The changing nature of outbound

royalties from Ireland and their impact on the taxation of the profits of US

multinationals

May 2021

Seamus Coffey

Department of Economics,

University College Cork

Disclaimer: This paper has been prepared by Seamus Coffey of University College Cork. The

views presented in this paper are those of the author alone and do not represent the official

views of the Department of Finance or the Minister for Finance. The paper was prepared in

the context of ongoing analysis of Ireland's Corporation Tax regime and reflects the data

available to the author at a given point in time.

ii

Summary

Large outbound royalty payments are made from Ireland as license fees for intellectual

property developed elsewhere. These outbound payments were €84.3 billion in 2019 and

preliminary figures for 2020 show a figure of €83.6 billion. Both of these were in excess of

20 per cent of GDP, with the majority of the payments arising the operations of US

multinational companies in Ireland.

An analysis of the geographic breakdown of these flows from Balance of Payments data

shows a very significant change in 2020. Up to 2020, the majority of the outbound royalty

payments from Ireland were directed to offshore financial centres such as Bermuda and the

Cayman Islands. In 2020, a number of US MNCs, particularly in the ICT sector, announced

changes to the licensing arrangements for the use of their intellectual property by their

international operations. Several US ICT MNCs began licensing their intellectual property

from the United States during 2020. After averaging €8 billion a year in the five previous

years, royalty payments from Ireland to the US jumped to €52 billion in 2020, and are likely

to be higher in future years.

In a case study of a US ICT MNC, this report analyses the impact of the changing nature of

outbound royalties from Ireland on the taxation of the profits of US multinationals. In

particular, the analysis focuses on three elements of the 2017 Tax Cuts and Jobs Act. These

are the one-time transition tax on pre-2018 profits of US MNCs which had benefitted from

deferred taxation, the US tax due on what is deemed to be global intangible low-taxed

income, and the relief provided by the US for foreign derived intangible income. Using

publicly available information including financial statements, the case study explores how

these have impacted the effective tax rate of a US MNC.

In time, the impact of these revised structures which is already evident in balance of

payments data will also be evident in other datasets including the aggregate statistics

published by the IRS and the OECD from the country-by-country reports filed by

multinational companies. The changes will also have a significant impact on the data on the

Activities of US Multinational Enterprises published by the Bureau of Economic Analysis

which have historically overstated the level of profits earned by the subsidiaries of US

multinational companies in Ireland.

The changes highlighted in the case study illustrate that the use of “double irish” type

structures is ending. It is non-controversial that the Irish operations of US companies have

to pay for the use of technology that is developed elsewhere and, in many cases, these

payments will continue to be made in form of outbound royalties. However, it is not clear

that the scale of these payments is a signal of aggressive tax planning as a greater and

greater share of these payments, particularly from the ICT sector, will flow directly and in

full to the United States. The changed pattern of royalty flows from Ireland is now more in

line with the economic substance of these companies and the reporting of their profits is

better aligned with the function, assets and risks that generate those profits

iii

Table of Contents

1 Introduction ............................................................................................................................ 1

2 Aggregate analysis of changes in royalty payments ............................................................... 1

2.1 Sectoral analysis ............................................................................................................... 2

2.2 Destination analysis ......................................................................................................... 3

3 The revised structures of US ICT MNCs .................................................................................. 6

3.1 Identifying revised structures in Ireland’s Balance of Payments statistics ...................... 6

3.2 A case study of these changes in company accounts data .............................................. 8

4 The impact on tax of the identified changes in royalty flows............................................... 12

4.1 Global Intangible Low-Taxed Income ............................................................................. 13

4.2 Foreign-Derived Intangible Income ................................................................................ 14

4.3 Why have US MNCs changed their structure? ............................................................... 15

4.4 How these changes will impact other statistics ............................................................. 16

4.5 The end of the “double-irish” ........................................................................................ 17

4.6 Complying with a Country-Specific Recommendation .................................................. 18

5 Conclusion ............................................................................................................................. 19

REFERENCES ............................................................................................................................. 20

iv

List of Figures

Figure 1: Outbound Royalty Payments …….………………….……………………….……………………………….2

Figure 2: Outbound Royalty Payments by Sector …………………………………….…………………………….2

Figure 3: Outbound Royalty Payments by Destination ……….…………………………..…………………….3

Figure 4: Outbound Royalty Payments to the Euro Area ……….……………..……………………………….6

Figure 5: Outbound Royalty Payments to Offshore Financial Centres…….……..……………………….7

Figure 6: Outbound Royalty Payments to the United States…………………..……………..……………….8

Figure 7: Profit in Bermuda by Ultimate Parent Jurisdiction………….…………………………………….15

List of Tables

Table 1: US ICT MNC Income from continuing operations before income taxes………………………8

Table 2: Holding Company Subsidiary of US MNC in Bermuda……………………………………………..…9

Table 3: Trading Company Subsidiary of US ICT MNC in Ireland……………………………………………10

Table 4: Consolidated Tax Reconciliation Statement of a US ICT MNC………………………………….12

Table 5: Profit of US Multinationals attributed to selected jurisdictions……………………………….16

Table 6: Income from continuing operations before income taxes of a US ICT MNC…….……....17

1

1 Introduction

The subsidiaries of US multinational companies (MNCs) operating in Ireland generate their

revenues from the sales of products and services that are the result of research and

development that is primarily undertaken in the United States. These include

pharmaceutical medicines and computer chips which are manufactured at Irish facilities and

advertising and other services sold on online platforms by information and communication

technology (ICT) companies that have their international headquarters in Ireland.

Recent years have seen significant changes introduced that impact on the taxation of these

companies. These changes include those brought about through the Organisation for

Economic Cooperation and Development’s original Action Plan under the Base Erosion and

Profit Shifting (BEPS) project, the Tax Cuts and Jobs Act signed into US law in 2017 and

changes to corporate tax residency rules in Ireland. These changes have been significant

and have triggered significant responses.

