The Death of the “Double Irish”?

By Sam Willie

On October 14th, Ireland’s Minister for Finance announced plans to close the infamous and controversial “Double Irish” tax loophole, a tax avoidance scheme favored by foreign companies, and in particular US technology giants. Whether closure will affect Ireland’s status as an attractive tax jurisdiction for foreign companies looking to protect IP royalties is another matter.

Companies like Facebook, Google, and Microsoft have benefited from this tax scheme, transferring intellectual property royalty payments to firms in Ireland, and then on to Irish registered subsidiaries in other countries who abstain from taxing corporate income. The Economist has reported that the “Double Irish” could slash a company’s effective tax rate on IP profits to less than 2%. That rate could be lowered still when the “Double Irish” is used in conjunction with a “Dutch Sandwich,” where, as an intermediary step between transferring profits among Irish firms, the payments are routed through yet another tax haven, such as the Netherlands. Forbes reported that Facebook has sent $700 million in profits to the Cayman Islands through the scheme. Additionally, Google has used both the “Double Irish” and the “Dutch Sandwich” to save billions, and in a single year the scheme enabled Apple to avoid $9 billion in U.S. taxes.

Despite its popularity in Ireland and Silicon Valley alike, and even after a surprising endorsement from U2’s Bono, Ireland has come under increasing pressure from the European Union and the Obama administration to close the “Double Irish” loophole. In response to this pressure, the European Commission and the Organization for Economic Co-operation and Development, are currently working in tandem to investigate purportedly improper relationships between corporations and tax havens like Ireland and the Netherlands. They are also working more generally to promote reform in international tax laws. Similar sentiments were echoed in the recent announcement that Britain, France, Germany, Italy, Spain and 46 other nations have signed an accord aimed at cracking down on tax fraud and tax evasion by requiring signatories to automatically exchange tax information starting in 2017.

Despite growing criticisms of corporate tax avoidance schemes, and the recent Irish minister’s announcement regarding the closure, corporations already utilizing the Irish tax policy are not running for the exits just yet. While closure will cause Irish-incorporated nonresident companies to be treated as tax-residents in Ireland beginning on January 1, 2015, companies already registered in Ireland can continue using the “Double Irish” for six more years until December 31, 2020. The Economist has reported that the Irish government sought a four-year grace period, but ultimately caved under pressure from pharmaceutical company lobbyists, who argued that a short grace period would negatively impact the financing of their drug research.

Furthermore, Ireland has taken steps to create new incentives for foreign corporations to do business in Ireland. Speaking during a five day trade mission to Washington, DC, Ireland’s Minister for Jobs, Enterprise and Innovation, Richard Bruton, stated that the implementation of a new Knowledge Development innovation "box" tax scheme, would set lower tax rates for patents managed in Ireland, and would continue to attract companies to develop their products and services within the country. It has even been suggested that foreign companies may use a treaty between Ireland and Malta that is not invalidated by the closure proposal as the basis for a new tax avoidance workaround. This treaty holds that an Irish corporation is a resident of Malta for taxation purposes when the company’s management and control center is in Malta. Residents of Malta do not pay taxes on IP royalties. In short, many predict that the death of the “Double Irish” will not cause multinationals to leave Ireland, and for the foreseeable future, it is business as usual.