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Legislation states the acquired IP must be linked to the activity generating the Irish profits (i.e. company must be "working on" the IP). A "business plan" must be produced showing agreed levels of Irish employment during the capital write off period. If the company deviates from this business plan, or leaves Ireland before the period ends, it must repay all allowances.
Legislation states the acquired IP must be linked to the activity generating the Irish profits (i.e. company must be "working on" the IP). A "business plan" must be produced showing agreed levels of Irish employment during the capital write off period. If the company deviates from this business plan, or leaves Ireland before the period ends, it must repay all allowances.

In 2017, the Irish Government accepted the recommendation of economist Seamus Coffey (Chairman of the State's '''Irish Fiscal Advisory Council''' and consultant to the Irish Government Irish Corporate Taxation) <ref>{{cite web|url=http://www.finance.gov.ie/updates/minister-donohoe-publishes-review-of-irelands-corporation-tax-code/|title=Minister Donohoe publishes Review of Ireland’s Corporation Tax Code|publisher=Department of Finance|date=21 December 2017}}</ref> <ref>{{cite web|url=http://www.finance.gov.ie/wp-content/uploads/2017/09/170912-Review-of-Irelands-Corporation-Tax-Code.pdf|title=REVIEW OF IRELAND’S CORPORATION TAX CODE, PRESENTED TO THE MINISTER FOR FINANCE AND PUBLIC EXPENDITURE AND REFORM BY MR. SEAMUS COFFEY|publisher=Department of Finance|date=30 January 2017}}</ref> that the Irish capital allowances arrangement be capped at 80% for new arrangements, to give a minimum effective tax rate of circa 2-3%. <ref>{{cite web|url=https://www.independent.ie/business/budget/tax-break-for-ip-transfers-is-cut-to-80pc-36215540.html|title=Tax break for IP transfers is cut to 80pc|publisher=Department of Finance|date=11 October 2017}}</ref>


==Effect of Tax Cuts and Jobs Act ("TCJA")==
==Effect of Tax Cuts and Jobs Act ("TCJA")==

Revision as of 17:26, 22 March 2018

The double Irish arrangement is a tax strategy used by some multinational corporations to lower their corporate tax liability. The strategy uses payments between related entities in a corporate structure to transfer income from a higher-tax country to a lower or no-tax jurisdiction. The strategy can be used with any low or no tax jurisdiction. Irish tax law, for example, does not have transfer pricing rules as do the United States[1] and many other jurisdictions. Specifically, Ireland has territorial taxation, and does not levy taxes on income booked in subsidiaries of Irish companies outside the country.

The double Irish tax structure was first used in the late 1980s by large companies, including Apple Inc,[2] Google and many others. In 2010, Ireland passed a law intended to counter such arrangements, though existing arrangements were exempt, and lawyers have said that this change will cause no significant problems for multinational firms.[3] In 2013, the Irish government announced that companies which incorporate in Ireland must be tax resident, with effect on 1 January 2015 for newly incorporated companies, and the end of 2020 for companies with existing operations in Ireland.[4] Irish Finance Minister Michael Noonan, during the presentation of his 2015 budget, said that he believed this would align Ireland's corporate tax regime with international best practice.[5]

In November 2017, it emerged that a new single malt arrangement immediately replaced the double Irish in January 2015. Under the single malt arrangement, the non-EU company from the double Irish arrangement (often located in a Caribbean tax haven) is re-located to Malta (or the United Arab Emirates). The Irish Government is investigating. [6][7][8] Commentators noted that single malt explains why the abolition of the double irish had so little effect on US multi-national activity in Ireland (it actually increased since 2015).

The EU Commission's €13bn fine against Apple in Ireland ironically relies on the fact that Apple did not properly execute the double Irish arrangement (used one company instead of two). A second potential irony is that in re-structuring its Irish company in January 2015, Apple elected not to use the standard double Irish (which was still operating), but elected instead to use the Irish capital allowances arrangement, which Irish tax experts note could open Apple to further EU Commission prosecution and another fine of the same scale.