This note examines some of these changes and, in particular, focusses on outbound royalty

payments from Ireland. Section 2 looks at the major changes that have occurred since the

start of 2020 in the destination of these royalty payments. Section 3 provides some case-

study analysis exploring the evidence of revised structures of US MNCs from publicly-

available data. Section 4 continues this analysis and looks at the taxation of the profits from

such royalties with an emphasis on the relevant provisions of the US tax code including

those introduced by the Tax Cuts and Jobs Act of 2017 and also provides a brief analysis of

how the revised structures are likely to impact on some of the data sources used to assess

the activities of US MNCs. Section 5 draws together the main conclusions.

2 Aggregate analysis of changes in royalty payments

It is non-controversial that the Irish operations of US companies have to pay for the use of

technology that is developed elsewhere. There are essentially two ways in which this can be

achieved:

1. An outright purchase with the subsidiary in Ireland acquiring the rights or license to

use the technology;

2. Recurrent payments with the subsidiary in Ireland getting access to the technology

via royalty payments.

Historically, the latter was the main method used and recent years have seen an increase in

outright purchases or a combination of the two. Even still, it is likely that royalty payments

from Ireland will remain very significant over the coming years. However, there have been

important changes in the nature of these payments.

Figure 1 shows that in 2019, outbound royalties from Ireland were €84.3 billion, with the

preliminary figures for 2020 recording a small drop to €83.6 billion. Latest estimates are

that Irish GDP in 2020 was €366.5 billion meaning that the outbound royalty payments

made were equivalent to around 22.5 per cent of GDP.

2

The headline totals in recent years may have been relatively stable but there have been very

significant changes in the composition of outbound royalties from Ireland. In this section,

aggregate data by sector and by destination will be considered with Section 3 providing a

case study of company-specific outturns.

2.1 Sectoral analysis Some of the changes in the composition of outbound royalties can be seen if we look at the

contribution of the pharmaceutical and ICT sectors to the total in recent years. Figure 2

shows that, in 2016, the amount of outbound royalties for the ICT and pharmaceutical

sectors were broadly the same. In recent years these amounts have diverged, with

outbound royalties in the ICT sector rising and those for the pharmaceutical sector falling.

0

20,000

40,000

60,000

80,000

€million

2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Central Statistics Office, Balance of Payments

Value of Annual Irish Royalty Imports with all Countries

Figure 1: Outbound Royalty Imports

0

20,000

40,000

60,000

80,000

€million

2016 2017 2018 2019 2020 Source: Central Statistics Office, Balance of Payments

Value of Annual Irish Royalty Imports with all Countries by selected NACE Categories

Figure 2: Outbound Royalty Imports by Sector

Other Sectors

Pharmaceutricals

Information and Communication

3

Compared to 2016, outbound royalty payments by the pharmaceutical sector in Ireland

have reduced from €24 billion to €14 billion. Over the same period, outbound royalty

payments linked to the ICT sector have risen from €28 billion to €57 billion. Payments from

all other sectors excluding these two have also declined.

The share of outbound royalties from Ireland arising from the ICT sector has risen from 40

per cent in 2016 to almost 70 per cent in 2020. As a result of this much of the subsequent

analysis, including the case study beginning in Section 3, focusses on the ICT sector.

2.2 Destination analysis

Royalty payments leaving Ireland for technology developed elsewhere is only a part of the

story. Where they go to is also relevant. Up to recently the largest destination of these

royalties had been what are termed ‘offshore financial centres’. In the notes for its Balance

of Payments statistics, Ireland’s Central Statistics Office sets out that:

This category overlaps with the regions referred to above and covers Andorra, Antigua and Barbuda, Anguilla, Netherlands Antilles, Barbados, Bahrain, Bermuda, Bahamas, Belize, Cook Islands, Curacao, Dominica, Grenada, Guernsey, Gibraltar, Hong Kong, Isle of Man, Jersey, Jamaica, St. Kitts and Nevis, St Maarten, Turks and Caicos Islands, Cayman Islands, Lebanon, Saint Lucia, Liechtenstein, Liberia, Marshall Islands, Montserrat, Maldives, Nauru, Niue, Panama, Philippines, Singapore, Saint Vincent and the Grenadines, British Virgin Islands, US Virgin Islands, Vanuatu, Samoa.

Figure 3 provides a geographic breakdown of the main destinations of outbound royalty

payments from Ireland. In 2019, €37 billion or almost 45 per cent of total outbound

royalties from Ireland were paid to offshore financial centres.

0

20,000

40,000

60,000

80,000

€million

2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Eurostat, Balance of Payments

Value of Annual Irish Royalty Imports with Selected Regions

Figure 3: Outbound Royalty Imports by Destination

Other Regions Euro Area

Offshore Financial Centres United States

4

It can be seen that the amounts going to offshore financial centres were relatively modest

up to 2013 after which they increased rapidly. A likely reason for this is that up to then

Ireland levied a withholding tax on outbound royalty payments paid to non-treaty

countries. If royalty payments were made by an Irish resident person or entity to these

jurisdictions some of the payment would have to be withheld and paid to the Irish tax

authority, the Revenue Commissioners, to cover potential tax liabilities.

There was a fairly straightforward workaround for companies to avoid Ireland’s withholding

tax on outbound royalties to non-treaty countries. Under the EU’s Interest and Royalties

directive EU Member States cannot levy a withholding tax on royalty payments made by a

company to an associated company that is resident of another Member State.1

And as is well known The Netherlands does not levy a withholding tax on outbound

payments from there to locations such as Bermuda. This means that Figure 3 does not fully

represent the amount of outbound royalties from Ireland that are directed to ‘offshore

financial centres’.

