Double Irish arrangement
The Double Irish arrangement was a base erosion and profit shifting corporate tax avoidance tool used mainly by United States multinationals since the late 1980s to avoid corporate taxation on non-US profits. It was the largest tax avoidance tool in history. By 2010, it was shielding US$100 billion annually in US multinational foreign profits from taxation, and was the main tool by which US multinationals built up untaxed offshore reserves of US$1 trillion from 2004 to 2018. Traditionally, it was also used with the Dutch Sandwich BEPS tool; however, 2010 changes to tax laws in Ireland dispensed with this requirement.
File:Michael Noonan.jpg|thumb|Former Finance Minister Michael Noonan closed the Double Irish BEPS tool to new entrants in October 2014, but expanded the CAIA BEPS tool as a replacement in 2011–2016, and infamously told an Irish MEP who alerted him to the Single Malt BEPS tool, to "put on the green jersey".
Despite US knowledge of the Double Irish for a decade, it was the European Commission that in October 2014 forced Ireland to close the scheme, starting in January 2015. However, users of existing schemes, such as Apple, Google, Facebook and Pfizer, were given until January 2020 to close them. At the announcement of the closure, it was known that multinationals had replacement BEPS tools in Ireland, the Single Malt, and Capital Allowances for Intangible Assets :
In their 1994 paper, the economist James R. Hines Jr. and his PhD student Eric M. Rice showed in that US multinational use of tax havens and BEPS tools had maximised long-term US Treasury receipts. They showed that multinationals from "territorial" tax systems, which all but a handful of countries follow, did not use BEPS tools, or tax havens, including those that had recently switched, such as Japan, and the UK. By 2018, tax academics showed US multinationals were the largest users of BEPS tools and Ireland was the largest global BEPS hub or tax haven. They showed that US multinationals represented the largest component of the Irish economy and that Ireland had failed to attract multinationals from "territorial" tax systems.
The United States switched to a "territorial" tax system in the December 2017 Tax Cuts and Jobs Act, causing American tax academics to forecast the demise of Irish BEPS tools and Ireland as an American corporate tax haven. However, by mid-2018, other tax academics, including the IMF, noted that technical flaws in the TCJA had increased the attractiveness of Ireland's BEPS tools, and the CAIA BEPS tool in particular, which post-TCJA, delivered a total effective tax rate of 0–2.5% on profits that can be fully repatriated to the US without incurring any additional US taxation. In July 2018, one of Ireland's leading tax economists forecasted a "boom" in the use of the Irish CAIA BEPS tool as US multinationals close existing Double Irish BEPS schemes before the 2020 deadline.
Double Irish
Concept and origin (1991)
The Double Irish is an IP–based BEPS tool. Under OECD rules, corporations with intellectual property, which are mostly technology and life sciences firms, can turn this into an intangible asset on their balance sheet, and charge it out as a tax-deductible royalty payment to end-customers. Without such IP, if Microsoft charged a German end-customer $100, for Microsoft Office, a profit of about $95 would be realised in Germany, and German tax would be payable on this profit. However, if Germany allows such an intangible asset, Microsoft can additionally charge Microsoft Germany $95 in IP royalty payments on each copy of Microsoft Office, reducing its German profits to zero. The $95 is paid to the entity in which the IP is legally housed. Microsoft would prefer to house this IP in a tax haven; however, higher-tax locations like Germany do not sign full tax treaties with tax havens, and would not accept the IP charged from a tax haven as deductible against German taxation. The Double Irish fixes this problem.The Double Irish enables the IP to be charged-out from Ireland, which has a large global network of full bilateral tax treaties. The Double Irish enables the hypothetical $95, which was sent from Germany to Ireland, to be sent on to a tax haven such as Bermuda without incurring any Irish taxation. The techniques of using IP to relocate profits from higher-tax locations to low-tax locations are called base erosion and profit shifting tools. There are many types of BEPS tools ; however, IP–based BEPS tool are the largest group.
As with all Irish BEPS tools, the Irish subsidiary must conduct a "relevant trade" on the IP in Ireland. A "business plan" must be produced with Irish employment and salary levels that are acceptable to the Irish State during the period the BEPS tool is in operation. Despite these requirements, the effective tax rate of the Double Irish is almost 0%, as the EU Commission discovered with Apple in 2016.
Most major US technology and life sciences multinationals have been identified as using the Double Irish. By 2010, US$95 billion of US profits were shifted annually to Ireland, which increased to US$106 billion by 2015. As the BEPS tool with which US multinationals built up untaxed offshore reserves of circa US$1 trillion from 2004 to 2017, the Double Irish is the largest tax avoidance tool in history. In 2016, when the EU levied a €13 billion fine on Apple, the largest tax fine in history, it only covered the period 2004–14, during which Apple shielded €111 billion in profits from U.S tax.