Overview

Typically, a company arranges for the rights to exploit intellectual property outside the United States to be owned by an offshore company, which then enters into a cost sharing agreement between the American parent, written strictly in terms of American transfer pricing rules. The offshore company continues to receive all of the profits from exploitation of the rights outside the American, but without paying American tax on the profits unless and until they are remitted to the United States of America.[9]

It is called double Irish because two Irish companies are used in the arrangement. One of these companies is tax resident in a tax haven, such as the Cayman Islands or Bermuda. Irish tax law currently provides that a company is tax resident where its central management and control is located, not where it is incorporated, so that it is possible for the first Irish company not to be tax resident in Ireland. This company is the offshore entity which owns the valuable non US rights that are then licensed to a second Irish company (and this one is tax resident in Ireland) in return for substantial royalties or other fees. The second Irish company receives income from the use of the asset in countries outside the United States, but its taxable profits are low because the royalties or fees paid to the first Irish company are tax-deductible expenses. The remaining profits are taxed at the Irish rate of 12.5%.

For companies whose ultimate ownership is located in the United States, the payments between the two related Irish companies might be non-tax-deferrable and subject to current taxation as Subpart F income under the Internal Revenue Service's controlled foreign corporation regulations if the structure is not set up properly. This is avoided by organizing the second Irish company as a fully owned subsidiary of the first Irish company resident in the tax haven, and then making an entity classification election for the second Irish company to be disregarded as a separate entity from its owner, the first Irish company. The payments between the two Irish companies are then ignored for American tax purposes.[1]

Dutch Sandwich

Main article: Dutch Sandwich
Example of a double Irish with a Dutch Sandwich:
  1. An advertiser pays for an ad in Germany.
  2. The ad agency sends money to its subsidiary in Ireland, which holds the intellectual property (IP).
  3. Tax payable in Ireland is 12.5%, but the Irish company pays a royalty to a Dutch subsidiary, for which it gets an Irish tax deduction.
  4. The Dutch company pays the money to yet another subsidiary in Ireland, with no withholding tax on inter-EU transactions.
  5. The last subsidiary, although it is in Ireland, pays no tax because it is controlled outside Ireland, in Bermuda or another tax haven.

Ireland has a high tax on transfers to a tax haven jurisdiction, like the Cayman Islands or Bermuda. On the other hand, Ireland does not levy a withholding tax on transfers to other European Union member States; so revenues from the sale of goods and services by a second Irish company (the second in the double Irish) are first booked by a shell company in the Netherlands, taking advantage of generous Dutch tax laws on the profits generated. Also, the Netherlands does not have a direct tax on royalties.[10] From there the profits are transferred at little cost directly to a tax haven jurisdiction which do not have a corporate income tax. This part of the scheme is referred to as the "Dutch Sandwich".[11][12] The Irish authorities never see the full revenues and hence cannot tax them, even at the low Irish corporate tax rate of 12.5%.

Counter-measures

In 2010, the Obama administration was said to propose to tax excessive profits of offshore subsidiaries to curb tax avoidance in the United States.[13] A 2010 Irish law brought Irish transfer pricing rules into line with most of its trading partners requiring companies' intra-group transfer prices to be similar to those that would be charged to (or from) independent entities. The first deadline for corporate tax submissions under the new rules was September 2012.[3] However, companies such as Google, Oracle and FedEx are declaring fewer of their ongoing offshore subsidiaries in their public financial filings, which has the effect of reducing visibility of entities declared in known tax havens.[14]

In 2014, the Irish government announced that companies would no longer be able to incorporate in Ireland without also being tax resident there, a measure intended to counter arrangements similar to the double Irish.[4] Irish Finance Minister Michael Noonan addressed the "Double Irish" during the presentation of his 2015 budget. Under the new rules, companies not already operating in the country may not pursue the “Double Irish” scheme as of 1 January 2015; and those already engaging in the tax avoidance scheme have a five-year window until the end of 2020 to find another arrangement.[15]

Under Finance Act 2015, a new system has been introduced whereby innovative companies who choose to incorporate in Ireland can now benefit from the introduction of the Knowledge Development Box (the “KDB”) in Ireland, the scheme is seen as a replacement for the “double-Irish” tax system which was recently closed. An effective tax rate of 6.25% can be obtained on qualifying profits generated in periods commencing on or after 1 January 2016.