Data on royalty flows from Ireland to The Netherlands is not available from Eurostat for all

years. However, for those years which it is available, the data shows that almost all of the

royalty payments made from Ireland to the rest of the euro area went to The Netherlands.

For example, in 2019, of the €29.0 billion of royalties from Ireland to the euro area, €26.4

billion went to The Netherlands. Similar shares are evident for the other years for which

data is available. Further, as will be shown in the next section, it is safe to assume that via

this “dutch sandwich” these royalties from Ireland were further transferred from The

Netherlands to jurisdictions such as Bermuda.

All of the companies involved in these transactions are US multinationals. The US tax

system has allowed (and incentivised) US companies to locate licenses for the use of their

technologies outside the US in low-tax jurisdictions such as Caribbean Islands.

So, while the Irish subsidiaries were correctly paying for the use of technology generated

elsewhere these payments were going to locations where the companies had no substance

rather than where the technology was actually developed, i.e., the United States. The

primary tax payments affected by these strategies are US tax payments.

There are many reasons why these strategies will no longer be effective. Revisions to the

OECD Transfer Pricing Guidelines including those brought about by Actions 8 to 10 of Action

Plan from BEPS v1.0 means that while such payments to entities that license the technology

can be made, they should not be retained if the legal owners have no or limited involvement

in the functions that lead to the development of the intellectual property being licensed.

This is formally set out in paragraph 6.42 of the 2017 update to the OECD’s Transfer Pricing

Guidelines:

1 An associated company is where Company A holds 25 per cent of the voting power in Company B; or Company C holds 25 per cent of the voting power of Companies A and B.

5

6.42 While determining legal ownership and contractual arrangements is

an important first step in the analysis, these determinations are separate and

distinct from the question of remuneration under the arm’s length principle.

For transfer pricing purposes, legal ownership of intangibles, by itself, does

not confer any right ultimately to retain returns derived by the MNE group

from exploiting the intangible, even though such returns may initially accrue

to the legal owner as a result of its legal or contractual right to exploit the

intangible. The return ultimately retained by or attributed to the legal owner

depends upon the functions it performs, the assets it uses, and the risks it

assumes, and upon the contributions made by other MNE group members

through their functions performed, assets used, and risks assumed. For

example, in the case of an internally developed intangible, if the legal owner

performs no relevant functions, uses no relevant assets, and assumes no

relevant risks, but acts solely as a title holding entity, the legal owner will not

ultimately be entitled to any portion of the return derived by the MNE group

from the exploitation of the intangible other than the arm’s length

compensation, if any, for holding title.

OECD (2017), p.262

Under these guidelines if the owner of the intangible asset does not undertake the relevant

functions a set of service transactions must be entered to pay for these functions. The price

set in these transactions will determine the profit that accrues to the owner of the

intangible asset. This will depend on the level of functions carried out by the owner of the

intangible and the pricing approach used by the jurisdiction where the functions are

undertaken.

As well as these changes to the OECD’s transfer pricing guidelines, revisions to Ireland’s

residence rules for Corporation Tax meant it was no longer as feasible for US companies to

avail of the deferral provisions in the US tax code such as the “same country exemption” –

with the original basis for the “double irish” being that two companies were registered in

the same country.2 Significantly, the Tax Cuts and Jobs Act (TCJA) effectively abolished the

principle of deferral for the US tax due on the profit from passive income such as royalties

which was the primary motivation for the creation of these structures.

2 These structures were multi-layered and a similar outcome could be achieved a number of ways. For example, the introduction by the IRS in 1997 of the “check the box” election for entity classification facilitated the broader use of ‘disregarded entities’ for tax purposes in the structures of US MNCs. This election was formalised via the temporary introduction of the ‘look-through rule’ for disregarded entities into Subpart F of the US tax code. There were a number of occasions on which the ‘look-through rule’ was set to expire but each time the US Congress passed an Act that included a provision for its extension. A feature of the “same country exemption” is that it is a permanent feature of the US tax code that did not require a Congressional vote for its extension or rely on an IRS regulation which could be changed.

6

3 The revised structures of US ICT MNCs

It is only US companies that have structures similar to the “double irish with a dutch

sandwich”. A number of companies, most notably in the ICT sector, have made public

statements that they are ending this arrangement. In its annual filing with the Securities

and Exchange Commission (SEC) for 2020, one US ICT company announced:

“As of December 31, 2019, we have simplified our corporate legal entity

structure and now license intellectual property from the U.S. that was

previously licensed from Bermuda resulting in an increase in the portion of

our income earned in the U.S.”

While another US ICT MNC, which previously made payments directly from Ireland to an

offshore financial centre, issued a statement in December 2020 which said:

“Intellectual property licenses related to our international operations have

been repatriated back to the US. This change, which has been effective since

July this year, best aligns corporate structure with where we expect to have

most of our activities and people. We believe it is consistent with recent and

upcoming tax law changes that policymakers are advocating for around the

world.”

3.1 Identifying revised structures in Ireland’s Balance of Payments statistics These changes have been made and the impact on royalty payments can be seen in the

data. As noted above, Eurostat don’t provide a complete series for royalty payments from

Ireland to the Netherlands (many of the values are redacted) but there is a complete series

for quarterly royalty payments from Ireland to the Euro Area and this is shown in Figure 4.

The available data suggest that payments to The Netherlands make up 90 per cent of royalty

payments from Ireland to the Euro Area.

0

2,500

5,000

7,500

10,000

€million

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Eurostat, Balance of Payments

Value of quarterly outbound royalties from Ireland to the rest of the Euro Area (EA19)

Figure 4: Royalty Imports with the Euro Area

7

It is clear there was a significant change at the start of 2020 with a large drop in royalties

payments made from Ireland to the Euro Area, which means there was a large drop in these

payments from Ireland to The Netherlands.