The earliest recorded versions of the Double Irish-type BEPS tools are by Apple in the late 1980s, and the EU discovered Irish Revenue tax rulings on the Double Irish for Apple in 1991. Irish state documents released to the Irish national archives in December 2018 showed that Fine Gael ministers in 1984 sought legal advice on how US corporations could avoid taxes by operating from Ireland. The former Irish Taoiseach, John Bruton, wrote to the then Finance Minister Alan Dukes saying: "In order to retain the maximum tax advantage, US corporations will wish to locate FSCs in a country where they will have to pay little or no tax. Therefore unless FSCs are given favourable tax treatment in Ireland, they will not locate here." Feargal O'Rourke, PwC tax partner in the IFSC is regarded as its "grand architect".
Basic structure (no Dutch sandwich)
While there have been variations, the standard Double Irish arrangement, in simplified form, takes the following structure :This structure has a problem. The pre–TCJA US tax code allows foreign income to be left in foreign subsidiaries, but it will consider BER1 to be a controlled foreign corporation, sheltering income from a related party transaction. It will apply full US taxes to BER1 at 35%.
To get around this, the US corporation needs to create a second Irish company, legally incorporated in Ireland, but which is "managed and controlled" from Bermuda. IRL2 will be placed between BER1 and IRL1. Up until the 2015 shut-down of the Double Irish, the Irish tax code was one of the few that allowed a company to be legally incorporated in its jurisdiction, but not be subject to its taxes.
The US corporation will "check-the-box" for IRL1, declaring it a foreign subsidiary selling to non-US locations. Then the US tax code will ignore IRL1 from US tax calculations. However, because the US tax code also views IRL2 as foreign, it also ignores the transactions between IRL1 and IRL2. This is the essence of the Double Irish arrangement.
Note that in some explanations and diagrams BER1 is omitted ; however, it is rare for a US corporation to "own" IRL2 directly.
Elimination of Dutch Sandwich (2010)
The Irish tax code historically levied a 20% withholding tax on transfers from an Irish company like IRL1, to companies in tax havens like BER1. However, if IRL1 sends the money to a new Dutch company DUT1, via another royalty payment scheme, no Irish withholding tax is payable as Ireland does not levy withholding tax on transfers within EU states. In addition, under the Dutch tax code DUT1 can send money to IRL2 under another royalty scheme without incurring Dutch withholding tax, as the Dutch do not charge withholding tax on royalty payment schemes. This is called the Dutch Sandwich and DUT1 is described as the "Dutch slice". Thus, with the addition of IRL2 and DUT1, we have the "Double Irish Dutch Sandwich" tax structure.In 2010, the Irish government, on lobbying from PwC Ireland's IFSC tax partner, Feargal O'Rourke, relaxed the rules for sending royalty payments to non-EU countries without incurring Irish withholding tax, but they are subject to conditions that will not suit all Double Irish arrangements.
Controversial closure (2015)
The 2014–16 EU investigation into Apple in Ireland, showed that the Double Irish existed as far back as 1991. Early US academic research in 1994 into US multinational use of tax havens identified profit shifting accounting techniques. US congressional investigations into the tax practices of US multinationals were aware of such BEPS tools for many years. However, the US did not try to force the closure of the Double Irish BEPS tool, instead it was the EU which forced Ireland to close the Double Irish to new schemes in October 2014. Nevertheless, existing users of the Double Irish BEPS tool, were given five more years until January 2020, before the tool would be fully shut-down to all users.This approach by successive US administrations is explained by an early insight that one of the most cited US academic researchers into tax havens, and corporate taxation, James R. Hines Jr., had in 1994. Hines realised in 1994, that: "low foreign tax rates ultimately enhance U.S. tax collections". Hines would revisit this concept several times, as would others, and it would guide US policy in this area for decades, including introducing the "check-the-box" rules in 1996, curtailing the 2000–10 OECD initiative on tax havens, and not signing the 2016 OECD anti-BEPS initiative.
By September 2018, tax academics proved US multinationals were the largest users of BEPS tools, and that Ireland was the largest global BEPS hub.
In December 2018, Seamus Coffey, the Chairman of the Irish Fiscal Advisory Council, told The Times in relation to the closure of the Double Irish that "A lot of emphasis has been put on residency rules and I think that emphasis has been misplaced and the changes didn't have that much effect". On 3 January 2019, The Guardian reported that Google avoided corporate taxes on US$23 billion of profits in 2017 by using the Double Irish with the Dutch sandwich extension.