In summer of 2016, another dispute flared up between the European Commission and the US Treasury Department over Irish tax breaks, which in the EU may comprise a type of state aid.[16] U.S. Secretary of the Treasury Jacob J. Lew issued a white paper referring to transfer pricing.[17] Separately EU Competition Commissioner Vestager was quoted by the press as clarifying that: “This is not about transfer pricing, it is about allocation of profits so it is different to the decisions on Starbucks and Fiat.” [18]

Companies using Double Irish

A number of major companies are known to employ the double Irish strategy, including:

3

Apple Inc issues

In 2004, Ireland was home to more than one-third of Apple's worldwide revenues, according to company filings. Robert Promm, Apple's controller in the mid-1990s, called the strategy "the worst-kept secret in Europe".[28] Using the strategy it could keep its tax cost to less than 1% of pre-tax earnings.

A Senate report on the company's offshore tax structure concluded in May 2013, Apple has held billions of dollars in profits in Irish subsidiaries to pay little or no taxes to any government by using an unusual global tax structure.[29] The main subsidiary, a holding company that includes Apple's retail stores throughout Europe, has not paid any corporate income tax in the last five years. "Apple has exploited a difference between Irish and U.S. tax residency rules," the report said.[30]

On August 30, 2016, after a three-year investigation, the EU's competition commissioner concluded that Apple had received "illegal state aid" from Ireland. The Commission ordered Apple to pay €13 billion ($14.5 billion), plus interest, in unpaid Irish taxes.[31] Both the Irish government and Apple are appealing the Commission's action. [32] [33]

What is ironic is that Apple was not using the standard double Irish arrangement of two separate companies (one in Ireland, and one in the Caribbean). Apple decided to combine the functions of the two companies inside one company (namely Apple Sales International (ASI)), but split into two "branches". [34] The Irish Revenue's acceptance of Apple's "branches" structure, is what the EU Commission is challenging as "illegal state aid". The EU Commission has not take any cases against companies using the standard double Irish arrangement.

The Apple affair took another twist when Apple decided bring ASI onshore to Ireland in January 2015.

It was finally shown in 2018 that this re-structuring was the driver of the 2015 Irish Leprechaun economics GDP growth. The process of demonstrating this additionally highlighted that Apple had used the Irish capital allowances for intangible assets arrangement to re-structure its Irish subsidiaries in January 2015, which in itself could be subject to further EU Commission challenge, because it cannot be used for explicit tax avoidance, and fines of a similar magnitude to the €13bn figure could ensue (see further potential Apple litigation).

The EU Commission is currently investigating Apple's post January 2015 Irish structure. [35]

Replacement by Single Malt

In 2014, as the Irish Government were closing the double Irish arrangement, the influential US National Tax Journal published an article by Jeffrey L Rubinger and Summer Lepree, showing that Irish based subsidiaries of US corporations could replace the double Irish arrangement with a new structure (now known as single malt).

If the non-EU company in the double Irish, could be relocated to a country with whom (a) Ireland has a full tax treaty, (b) with specific loose wording and treatment of "management and control" tax residency rules, and (c) with had a zero corporate tax rate, then the same double Irish effect could be achieved. They highlighted Malta as a candidate.[36]

The mainstream Irish media picked up this Rubinger and Lepree article at the time it was written. [37]

The situation was forgotten until a 2017 report by Christian Aid titled "Impossible Structures" [38] which outlined how popular the single malt arrangement has become. The report went into great detail (money flow diagrams, Microsoft's and Allergen's schemes, extracts from advisers to their clients, and estimates of lost tax revenues). This report was discussed more widely in the media [39] and unlike 2014, brought a formal response from the Irish Finance Minister Paschal Donohoe that it would be investigated.[40]

The lack of action since the single malt structure was highlighted in 2014, raised questions regarding the Irish Government's stated policy of addressing corporate tax avoidance. [41]

In this regard, the Christian Aid report noted that the single malt arrangement would have been largely neutralised had the Irish Government not deliberately not opted out Article 12 (Disclosure of Aggressive Tax Planning) when signing the new OECD Multilateral Convention in July 2017 (which came from the the Base erosion and profit shifting (OECD project)). [42]

Paradoxically, the Christian Aid report notes that there has been "... a dramatic increase in companies using Ireland as a low-tax or no-tax jurisdiction for intellectual property (IP) and the income accruing to it, via a nearly 1000% increase in the uptake of a tax break expanded between 2014 and 2017." [43]

Backstop of Capital Allowances

Double Irish and single malt arrangements are structures which use Ireland to move profits from high tax locations (i.e. Germany) to lower / zero tax locations (i.e. Cayman Islands or Malta). However, they are now well understood structures and are under increasing attack from tax authorities (i.e. Article 12 of the OECD Multilateral Convention in 2017).