This change doesn’t make a significant immediate difference to the companies’ operations

in Ireland. The Irish company must still pay for the right to use the technology or platform it

is using but these license payments or royalties are no longer going to an offshore financial

centre via The Netherlands. The ending of this arrangement will not have a material impact

on the amount of Corporation Tax paid in Ireland.

There is also evidence of the changes that were flagged for July of 2020 in the second

company statement above. As shown in Figure 5, outbound royalty payments from Ireland

to offshore financial centres had been relatively stable from Q1 2015 to Q2 2020 but they

fell steeply in Q3 2020 in line with the announced change in the statement reproduced

above.

Royalty payments from Ireland to offshore financial centres averaged just over €8 billion a

quarter from Q1 2015 to Q2 2020. For the final two quarters of 2020 these payments fell to

€2 billion a quarter – a 75 per cent reduction.

The aggregate analysis in Section 2 shows that total outbound royalties from Ireland in 2020

were largely unchanged from what they were in 2019, with the total for both years being

close to €85 billion. This means that the reductions in payments shown Figure 4 for royalty

payments to the Euro Area and Figure 5 for royalty payments to offshore financial centres

were offset by increases in royalty payments to other destinations. Figure 6 shows data

from Eurostat for quarterly royalty payments from Ireland to the United States.

0

2,500

5,000

7,500

10,000

€million

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Eurostat, Balance of Payments

Value of quarterly outbound royalties from Ireland to Offshore Financial Centres

Figure 5: Royalty Imports with Offshore Financial Centres

8

We can conclude that the royalty payments that went to The Netherlands up to Q4 2019

began flowing to the US in Q1 2020, with a further increase in the second half of 2020

coinciding with the drop in royalty payments from Ireland to offshore financial centres.

After averaging €8 billion a year in the five previous years, royalty payments from Ireland to

the US reached €52 billion in 2020. The total is likely to be even higher in 2021 as

restructures that were put in place in the middle 2020 will be effective for the full year.

Royalty payments from Ireland as a share of GDP are likely to remain at a level that is much

higher than other countries but future years are likely to see most of these payments go to

the United States where the technologies used by the subsidiaries of US MNCs in Ireland are

developed.

3.2 A case study of these changes in company accounts data We have further evidence of these changes in royalty flows from the filings made by US

companies to the Securities and Exchange Commission (SEC). Table 1 shows the split of one

company’s income before taxes in profit from domestic operations and profit from foreign

operations:

Table 1: Income from continuing operations before income taxes for a US ICT MNC

2015 2016 2017 2018 2019 2020

$m $m $m $m $m $m Domestic Operations 8,300 12,000 10,700 15,800 16,400 37,600 Foreign Operation 11,400 12,100 16,500 19,100 21,200 10,500

Total 19,700 24,100 27,200 34,900 37,600 48,100

Source: Annual 10K SEC Filings (figures rounded to the nearest $hundred million)

0

5,000

10,000

15,000

20,000

25,000

€million

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Eurostat, Balance of Payments

Value of quarterly outbound royalties from Ireland to the United States

Figure 6: Royalty Imports with the United States

9

In the context of US MNCs, the figures for domestic operations refer to the income

attributed to the functions, assets and risks that are located in the United States and foreign

operations refers to activities in other jurisdictions. For this multinational, up to 2019, more

of its income was deemed as foreign rather than domestic. For the five years from 2015 to

2019, an average of 55 per cent of income before income taxes was attributed to foreign

operations. This is somewhat at odds with the economic footprint of these companies as

most of the functions, assets and risks that generate their profits, most notable the research

and development activities, are located in the US.

Included in those foreign profits up to 2019 would have been the profit from the royalty

flows out of Ireland. The outbound royalties from Ireland were payment for technology

developed in the US but the US approach to transfer pricing allowed the rights to this

technology to be advantageously placed offshore. Companies were then able to locate

these licenses in no-tax jurisdictions such as Bermuda and the approach at the time allowed

them to fully attribute the profit from these licenses to their legal owners. Table 2 gives the

income statement for the years from 2017 to 2019 for an IP holding company based in

Bermuda of a US ICT MNC.

Table 2: Holding Company Subsidiary of US ICT MNC in Bermuda

2017 2018 2019

$m $m $m

Statement of Profit and Loss and Other Comprehensive Income

Turnover 22,334 25,740 26,520

Cost of sales -94 -108 -87

Gross profit 22,240 25,632 26,433

Administration expenses -10,552 -11,122 -14,123

Other operating income 44 - 39

Other operating expenses -27 -56 -1

Operating profit 11,704 14,454 12,347

Income from shares in group undertakings 1,974 3 598

Interest receivable and other income 869 1,075 767

Interest payable and other expenses -18 -15 -1

Profit on ordinary activities before tax 14,529 15,517 13,711

Tax on profit on ordinary activities - - -

Profit for the financial year 14,529 15,517 13,711

Source: Filings with Irish Companies Registration Office

The turnover of this holding company subsidiary was the royalties received from a related

holding company subsidiary in The Netherlands. In turn, the subsidiary in The Netherlands

received royalties from trading subsidiaries in Ireland and Singapore. In its 2019 accounts

10

filed with The Netherlands Chamber of Commerce, the holding company subsidiary in The

Netherlands reported the following (the actual names of the related companies are

replaced with their <jurisdiction of residence>):

“The Company received royalty income in the amount of €19,443,476,523

(2018: €16,124,137,514) from <Ireland> and €6,811,660,420 (2018:

€5,687,595,633) from <Singapore>. The Company paid royalty expense in

the amount of €23,684,676,284 (2018: €21,797,389,628) to <Bermuda>

and €2,554,784,118 (2018: €0) to <the United States>.”

