The Double Irish Jig Is Up

Apple and other multinational companies that have been exploiting the notorious Double Irish tax loophole for years will have to look elsewhere for a comparable tax dodge.

The Irish government’s budget, presented on Tuesday by Finance Minister Michael Noonan, closes the loophole.

The country’s residency rules have been amended to require that all companies registered in Ireland be tax residents. New companies will be subject to the new law starting Jan. 1, 2015. Existing companies will have until the end of 2020 to make the transition.

Ireland has been under heavy pressure from the European Union and governments around the world.

Although the party is over, the companies are not likely to lose whatever monies they have retained so far under the Double Irish practice.

“They should be able to keep the billions they’ve socked away overseas,” Charles King, principal analyst at Pund-IT, told the E-Commerce Times.

That’s a lot of billions — the 307 largest US MNCs held nearly US$2 trillion outside the U.S. last year, Bloomberg reported.

The Double Irish Stew

The Double Irish is essentially a shell game played by corporate accountants.

Companies with valuable intellectual property that is the basis of their business, such as high-tech companies and pharmaceuticals, arrange an offshore company to own the rights to exploit that intellectual property outside the home country, in this case the United States.

The arrangement is called “Double Irish,” because it requires two Irish companies: One is a tax resident of a tax haven such as Bermuda or the Cayman Islands; the second, set up as its fully owned subsidiary, is a tax resident of Ireland.

The IP is owned by the company in the tax haven, which licenses it to its Irish subsidiary for a fat fee. Those fees are ignored for U.S. tax purposes and are tax-deductible in Ireland.

This can be highly remunerative. A Facebook subsidiary in Ireland, for example, reportedly realized revenue of nearly $2.3 billion last year, but after deducting $2.23 billion in administrative fees, including royalties for use of the Facebook platform to Cayman Island-based Facebook Ireland Holdings, posted a pretax loss of almost $800,000.

VMware’s Ireland-registered Bermuda subsidiary, VMware Bermuda, reportedly sucked up more than $1.8 billion in licensing fees from its Irish sales and marketing subsidiary and paid no corporate taxes last year.

Two Irish subsidiaries of U.S. pharmaceutical group Abbott Laboratories reportedly made profits totaling $3.7 billion in 2011 but paid no taxes in Ireland.

How About a Dutch Sandwich on the Side?

One variation of the Double Irish ploy is called the “Dutch Sandwich” (pictured above):

1. Advertiser pays for an ad in Germany.
2. Money goes to the Irish subsidiary with the IP.
3. Tax in Ireland is 12.5 percent. The Irish company pays a royalty to a Netherlands subsidiary and gets a tax deduction.
4. The Dutch company pays the money to another subsidiary in Ireland, with no tax payable.

The last company pays no tax because it is in Bermuda.

Luxembourg and Switzerland are other countries used instead of the Netherlands.

IBM reduced its tax rate to a two-decade low using the Dutch Sandwich, according to Bloomberg. It routed almost all sales in Europe, the Middle East, Africa, Asia and some of the Americas through its Netherlands subsidiary.

That led it to end 2013 with a tax rate of 15.65 percent instead of the forecasted 25 percent, cutting its tax provision by $1.84 billion and letting its earnings per share rise instead of falling. The move led IBM to miss analysts’ estimates by 2.9 percent instead of 14 percent.

Yahoo, Google and Cisco also use Dutch subsidiaries to reduce their tax burdens.

50 Shades of Grey

It’s not possible to point the finger at any one party for this state of affairs.

“Businesses should not be blamed in any way for taking advantage of lawfully written tax dodges,” King said, adding that the regulations that tax profits returned from foreign subsidiaries also are legal.

Closing the loophole will increase the tax liability of U.S. corporations affected and lower their bottom line, observed Rob Enderle, principal analyst at the Enderle Group.

That might drive them to incorporate outside of the U.S., he told the E-Commerce Times. They might also slash their U.S. workforces.