As a more sustainable solution, the Irish Government in the 2009 Irish Finance Act, dramatically expanded the range of intangible assets that could attract capital allowances which are fully deductible against Irish taxable profits.[44] These "specified intangible assets" cover more esoteric intangible assets such as general rights, general know-how, general goodwill, and the right to use software. [45]. It also includes even "internally developed" intangible assets. Basically anything that can be recorded under GAAP.

Instead of the typical double Irish (or single malt) arrangement where IP assets are charged to Ireland from an offshore location (or Malta location for single malt), the Irish subsidiary can now buy the IP assets, using an inter-company loan, and then write-off the acquisition cost over a fixed period (5-15 years) against Irish pre-tax profits.

Industries such as technology, pharmaceutical and medical devices (the three main US firms in Ireland) who have "product cycles", can re-fresh their Irish capital allowances arrangement by continually creating new IP with each product cycle (in an offshore location), which the Irish subsidiary will continually acquire to top-up its capital allowances.

It is noteworthy that when Apple, one of the largest users of tax structuring in the world, was re-structuring its controversial Irish subsidiaries in January 2015 (see above), it chose the Irish capital allowances arrangement rather then use a double Irish arrangement (which it could have legitimately done in January 2015).

Legislation states the acquired IP must be linked to the activity generating the Irish profits (i.e. company must be "working on" the IP). A "business plan" must be produced showing agreed levels of Irish employment during the capital write off period. If the company deviates from this business plan, or leaves Ireland before the period ends, it must repay all allowances.

In 2017, the Irish Government accepted the recommendation of economist Seamus Coffey (Chairman of the State's Irish Fiscal Advisory Council and consultant to the Irish Government Irish Corporate Taxation) [46] [47] that the Irish capital allowances arrangement be capped at 80% for new arrangements, to give a minimum effective tax rate of circa 2-3%. [48]

Effect of Tax Cuts and Jobs Act ("TCJA")

While the Irish Industrial Development Authority markets Ireland as a base for multi-nationals selling into Europe, in practice the main multi-nationals in Ireland are US multi-nationals shielding themselves from the pre-TCJA US Worldwide Tax System, which levied a 35% tax rate (one of the world's highest) on worldwide "unshielded" profits.

There are few major European, Asian, Canadian or other multi-nationals with substantive subsidiary offices in Ireland, as their home countries run more modern Territorial Tax System, enabling their home taxing authorities to charge lower rates on foreign income which incentivises their multi-nationals to keep more jobs at "home".

Irish tax structures (i.e. double Irish, single malt or capital allowances) rely on large amounts of intellectual property ("IP"). The largest global generators of IP are the technology, pharmaceutical, medical device industries and specific industrials. Thus the top 20 global multi-nationals firms in Ireland are predominately both US and from these industries.

Parts of the 2017 Tax Cuts and Jobs Act ("TCJA") directly targets these US multi-nationals in Ireland with both a "carrot" and a "stick".

  • As a "carrot", the TCJA enables these firms to charge out their IP globally (just like with a double Irish or single malt arrangement) but from a US base, at a preferential tax rate of 13.25% (it was 12.5% (the Irish rate) before the last minute changes raised the overall TCJA US tax rate from 20% to 21%).
  • As a "stick", the TCJA GILTI tax rate forces these firms to pay a minimum rate of tax of 13.25% on their intangible assets regardless of where they are located. Thus, the 0% tax rate of the double Irish and single malt arrangements, and the 2-3% rate of the Irish capital allowances arrangement, are no longer achievable.