The gross flows in each direction are large, exceeding €20 billion in each year, and the

resulting income before tax of this sub-licensing subsidiary in The Netherlands was €16

million in 2019 and €14 million in 2018. The origin of the royalties received from Ireland can

be seen in the accounts of the trading subsidiary this US MNC has in Ireland which are

shown Table 3.

Table 3: Trading Company Subsidiary of US ICT MNC in Ireland

2017 2018 2019

€m €m €m

Statement of Profit and Loss and Other Comprehensive Income

Turnover 32,160 38,069 45,685

Cost of sales -9,027 -11,560 -14,252

Gross profit 23,133 26,509 31,432

Administration expenses -21,944 -25,055 -29,740

Other operating income 146 - 243

Operating profit 1,335 1,685 1,936

Interest receivable and similar income 3 5 3

Interest payable and similar expenses -3 -5 -4

Other income - - 5

Profit on ordinary activities before tax 1,335 1,682 1,940

Tax on profit on ordinary activities -171 -272 -263

Profit for the financial year 1,164 1,410 1,677

Source: Filings with Irish Companies Registration Office

In 2019, the gross profit of the trading subsidiary after the deduction of its cost of sales was

€31.4 billion.3 The firm incurred administration expenses of €29.7 billion leaving an

operating profit of just under €2 billion. The expenses incurred include staff and premises

3 The accounts of the trading subsidiary which is tax resident in Ireland are denominated in euro, while the accounts of non-Irish resident holding subsidiary in Bermuda are dominated in US dollars.

11

costs in Ireland and fees paid to other group undertakings to provide services and support

to customers in local jurisdictions. However, by far the largest component of these expenses

incurred by the Irish trading subsidiary is the royalty it must pay for the license to use the

MNC’s platform and technology. As the accounts of the subsidiary in The Netherlands show,

these payments were equal to €19.4 billion in 2019 and €16.1 billion in 2018, with almost all

of this subsequently paid to an IP holding company subsidiary in Bermuda.

The Bermudan IP holding company obtained the rights that allowed it to charge royalties for

the use of the MNCs technology in markets outside the Americas via a cost-sharing

agreement. This meant the IP holding company had to make a contribution to the overall

research and development costs incurred by the multinational, with this cost-sharing

payment forming the bulk of the Administration expenses in the Statement of Profit and

Loss of the IP holding company subsidiary shown in Table 2.

For the three years for which the income statement of the holding company is shown, the

operating margin of the holding company was around 50 per cent. That is, it paid out

around 50 per cent of the turnover received (the royalties that originated in Ireland and

Singapore) with the bulk of this going to fund the R&D activities in the US.

As of the start of 2020, this cycle of flows has ended. For this US multinational, the royalty

from Ireland which previously went to Bermuda with about half being paid onwards to the

US to cover expenses now directly, and in full, flows to the United States. This payment

structure is in line with the economic reality and substance of the MNC as the technology

used by the Irish subsidiary to generate sales was almost wholly developed in the United

States.

This is evident from Table 1 in the 2020 split of the MNCs profit into domestic and foreign.

The MNC’s domestic profit rose from $16.4 billion in 2019 to $37.6 billion in 2020. There

was an offsetting change to profits from foreign operations which fell from $23.2 billion in

2019 to $10.5 billion in 2020.

These changes can be fully explained by the transfer of the 2020 equivalent of $13.7 billion

of profit reporting by the holding company in Bermuda in 2019 into the US in 2020. This

MNC is no longer using a “double-irish” structure involving two Irish-registered subsidiaries

– one a trading company in Ireland and the other a holding company in an offshore financial

centre.4 The trading company in Ireland continues as before but there is no longer a role for

the IP holding company in a no-tax jurisdiction. The MNC has transferred the IP assets of

this holding company back to the US and is now reporting most its profit where the

functions, risks and assets that generate it are located – in the US. The figures from Table 1

show that in 2020 around 80 per cent of the income before taxes of the MNC were

attributed to operations in the US.

4 The trading company was resident in Ireland for tax purposes but the IP holding company was not.

12

4 The impact on tax of the identified changes in royalty flows

We can get some insights into the tax implications of these changes from Table 4 which is

the reconciliation of the MNC’s effective tax rate with the statutory federal corporate

income tax rate in the US. It should be noted that this rate was 35 per cent up to 2017 and

has been 21 per cent since.

Table 4: Consolidated Tax Reconciliation Statement of a US ICT MNC

2015 2016 2017 2018 2019 2020

% % % % % %

U.S. federal statutory tax rate 35.0 35.0 35.0 21.0 21.0 21.0

Foreign income taxed at different rates (13.4) (11.0) (14.2) (4.4) (4.9) (0.3)

Foreign derived intangible income deduction - - - (0.5) (0.7) (3.0)

One-time transition tax - - 37.6 - - -

Federal research credit (2.1) (2.0) (1.8) (2.4) (2.5) (2.3)

Stock-based compensation expense 0.3 (3.4) (4.5) (2.2) (0.7) (1.7)

European Commission fines 0.0 0.0 3.5 3.1 1.0 0.0

Deferred tax asset valuation allowance - 0.1 0.9 (2.0) 0.0 1.4

State and local income taxes - - 0.1 (0.4) 1.1 1.1

Other adjustments (3.0) (0.6) (3.2) (0.4) 1.1 0.0

Effective tax rate 16.8 19.3 53.4 12.0 13.3 16.2

Source: Annual 10K SEC Filings

The three key provisions we are looking for the impact of are:

1. The one-time transition tax;

2. The abolition of deferral and the introduction of the tax on GILTI;

3. The introduction of relief for FDII.

All of these were introduced with the Tax Cuts and Jobs Act (TCJA) which was passed by the

US Congress in late 2017. Under the “double irish”, a significant share of the profits of

certain US MNCs ended up in jurisdictions with no income taxes such as

Bermuda. However, that didn’t mean the profit was not subject to income tax.

