Transfer pricing moves millions

When a tangible or intangible asset is transferred within a multinational, a sale has occurred that must be priced. Such transactions can be used to increase the profits of subsidiaries that are located in low-cost jurisdictions such as the Republic.

The US Internal Revenue Service (IRS) has 600 employees monitoring such transfer pricing decisions, which are made every day within US multinationals.

Transfer pricing has been an issue affecting the State since US multinationals first came here in the 1970s. Since then, what might originally have been low-end manufacturing or packaging operations have developed R&D, holding company and treasury arms.

More recently a wave of holding companies have been set up in the State to hold intellectual property (IP) belonging to US technology and pharmaceutical multinationals.

This IP is worth billions of euro. The companies try to effect the transfer at the lowest price possible while keeping the IRS satisfied. Once located here, companies holding the IP can earn hundreds of millions of euro annually in royalties from subsidiary companies around Europe and further afield.

This money can then be held in Ireland, or used for investments elsewhere. Once it is not brought back to the US, it will not be hit by the 35 per cent corporation tax rate that exists there.

At the same time, the profits made by the Irish holding companies can form part of the annual earnings that grade the performances of the multinationals and the executives that run them.

US semiconductor company Synopsys is fighting a $476.8 million (€403.5 million) bill from the IRS arising from the establishment of its Irish subsidiary. The IRS takes the view that the price the Irish subsidiary paid in 2000 for the assets it took charge of was too low.

Synopsys Ireland Ltd and a subsidiary, Synopsys International, bought up a number of Synopsys subsidiaries around Europe and Asia. The sales from these companies fed back to the Dublin holding company, which in its first year in operation had a turnover of $136 million.

The structures set up by Synopsys in 2000 have since developed. Synopsys Ireland is still registered in the Companies Registration Office in Dublin, but its accounts for 2004 - when it made a profit of $140 million - state that its place of business is now in Bermuda. The move occurred during the 2004 year.

This means the group headed by Synopsys Ireland will now pay less tax in Ireland.

While the group paid $11.85 million in corporation tax in 2004, the accounts show that the bulk of this arose from withholding tax which was not recoverable, as well as some "overseas" taxes. The Irish corporation tax paid was $1.89 million.

The move to Bermuda has accompanied a drop in the "predominant rate of tax" to zero (the Bermuda rate), from the 12.5 per cent rate (the Irish rate) that had applied in 2003.

Synopsys has a software business at the Blanchardstown Corporate Park, Co Dublin. The company that runs this business, Synopsys International Ltd, is involved in the research, development and licensing of software products in Europe, the Middle East, Asia Pacific and Japan. It has a number of subsidiaries throughout these regions and is itself a subsidiary of Synopsys Ireland.

Synopsys International made a pretax profit of $15.7 million and paid tax of $6 million, for the period to end October 2004.

During the period, the company employed an average of 56 people, of which 20 were R&D engineers.

A lot of the intellectual property that was transferred to Dublin in 2000, and which is at the centre of the dispute with the IRS, seems to now belong to a Dublin registered company, Synopsys International Old Ltd.

This company, which is owned by Synopsys Ireland Ltd, made a profit of $80.5 million in the period. However it only paid $538,000 in tax. The company moved its tax residency to Bermuda in November 2003, according to the accounts.

Synopsys International Old had a turnover of $170 million arising from royalties from the licencing of Synopsys software products in the period to end October 2004.