculty who studies tax law, said that, in practice, most are generally exempt from withholding tax.

“There is no doubt … that the structure was set up very carefully to avoid relatively high Canadian corporate tax rates,” Prof. Loomer said. Even if it were Ireland’s corporate tax rate alone that appealed to Microsoft, “a rate of 12.5 per cent isn’t as ‘good’ as zero, but it’s lower than the tax rates in most of the world.”

The Globe and Mail sent questions to Microsoft Canada in mid-December about its tax filings, strategy, residency and history. The company declined to respond in detail, and instead provided a brief e-mailed statement that said the tax filings themselves were “fully compliant with all laws and regulations in Ireland” and that they were the “best resource” for further detail.

“Microsoft has a complex global business and we have been actively looking for ways to simplify our tax and legal structure,” wrote Microsoft Canada’s head of communications, Lisa Gibson. “These filings reflect changes we made in prior fiscal years.”

The Irish filings for Microsoft Round Island One’s 2021 fiscal year show it became tax-resident there the day after the country stopped allowing widely publicized “Double Irish” tax strategies, which allowed Dublin-registered companies to be considered tax-resident in an offshore country with lower, or even zero, corporate tax.

Round Island One’s fiscal 2020 filing indicates that its majority parent that fiscal year, prior to becoming tax-resident in Ireland, was a Bermuda-incorporated company called MBH Ltd. Bermuda has no corporate income tax.

The “Double Irish” strategy allowed companies to transfer royalty payments from an Irish subsidiary to a Bermuda-resident one, drastically lowering their tax bills. Some of the world’s biggest multinationals, including Google owner Alphabet Inc. and Facebook owner Meta Platforms Inc., used versions of this strategy prior to Ireland sunsetting it, sending billions of dollars to jurisdictions where they were able to minimize their taxes.

Jinyan Li, a tax law professor and former interim dean of York University’s Osgoode Hall Law School, said in an interview that shifting ownership of Microsoft Canada to Ireland might be part of a global restructuring to grapple with changes to Irish tax rules, rather than for any Canadian-specific reason.

“For tax reasons, Microsoft might just aggregate all the subsidiaries under the umbrella of the Irish for their own global tax-planning reasons,” she said.

The Centre for International Corporate Tax Accountability and Research (CICTAR), which shared the Microsoft subsidiaries’ Irish filings with The Globe, is pushing for greater transparency by the software juggernaut.

CICTAR helped spearhead a proposal at Microsoft’s annual shareholder meeting, held online on Dec. 13, to demand the company produce a tax transparency report that follows guidelines from the Global Reporting Initiative. It would require jurisdictional breakdowns of revenues, profits and losses, and tax payments.

In its initial response to the proposal, Microsoft said it provides “abundant disclosure about our tax situation in multiple jurisdictions.” But CICTAR’s principal analyst, Jason Ward, told The Globe that Microsoft Canada’s move to Ireland prompts the need for clearer disclosures.

“There is no public disclosure on the shift of ownership of Microsoft Canada to Microsoft Round Island One and the subsequent transfer to Microsoft Ireland Research, both subsidiaries incorporated in Ireland,” Mr. Ward said. “If not for tax avoidance, what is the purpose of Microsoft owning Canadian and global operations through Irish structures that were previously tax resident in Bermuda?”

The tax transparency resolution received just 23-per-cent shareholder approval, but Mr. Ward said it sent a “clear message” to Microsoft board and management that shareholders wanted more detailed reporting.

Round Island One took ownership of a number of Microsoft subsidiaries for US$18.8-billion in the same fiscal year it brought in Microsoft Canada, though its tax filing said the Canadian division was not part of the same transaction, and did not assign it a monetary value.

Microsoft Ireland Research also owns German, French, Swiss, Swedish, Kenyan, Turkish and other Microsoft subsidiaries. It brought in US$41.2-billion in revenue in the fiscal year ended in June, 2021 – an 18.7-per-cent rise over the previous year, which Microsoft Ireland Research attributed to “increased royalty income from group companies.”

The company did not break this revenue down geographically in the filing, arguing that “this information would be seriously prejudicial to the interests of the company.”

Its profit was US$16.6-billion, and it distributed US$30-billion dollars in dividends, according to filings. It also reported a net book value for its intellectual property rights of US$29.6-billion. Round Island One, the holding company that owns Microsoft Ireland Research, declared a profit of US$30-billion and said it paid out US$30.5-billion in dividends.

Ireland was one of the last holdouts when the Organisation for Economic Co-operation and Development (OECD) secured agreement from more than 130 countries last year on a global minimum 15-per-cent corporate tax rate. The country agreed to the OECD’s terms only at the last minute, and they have not yet come into force.

The OECD is also pushing for international tax changes that would allow for a portion of the profits of some of the world’s biggest multinationals to be reallocated to where those profits were generated.