The US operates a worldwide corporate income tax regime so US companies owe US tax on

their profits wherever arising. US MNCs might have been able to shift the highly-valuable

license for the use of their platforms and technology out of the US and attribute significant

profits to the legal owner of that license in a no-tax jurisdiction but US tax was still due on

those profits.

Of course, pre-TCJA, companies could defer the payment of this US tax until the profit was

formally repatriated back to the US, if ever. For the US ICT MNC under examination here

13

this shows in Table 4 with the double-digit negative impact on the effective tax rate in the

row for foreign income taxed at different rates. The ability of US MNCs to defer the US tax

due on these profits until formally repatriated into the US significantly reduced their tax

payments at the time the profit was earned. In the example here, foreign income taxes at

different rates reduced this US MNCs effective tax rate by between 11 and 14 percentage

points from 2015 to 2017.

The TCJA introduced a “deemed repatriation tax” for these historical profits taxed at lower

rates but at a rate lower than the 35 per cent that would have applied without the deferral.

In its annual report for 2017, filed with the SEC in early 2018 after the passing of the TCJA,

the company for which the tax reconciliation in Table 4 applies noted the following:

One-time transition tax

The Tax Act requires us to pay U.S. income taxes on accumulated foreign

subsidiary earnings not previously subject to U.S. income tax at a rate of

15.5% to the extent of foreign cash and certain other net current assets and

8% on the remaining earnings. We recorded a provisional amount for our

one-time transitional tax liability and income tax expense of $10.2 billion.

We have recorded provisional amounts based on estimates of the effects of

the Tax Act as the analysis requires significant data from our foreign

subsidiaries that is not regularly collected or analyzed.

As permitted by the Tax Act, we intend to pay the one-time transition tax in

eight annual interest-free installments beginning in 2018.

This one-off tax applies to the pre-2018 foreign profits of US MNCs and the MNC here

reports that it faces a US tax bill of $10.2 billion on these profits. The impact of this can be

seen in the 2017 column in the Table 4 table with the row for the One-time transition tax

adding 37.6 percentage points to the company’s effective tax rate in 2017, giving rise to an

overall effective tax rate in that year of over 50 per cent.

For 2017, this US MNC reported an income before income taxes of $27.2 billion. The $10.2

billion tax liability that arose from the one-time transition tax is 37.6 per cent of the MNC’s

2017 pre-tax profit. However, the tax is due on historical profits and it is likely that the

previously unrepatriated profits earned by the IP holding company in Bermuda are

responsible for the bulk of this US tax liability. The amount of historical profit that was

subject to the one-time transition tax is not provided but the size of the tax liability and the

rates at which the tax is levied indicate a range of $65 billion to $127 billion of profits which

were subject to the tax.

4.1 Global Intangible Low-Taxed Income In effect, the TCJA effectively abolished the deferral provisions which meant the US tax due

on foreign passive income was not paid at the time the profit was earned and introduced

the tax on GILTI for these profits. GILTI is an acronym for Global Intangible Low-Taxed

Income. The detail is complex but at its essence GILTI imposes a 10.5 per cent US tax on

14

eligible foreign income in excess of the company’s foreign tangible assets with no additional

US tax due if the foreign tax paid on these profits exceeds 13.125 per cent.

As set out in Section 3, prior to 2020 a large share of this MNC’s foreign income ended up in

Bermuda. Those profits that were earned before 2018 were subject to the one-time

transition tax and the profit that ended up in Bermuda in 2018 and 2019 was subject to US

tax at 10.5 per cent regardless of whether it was repatriated to the US or not. Of course,

10.5 per cent is significantly lower than the statutory 21 per cent rate that was also

introduced by the TCJA, so having a large share of its profit taxed at 10.5 per cent would

reduce the MNC’s effective rate.

This can be seen in the tax reconciliation table for the row foreign income taxed at different

rates. As noted above, up to 2017, this row reflects the benefits from deferral while from

2018, among other things, it shows the impact of having GILTI taxed at 10.5 per cent instead

of 21 per cent. These different rates reduced the MNC’s effective tax rate by 4.4 percentage

points in 2018 relative to the 21 per cent statutory rate, while in 2019 the impact of foreign

income taxed at different rates was a 4.9 percentage point reduction in the effective tax

rate.

Under the new structure discussed in this note, where the foreign income of the MNC has

fallen substantially, the impact of foreign income taxed at different rates resulted in a

reduction of just 0.3 percentage points in 2020 effective tax rate. This implies that the

average tax rate on foreign profit in 2020 was close to 21 per cent and that the MNC no

longer has substantial income in non-US subsidiaries that is subject to the GILTI provisions.

4.2 Foreign-Derived Intangible Income So, does this mean that the profit previously reported in Bermuda is now subject to tax in

the US at 21 per cent? Not quite. We now turn to another TCJA provision, FDII – Foreign

Derived Intangible Income. This is also a complex provision but essentially is the reduced tax

that is applied when companies in the US sell or license property for a non-US resident to

use.

The MNC in the US is licensing the right to use its technology in markets around the world to

a trading subsidiary in Ireland. The fee that the Irish subsidiary pays (the royalty) is taxed

under the FDII provisions. This imposes a 13.1 per cent US tax on these profits (though the

calculation of the actual amount of taxable income subject to this tax is far from

straightforward).

The changed structure in 2020 means the MNC has moved from a situation where the profit

earned selling to customers via Ireland was taxed by the US at 10.5 per cent under the tax

on GILTI to this profit being taxed at 13.1 per cent under the tax on FDII.