At a simplified level if Google (tech), Pfizer (tech), Medtronic (med device) or Eaton (industrial) were starting out again today, they would not use Ireland post the 2017 TCJA from a tax saving perspective (they all have large Irish operations). In fact, the 100% expensing of US capital spending would make the US slightly more tax efficient than Ireland.

In addition, most US firms would rather have their most important IP inside the larger US legal system (were they can lobby Washington), then in the smaller Irish legal system (which is also subject to EU control and direction).

In practice, we may not see US firms in Ireland move for a few years until their Irish capital allowances arrangements expire (note from above, that if a multi-national leaves Ireland before its agreed capital allowances plan is complete, the Irish Revenue can "clawback" all allowances).

US multi-nationals starting an Irish capital allowances arrangement post 2015 used a 5 year term (i.e. Apple), while the older plans had a 10 year term (2009 Finance Act).

This is consistent with Seamus Coffey's statement that Irish tax revenues are predictable up until circa 2020. It would also explain why the TCJA staggers its GILTI 'stick' rates from 2018 to 2022 (when the last US multi-nationals are finished their Irish capital allowances arrangements) after which, it is more taxing for US firms to be in Ireland.

See also

References

  1. ^ a b Joseph B. Darby III, International “Tax Planning: Double Irish More than Doubles the Tax Saving”, Practical US/International Tax Strategies 11(9), 15 May 2007
  2. ^ a b Charles Duhigg (28 April 2012). "How Apple Sidesteps Billions in Global Taxes". New York Times. Retrieved 29 April 2012. In the late 1980s, Apple was among the pioneers in creating a tax structure – known as the Double Irish – that allowed the company to move profits into tax havens around the world ... {{cite news}}: Cite has empty unknown parameter: |coauthors= (help)
  3. ^ a b "Ireland boosting capacity to track transfer pricing". Reuters. 29 May 2013.
  4. ^ a b Irish Budget abolishes corporate tax avoidance schemes, European Tribune; October 15th, 2013.
  5. ^ Dublin, Henry McDonald in. "Ireland to abolish controversial 'double Irish' tax arrangement". The Guardian. Retrieved 9 July 2015.
  6. ^ "Multinationals replacing 'Double Irish' with new tax avoidance scheme". RTE News. 14 November 2017.
  7. ^ "How often is the 'Single Malt' tax loophole used? The government is finding out". thejournal.ie. 15 November 2017.
  8. ^ "Paschal Donohoe says Government will examine 'Single Malt' loophole". The Irish Times. 14 November 2017.
  9. ^ Wiederhold, Gio: "Follow the Intellectual Property: How companies pay Programmers when they move the related IP rights to offshore taxhavens?"; Communications of the ACM, vol. 54 no. 1, January 2011, pp. 66–74.
  10. ^ "Stingy Stones avoid tax on £240m fortune | Mail Online". Dailymail.co.uk. 2 August 2006. Retrieved 23 January 2013.
  11. ^ "'Dutch Sandwich' saves Google and many other U.S. companies billions in taxes". MSNBC. 22 October 2010.
  12. ^ "Man Making Ireland Tax Avoidance Hub Proves Local Hero"
  13. ^ a b c d e f Drucker, Jesse (21 October 2010). "Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes – Bloomberg". www.bloomberg.com.
  14. ^ From Google to FedEx: The Incredible Vanishing Subsidiary
  15. ^ Erb, Kelly. "Ireland Declares 'Double Irish' Tax Scheme Dead". Retrieved 24 May 2015.
  16. ^ Garside, Juliette. "Tax avoidance. War of words hots up between US and EU over tax avoidance". Retrieved 25 August 2016.
  17. ^ "THE EUROPEAN COMMISSION'S RECENT STATE AID INVESTIGATIONS OF TRANSFER PRICING RULINGS" (PDF). Retrieved 25 August 2016.
  18. ^ Baker, Jennifer. "Apple cored —Apple must pay Ireland €13B in taxes, rules European Commission". Retrieved 30 August 2016.
