Public Image Unlimited

Saturday's Wall Street Journal (subs. req'd) picks up a story from Thursday's Irish Times (subs. req'd) which in turn had built on an earlier WSJ story about how Microsoft uses Irish subsidiaries to dramatically reduce its corporate tax rate. Microsoft allocates a large proportion of its intellectual capital to the Irish companies, Round Island and Flat Island, and therefore pays Irish tax rates on the income to this capital, even when nearly all their sales occur in other countries. The basics of the operation could be figured out because even Ireland's lax corporate regime does have some reporting requirements, but Microsoft has now come up with a way around that problem:

Last month, two Dublin-based Microsoft subsidiaries -- Round Island One Ltd. and Flat Island Co. -- revamped their shareholding structure and applied to the Irish government to adopt "unlimited liability" status. That would allow the units to avoid filing detailed public statements of their accounts, government records show. But the change creates added risk for Microsoft in case either unit faces bankruptcy or a lawsuit.

The move clearly reflects increased US scrutiny of these arrangements:

The U.S. government is seeking to make it harder for companies like Microsoft to shift licensing rights and revenue to low-tax countries. "This is a serious issue, and we need to deal with it," Treasury Secretary John Snow said in an appearance before the Senate Finance Committee on Feb. 7. There is a "clear danger here that there has been migration of intellectual and other intangible property offshore," Mr. Snow said.

As the Journal indicates, the main risk to Microsoft from this move is if the Irish subsidiaries were exposed to a major lawsuit, which is unlikely but not impossible, not least because Microsoft continues to annoy the European Commission. However, the Irish Times story makes clear that this is not just a case of those Americans importing a stunt, because a few Irish companies have thought of it too:

A number of Irish-owned companies have taken out unlimited liability status in recent times, including Barry's Tea in Cork, construction firm Bovale Developments, the Tedcastle oil group, Cork industrial holdings company Punch, Kilsaran Concrete and fishing company Atlantic Dawn.

To be fair, Microsoft is not a one-trick pony. While it may be hiding some of its accounting behind an arcane ownership structure, it is also building some local goodwill as a sponsor of the first annual Irish Blog Awards.