The impact of this can again be seen in the tax reconciliation table and is easy to identify

with the row labelled Foreign-derived intangible income deduction. Table 4 shows that this

increased in 2020 – to coincide with the increased royalty payments from Ireland to the US

– and that having this profit taxed under the FDII provisions rather than at the statutory

15

headline rate of 21 per cent reduced the multinational’s 2020 effective tax rate by 3.0

percentage points. This item had a much lower impact on the effective tax in 2018 and

2019 as the MNC was not doing its main licensing for international markets from the US. A

useful summary of the impact of the GILTI and FDII provisions in the 2018 tax returns of 81

of the largest US MNCs is provided in Dowd, Giosa and Willingham (2020).

4.3 Why have US MNCs changed their structure? There are many reasons why US MNCs have made these changes including changes in tax

law in Ireland and the US. An overarching reason is the OECD’s BEPS project. One of the

aims of this project is to try to ensure that company profits are better aligned with

substance. These US MNCs had little or no substance in offshore financial centres so

declaring a large amount of profit there did not align with the location of their functions,

risks and assets.

Transfer pricing rules, particularly in relation to the pricing of intangibles, have changed to

reduce firms’ ability to do this. Most notable among these changes have been the

introduction of DEMPE rules for intangible assets. These mean the extent to which profits

are attributed to an intangible asset must reflect the development, enhancement,

maintenance, protection and exploitation functions carried out by the owner.

Of course, getting the license out of the US in the first place and into a no-tax jurisdiction is

the ultimate reason such profits ended up there. It is US rules, such as the US approach to

cost-sharing arrangements, that mean profits from US firms dominate in places like

Bermuda. This can be seen in Figure 7 which illustrates the profits of subsidiaries in

Bermuda by the jurisdiction of their ultimate parent from the OECD’s publication of 2016

data compiled from country-by-country reports of reporting MNCs.

-306

-0

-0

6

120

175

352

500

572

24,900

0 10,000 20,000 30,000US$ millions

China

Indonesia

South Africa

Mexico

Luxembourg

Australia

Italy

Brazil

India

United States

Source: OECD

Profit Before Tax from OECD Aggregate Data from Country-by-Country Reports

Figure 7: Profit in Bermuda by Ultimate Parent Jurisdiction, 2016

16

The figures for 2016 are from a limited sample of parent jurisdictions but the overall picture

is unlikely to change as the OECD publishes later updates of this data for the subsequent

years up to 2019. The bulk of the profit that ended up in jurisdictions such as Bermuda was

due to US MNCs. From the analysis shown in this note there will be a significant change in

this data for 2020 as IP licenses that were previously held in Bermuda by US MNCs were

relocated, again in line with the changed nature of outbound royalty payments from Ireland.

4.4 How these changes will impact other statistics The changes are also likely to impact the outcomes for Ireland and other jurisdictions shown

in other data sources. This includes the data on the Activities of US Multinational

Enterprises published by the Bureau of Economic Analysis (BEA). The reason these changes

will impact this data is because of the use by the BEA of country of incorporation in

assigning some outcomes to geographic areas in this data. If a US multinational has an Irish-

registered IP holding company subsidiary that is not resident in Ireland for tax purposes but

is based in Bermuda then the BEA data on the Activities of US Multinational Enterprises will

attribute any profit it earns to Ireland thus overstating profits actually earned in Ireland.

Table 5 compares the profit figures for recent year from the BEA data on the Activities of US

Multinational Enterprises and those reported by the Internal Revenue Service (IRS) based on

the country-by-country tax reports filed with them by US multinationals. This BEA data has

been used in a number of analyses to assess US multinationals including Zucman and Wright

(2018).

Table 5: Profit of US Multinationals attributed to selected jurisdictions

Ireland Bermuda UK Islands, Caribbean

BEA IRS BEA IRS BEA IRS $m $m $m $m $m $m

2016 76,913 31,390 -5,544 24,900 11,272 26,082 2017 81,268 29,478 4,388 32,476 12,906 61,441 2018 97,867 49,142 7,948 97,212 12,273 53,671

Source: BEA refers Bureau of Economic Analysis data on the Activities of US Multinational

Enterprises. The figures used are “profit-type return of affiliates” from Part II Table F.7.

IRS refers Internal Revenue Service Statistics of Income (SOI) Division data from Country-by-

Country Reports (Form 8975). The figures used are for “profit (loss) before income tax”

from Table 1A.

Note: UK Islands, Caribbean is comprised of British Virgin Islands, Cayman Islands,

Montserrat, and Turks and Caicos Islands.

As can be seen in Table 5, the BEA data on the Activities of US Multinational Enterprises

significantly overstates the profit of US multinationals that should be attributed to Ireland

17

while understating the profit reported for tax purposes in jurisdictions such as Bermuda and

the Cayman Islands.

The case study explored in the earlier sections shows the subsidiary that was in Bermuda

will have no such profits to report after 2019. The 2020 update of the BEA data on the

Activities of US Multinational Enterprises will be published in the third quarter of 2022. This

will likely show a significant drop in the amount of profit attributed to the activities of US

multinationals in Ireland – though most of this will actually be profit that was previously

reported in jurisdictions such as Bermuda or the Cayman Islands. This will likely bring the

figures for Ireland in the BEA data much more in line with those published by the Internal

Revenue Service (IRS) using data from country-by-country tax reports filed with it.

These differences have been noted in more recent analysis of the activities of US

multinationals. Garcia-Bernardo, Janský and Tørsløv (2021) use both BEA and IRS data to

assess US multinationals and they note that their “results are consistent across the data sets

with the exception of Ireland, for which the BEA and BEA 2 data sets provide much higher

excess profits than the remaining data sets.” Klausing, Saez and Zucman (2021) also

highlight the differences between the BEA and IRS data and when pointing to the greater

reliability of the IRS data they state that “since the data are known to be used for transfer

pricing risk assessment, it is unlikely that companies will have an incentive to overstate their

income, especially in tax havens.”