  19. ^ "Abbott Laboratories Irish subsidiary paid no tax on €1.8 billion profit". The Irish Times. 31 May 2013.
  20. ^ "Abbott subsidiaries paid no tax on €2.9 billion profits". Sligo Today.
  21. ^ a b c d e f g h Chitum, Ryan (2007). "How 60 billion are lost in tax loopholes", Bloomberg.
  22. ^ "The Sharing Economy Doesn't Share the Wealth". Bloomberg News. 6 April 2016. Retrieved 7 April 2017.
  23. ^ "Low Irish taxes boost Airbnb profits". EURACTIV. 22 July 2014. Retrieved 7 April 2017.
  24. ^ "How Google saved $2 billion in income tax – Times of India". www.timesofindia.com. 11 December 2012.
  25. ^ "IBM gooses its sales numbers thanks to overseas tax tricks". ARS Technica. 4 February 2014.
  26. ^ "Medtronic's $43 Billion Covidien Buyout Is More Than Just A Tax Saving Deal". Forbes. 14 June 2014.
  27. ^ "Corporate Tax 2014: Yahoo! joins "Double Irish Dutch Sandwich" club; IDA Ireland wants more members". FinFacts Ireland. 10 February 2014.
  28. ^ CHARLES DUHIGG, DAVID KOCIENIEWSKI (28 April 2012). "How Apple Sidesteps Billions in Taxes". The NY Times. Retrieved 20 May 2013.
  29. ^ Levin, Carl; McCain, John (May 2013), Memorandum: Offshore profit shifting and the U.S. tax code - Part 2 (Apple Inc.) (memorandum of the Permanent Subcommittee on Investigations), archived from the original (PDF) on 29 June 2013, retrieved 27 June 2013 {{citation}}: Unknown parameter |deadurl= ignored (|url-status= suggested) (help)
  30. ^ "Senate Probe Finds Apple Used Unusual Tax Structure to Avoid Taxes". Reuters. Retrieved 20 May 2013.
  31. ^ Kanter, James and Scott, Mark (August 30, 2016) Apple Must Pay Billions for Tax Breaks in Ireland, E.U. Orders The New York Times
  32. ^ Harry McGee. "Apple tax appeal: The three arguments Government to use". Irish Times. Retrieved 3 September 2016.
  33. ^ Tim Cook. "A Message to the Apple Community in Europe". apple.com. Retrieved 3 September 2016.
  34. ^ "Apple's Irish company structure key to EU tax finding". Irish Times. Retrieved 2 September 2016.
  35. ^ "EU asks for more details of Apple's tax affairs". The Times. 8 November 2017.
  36. ^ "Death of the "Double Irish Dutch Sandwich"? Not so Fast". Taxes Without Borders. 23 October 2014.
  37. ^ "Multinationals replacing 'Double Irish' with new tax avoidance scheme". The Irish Independent. 9 November 2014.
  38. ^ "'Impossible' structures: tax outcomes overlooked by the 2015 tax Spillover analysis" (PDF). Christian Aid. November 2017.
  39. ^ "Multinationals turn from 'Double Irish' to 'Single Malt' to avoid tax in Ireland". Irish Times. 14 November 2017.
  40. ^ "Paschal Donohoe says Government will examine 'Single Malt' loophole". The Irish Times. 14 November 2017.
  41. ^ "Three years of silence on 'Single Malt' tax loophole raises questions". Irish Times. 16 November 2017.
  42. ^ "Multilateral Instrument: Department of Finance announces Irish positions". Deloitte. June 2017.
  43. ^ "'Impossible' structures: tax outcomes overlooked by the 2015 tax Spillover analysis (Page 3)" (PDF). Christian Aid. November 2017.
  44. ^ "Intangible Assets Scheme under Section 291A Taxes Consolidation Act 1997" (PDF). Irish Revenue. 2010.
  45. ^ "Ireland as a Location for Your Intellectual Property Trading Company" (PDF). Arthur Cox Law. April 2015.
  46. ^ "Minister Donohoe publishes Review of Ireland's Corporation Tax Code". Department of Finance. 21 December 2017.
  47. ^ "REVIEW OF IRELAND'S CORPORATION TAX CODE, PRESENTED TO THE MINISTER FOR FINANCE AND PUBLIC EXPENDITURE AND REFORM BY MR. SEAMUS COFFEY" (PDF). Department of Finance. 30 January 2017.
  48. ^ "Tax break for IP transfers is cut to 80pc". Department of Finance. 11 October 2017.
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