According to Feargal O’Rourke, a partner at PricewaterhouseCoopers, the infamous Double Irish tax avoidance method could be endangered. If it were to be written out of law, the legal practice would force many companies to either find new methods to avoid taxation, or pay far higher rates on their profits.
Before we dig into the details of the matter, keep in mind that it is the responsibility of every tax-paying entity to arrange its affairs in the way that will most limit its tax bill, and then pay every cent of that total. The gist is that we should expect corporations to pay as little in taxes as they can. How they manage to do so while staying inside of the law you may find abusive, or asinine, but you should never be surprised by their efforts.
O’Rourke is a voice that matters as he advises a number of companies on how to employ the Double Irish tax avoidance method. Intel, for example, is his client. He has worked with Facebook, Google, and LinkedIn. In an interview with Bloomberg, O’Rourke predicted that the Double Irish will, in time, become illegal.
Regarding government policy, O’Rourke has standing, as, Quartz notes, he helped end a 20 percent tax on profits leaving Ireland. This made use of the country as a place to more simply shuffle around revenue and profit.
What Is The Play?
So, what is the Double Irish, or the Double Irish with a Dutch Sandwich? It’s a form of income moving that helps companies avoid huge tax bills. In the same report, Bloomberg states that Google saved $2.2 billion last year using the technique, and that companies overall slip past around $100 billion in taxes in the United States and Europe yearly through its effectiveness. So, the dollars at play here are not small.
Here’s how it works: Move your money to Ireland, then the Netherlands, and finally to a tax haven such as Bermuda, but in a very specific order.
- Develop technology or other intellectual property in the United States.
- Set up a corporate subsidiary in Ireland, and sell (or license) foreign rights to said intellectual property. However, ensure that this company is headquartered in Bermuda, or a different but similar tax haven.
- Foreign profits that come from revenue based on that intellectual property can now be assigned to that entity. This means that the parent company will not pay home-market taxes on the full profit bill. Instead, it will pay home-market taxes only on the fees that the Irish subsidiary remits to the parent corporation itself.
- Have the subsidiary pay as little as possible for the sold or licensed intellectual property. This shifts the maximum amount of profit to Ireland and away from the parent company’s home-market tax rate.
- Now, set up a second Irish corporation. Your first Irish company will own this company. The second company will do the work of selling products and recording revenue. However, its profits won’t stay put.
- Send the profits from the second Irish corporation through a third subsidiary corporation in the Netherlands. Ireland has tax-free transfers inside the European Union. The profits from the second Irish corporation are now safely ensconced in Holland.
- Now, route that profit from the Netherlands back to the first Irish subsidiary, which is headquartered in Bermuda.
- Thanks to Irish law, if a company is managed elsewhere (Bermuda!), its profits can, in the words of the New York Times, “skip across the world tax free.”
- Ship the profits sent to the first subsidiary to its headquarter location in Bermuda and no taxes are paid!
And that’s the kids’ version. The process can become vastly more complex once new entities are involved, primarily when you begin to extend the number of countries.
This is enough: A company sells its foreign intellectual rights to an Irish subsidiary (company) that is separate from the firm (which the first subsidiary will own) that will actually drive revenue for it abroad. That second company will “pay” the first company for using the rights. The first firm, headquartered in Bermuda thanks to Irish law, can ship those profits back over the Atlantic sans taxes. But to get the money from company two to company one, the Netherlands is used as a stopover to dodge any sort of withholding taxes.
So, two Irish companies with a Dutch company in between. Hence the “sandwich” metaphor.
Tech Impact
This method, and others similar to it (you can just Double Irish and not Dutch Sandwich, or use a different country to start with) is very popular with wealthy technology companies. If Apple had paid the full-ticket U.S. corporate tax rate on all of its global profits (it never will, of course), it would have far less cash – stored profit – and thus be worth less, and have less internal flexibility. It would also have less ability to distribute profits via dividends, share buybacks, and the like.
The winners are shareholders. The losers are governments losing out on huge incomes that they, presumably, want.
If O’Rourke is correct, and the Double Irish play is doomed in time, it will either greatly lower the profitability rates of tech companies, or they will find another way to avoid taxes. If tech companies become less profitable, that will trickle down the ecosystem, lowering the rate of acquisitions and any other cash-dependent activity.
End of the world? Not close. Painful correction to corporate rates that could shake up tax policy for immensely profitable companies? Yes.
Apple, Microsoft, Google and others have stacked mountains of cash built on profits that are taxed at vanishing rates. The next giants to do the same might not have the same favorable tax options open to them. It will take them more time, therefore, to become just as rich.
Provided that the Double Irish is closed, the implicit value of future tech-giant cash flow is lowered. This decreases the value of large technology companies, those big enough at least to rock a Double Irish. Twitter, for example, a company that is struggling to find a way to profits, could see that path steepened if the loophole closes.
There is increasing pressure to keep profits where they are sourced. But tech giants are wealthy and wealth comes with advantages, such as lobbying dollars, political donations and the finest legal offense and defense that you can buy. Given the sums involved, expect the coming battle to get messy.
Top Image Credit: Flickr