Companies have long taken advantage of a quirk in Irish law that allows for royalty payments for intellectual property to be sent from one Irish –registered subsidiary to another that resides in a country with no corporate income taxes, thereby evading such taxes entirely. This is possible because Ireland does not subscribe to the transfer pricing rules in effect in the United States; Ireland uses a system of territorial taxing in which taxes are not levied on Irish companies’ income booked outside of the Emerald Isle. This creates an opportunity for companies to conduct the “Double Irish”. In 2010, for example, Google reported having lowered its overseas effective corporate income tax rate to 2.4% using Irish (and Dutch- the Netherlands has a similar loophole) financial institutions to transfer their royalty payments to the Bermuda, which has no corporate income tax. The American rate is 35%. A diverse group of companies, including Facebook, Johnson & Johnson, and Starbucks have used the technique over the years.
The outrage over this practice reached a fever pitch in Washington this summer when medical device-maker Medtronic, Inc. purchased Dublin-based Covidien Plc, and redomiciled in Ireland for tax purposes. The acquisition was a brazen attempt to dodge American taxes; the agreement itself allowed Medtronic the opportunity to void the agreement in the event that American tax law changed before the consummation of the deal or in the event that a law passed that would reclassify the company as American for tax purposes.
The European Union has joined the United States in pressuring Ireland to close this loophole, and it appears Ireland is close to action. Lawmakers have been debating the matter and major legislation is expected to be signed by the end of 2014. It is expected that Ireland will begin taxing corporate income booked in foreign markets.
However, it also appears that the agreement will include a brand new tax break. Currently, Ireland allows companies to shield 80% of income from intellectual property from Irish corporate income taxes. The new legislation is expected to eliminate that cap entirely, maintaining the incentive for American companies to evade US corporate income taxes by domiciling in Ireland and simply not paying such taxes on income from intellectual property. Under the new law, Google will not even have to bother wiring the income to Bermuda; it can just leave it in Ireland and pay no taxes.
The agreement gives American and European Union regulators an opportunity to claim an achievement. The Double Irish is, in fact, dying. However, the new law allows companies to achieve the same ends even more easily than before. The Double Irish is simply being replaced by the Single Irish. Perhaps there will be another push for a solution the next time an American company acquires an Irish company strictly for tax purposes.
Barr, Caelainn. Francis, Theo. “Ireland Opens New Tax Break: Bill to End ‘Double Irish’ Also Proposes No Income Tax on Intellectual Property.” Wall Street Journal 5 Nov 2014. B1. Print.