Successful Synopsys appeal likely to boost Irish tax incentive scheme

MULTINATIONALS:A US multinational software group has successfully appealed a bill for more than $477 million (€356 million) from the US Internal Revenue Service (IRS) issued after a review of transfer pricing arrangements with its Irish subsidiary.

The successful appeal by Synopsys, a world leader in software for semiconductor design and manufacturing, is a boost to Ireland's strategy of using tax incentives to attract foreign direct investment.

The successful resolution of the issue was announced by the company in its most recent quarterly report filed with the Securities and Exchange Commission (SEC) in the US.

That report discloses that the group's effective tax rate for the period was just 9 per cent.

This compares with the Irish corporation tax rate of 12.5 per cent and the US rate of 35 per cent. An effective tax rate is the rate that emerges when all profits globally are compared with taxes paid globally.

Revenues earned abroad by US multinationals, which are re-invested without being repatriated, are not subject to US tax.

"The effective tax rate decreased in the three months and nine months ended July 31th, 2008, as compared to the same periods in fiscal 2007, primarily due to a favourable final resolution on transfer pricing issues related to the 2000-2001 IRS examination," the report stated.

In June 2005, Synopsys received a revenue agent's report from the IRS that proposed to assess a net tax deficiency for the financial years 2000 and 2001 of approximately $476.8 million, plus interest. At the time, Synopsys's chief financial officer Rex Jackson told investors the assessment "relates primarily to the establishment of our Irish subsidiary".

The latest accounts for Synopsys Ireland Ltd, the holding company which is responsible for Synopsys's sales and consulting services in Europe, the Middle East, Asia Pacific and Japan, show its income grew by 15 per cent in the year to November 7th, 2007, to $491 million.

The results also include the turnover of subsidiaries in Hong Kong, China, Taiwan, and Russia.

The Synopsys Ireland turnover also arises from the holding of licences.

The consolidated accounts for the company and its subsidiaries show a pretax profit of $108 million and tax of $14.9 million.

Of this tax, $3 million was paid in Ireland with the rest paid abroad.

There was no dividend.

Although Synopsys Ireland has its registered office in Blanchardstown Business Park, Dublin, it operates from its business in Bermuda, according to its accounts.

A subsidiary, Synopsys International Old Ltd, which is involved in research, development and licensing of software products, made a profit of $206 million in the year to November 3th, 2007, according to its latest accounts. It paid only $46,000 in tax.

During the year, it sold its distribution rights for intellectual property to certain regions for $180.8 million.

Globally, Synopsys reported turnover of $344.1 million in its third-quarter filing to the SEC. This was a 13.2 per cent increase compared to the third quarter of 2007.