THE US Treasury secretary John Snow has told the Senate finance committee he plans to tighten rules this year that allow American companies to save billions by reporting vast profits in Ireland.

The issue came to prominence last November when it emerged that Microsoft was shaving at least $500m (€419.7m) off its tax bill by reporting $9 billion, or 22%, of its gross profit through an Irish subsidiary, Round Island One.

With the aid of Ireland’s low corporate tax rate of 12.5%, the unit — which controls the licensing rights to Microsoft’s software programs sold in Europe, the Middle East and Africa — only paid $300m in tax in 2004 to the Irish collector-general. The rate in the US is 35%, with extra amounts charged by individual states.

The Microsoft case was highlighted by Charles Grassley, chairman of the Senate finance committee, when he grilled Snow last week. Instead of receiving royalties from their foreign subsidiaries, American parent companies commonly set up licensing deals, with up-front payments, to reduce their tax exposure.

American authorities have long been worried that some of its biggest companies were setting artificially low prices for offshore units to buy into licensing deals with their parent company.

The Treasury department responded last year by drawing up regulations that would limit these cost-sharing arrangements. It claims the arrangements allow companies to undervalue intellectual property transferred to its subsidiaries. Intellectual property is intangible and hence relatively simple for multinationals to transfer and notoriously difficult to value.

However, the new rules would require companies to value these assets at the same price that they would charge a competitor.

“We would expect to have them made final some time in 2006 . . . this is a serious issue and we need to deal with it,” said Snow.

“I think what this will do is reduce the opportunity for abuse here, and certainly remove some of the incentives to engage in the sorts of behaviours that deny revenues to the United States Treasury,” he added.

A tougher cost-sharing regime would have a huge impact on the Irish exchequer’s tax income, given that five of the 10 most profitable companies in this country are subsidiaries of American multi-nationals.

Round Island One tops the list. The others are Janssen Pharmaceutical, a unit of Johnson & Johnson, Intel Ireland, Oracle EMEA and Forest Laboratories. All are involved in either technology or pharmaceuticals, where the issue of intellectual property movement is most acute.

It recently emerged that Janssen and Dell paid dividends of €6.6 billion and €4.76 billion, respectively, to their US parents last year in order to take advantage of a one-off tax concession to encourage the repatriation of profits to America.

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