4.5 The end of the “double-irish” The changes in the licensing structures for a US ICT MNC discussed above illustrate the end

of the “double-irish”. The impact can also be seen if we look at other companies. Table 6 is

the split of income before taxes into that attributed to domestic operations and attributed

to foreign operations from the 2020 annual report of another US ICT MNC.5

Table 6: Income from continuing operations before income taxes of a US ICT MNC

2015 2016 2017 2018 2019 2020

$m $m $m $m $m $m

Domestic Operations 2,802 6,368 7,079 8,800 5,317 24,233

Foreign Operation 3,392 6,150 13,515 16,561 19,495 8,947

Total 6,194 12,518 20,594 25,361 24,812 33,180

Source: Annual 10K SEC Filings

5 This table is similar to Table 1 for the company examined in the case study in Section 3.

18

Again, we see a very significant change in 2020 with a much larger share of the MNC’s profit

being attributed to its domestic, i.e., US, rather than foreign operations. In 2019, over 75

per cent of this MNCs income before taxes was attributed to foreign operations. In 2020

this fell to 25 per cent. This is because this multinational transferred the license to sell

services on its online platforms in international markets from the Cayman Islands back to

the US.

We could go through the same analysis on the one-time transition tax and the impact of the

GILTI and FDII provisions for this US multinational as undertaken in the case study in

sections 3 and 4, but it is not necessary. The conclusion is simple: the “double-irish” is

redundant. The heretofore foreign profit of some of the US MNCs that used such structures

has been shifted back to the US.

The fact that these profits were already subject to US tax6 means this has not resulted in a

significant increase in these companies’ effective tax rates but the changes do mean that

much more of the profit of these US MNCs is reported where the functions, risks and assets

that generate those profits are located.

4.6 Complying with a Country-Specific Recommendation The European Commission have raised concerns with the level of outbound royalty

payments from Ireland. In its 2020 Country-Specific Recommendations to Ireland, the

Commission note:

“[T]he high level of royalty and dividend payments as a percentage of GDP

suggests that Ireland’s tax rules are used by companies that engage in

aggressive tax planning, and the effectiveness of the national measures

will have to be assessed.”

European Commission (2020), p.7

The analysis in this note has shown that royalty payments from Ireland are likely to continue

at a high level as a percentage of GDP relative to the levels seen in other Member States.

However, it is not clear that this is a signal of aggressive tax planning as a greater and

greater share of these payments, particularly from the ICT sector, flow directly and in full to

the United States. Are national measures being effective if, in conjunction with changes

agreed internationally, they are resulting in a large reduction in the level of outbound

royalty payments being directed to offshore financial centres? The pattern of royalty flows

from Ireland is now more in line with the economic substance of these companies.

6 Either upon repatriations under the pre-TCJA US corporate income tax regime, under the one-off transition tax introduced by the TCJA or under the GILTI provisions of the same Act.

19

5 Conclusion

The subsidiaries of US multinationals operating in Ireland generate significant sales through

the use of technologies developed in the US. It is incontrovertible that the Irish operations

of these multinationals pay for the use of technology and much of these payments are made

in the form of outbound royalties. In 2020, outbound royalty payments from Ireland were

€83.4 billion which is equivalent to 22.5 per cent of Irish GDP in that year.

There was a significant change in 2020 in the destination of these royalty payments. Many

US MNCs, most notably in the ICT sector, have restructured the licensing arrangements for

their technology as a result of changes to the OECD Transfer Pricing Guidelines, revisions to

Ireland’s residency rules for Corporation Tax and the changes to the US tax code introduced

by the Tax Cuts and Jobs Act of 2017. A case study of US MNCs in the ICT sector shows that

under the revised structures the use of technology in international markets is no longer

licensed from jurisdictions such as Bermuda and the Cayman Islands but instead is licensed

directly from the United States. This is in line with the economic footprint of these

companies and aligns the reporting of their profits with the location of their substance. The

annual reports for 2020 for these companies show a large rise in the share of their profits

being attributed to domestic, or US-based, operations. These US operations include the

bulk of these companies’ research and developments activities which is a key driver of their

profits.

Outbound royalty payments continue to be made from Ireland for the use of the resulting

technology but rather than being routed to offshore financial centres benefitting from a

deferral of US tax as was the case under the pre-2018 US tax regime, this income is now

being directed to the United States. In 2020, around 60 per cent of the royalty payments

from Ireland went to the United States. This share is likely to increase in coming years.

20

REFERENCES

Clausing, K., Saez, E. and Zucman, G. (2021). Ending corporate tax avoidance and tax

competition: A plan to collect the tax deficit of multinationals. UCLA School of Law, Law-

Econ Research Paper No. 20-12, http://dx.doi.org/10.2139/ssrn.3655850

Dowd, T. and Giosa, C.P. and Willingham, T. (2020). Corporate behavioral responses to TCJA

for tax years 2017–2018. National Tax Journal.

https://www.journals.uchicago.edu/doi/10.17310/ntj.2020.4.09

European Commission (2020). Recommendation for a Council Recommendation on the 2020

National Reform Programme of Ireland and delivering a Council opinion on the 2020 Stability

Programme of Ireland. https://ec.europa.eu/info/sites/default/files/2020-european-

semester-csr-comm-recommendation-ireland_en.pdf

Garcia-Bernardo, J., Janský, P. and Tørsløv, T. (2021). Multinational corporations and tax

havens: evidence from country-by-country reporting. International Tax and Public Finance.

https://doi.org/10.1007/s10797-020-09639-w

Organisation for Economic Cooperation and Development (2017). Transfer pricing guidelines

for multinational enterprises and tax administrations. https://www.oecd.org/tax/transfer-

pricing/oecd-transfer-pricing-guidelines-for-multinational-enterprises-and-tax-

administrations-20769717.htm

Wright, T., and Zucman, G. (2018). The exorbitant tax privilege. National Bureau of Economic

Research Working Paper, 24983. https://www.nber.org/papers/w24983