Technology companies currently using a tax scheme known as the Double Irish will soon have to look for other ways to reduce their tax burdens.
Starting next year, the controversial tax reduction measure will no longer work for new companies. Companies already using it — including tech giants Google, Apple, Adobe, Amazon and Oracle — will have until 2020 to stop.
How the Double Irish Works
Companies use the Double Irish, a strategy which leverages Ireland’s corporate tax laws, to reduce their tax burden in their home country, usually the United States. The strategy is so named because it requires two Irish subsidiary companies.
The Double Irish hinges on Irish tax law allowing a company to be residing in Ireland, but to be a tax resident of another country; typically one with extremely favourable corporate tax laws. For example, Google Ireland Holdings resides in Ireland, but is a tax resident of Bermuda, which has no corporate tax, because it is headquartered there.
This first subsidiary company owns a second subsidiary company that operates in, and is a tax resident of, Ireland. Most of the profits of the second company are paid as royalties, and so a tax deductible expense, to its parent company. Any profits that aren’t are paid to the first company are taxed at Ireland’s corporate rate of 12.5 percent.
As the parent company is not a tax resident of Ireland, the money transferred as royalties from the subsidiary is not taxed there, but is instead taxed in their headquarter country. In Google’s case, Bermuda. And Bermuda doesn’t impose corporate income tax.
There are various complications on top of the Double Irish. The Dutch Sandwich, for example, adds a third subsidiary in the Netherlands in the middle of the two Irish subsidiaries, reducing companies’ tax burdens even more.
The Doom of the Double Irish
Ireland has been consistently criticised by both the EU and the US Government for allowing tax setups like the Double Irish. Caving to this pressure, from 2015, Ireland will require companies residing in Ireland to also be a tax resident of Ireland.
This won’t effect the tech companies currently using the structure immediately. They will have until 2020 to comply. Although Ireland will still be largely a favourable place for international companies, the Double Irish strategy will no longer be legal.
Removing tax strategies like the Double Irish is a game of legal Whac-A-Mole. Many companies will just move on to using a different strategy, possibly in Ireland, and possibly elsewhere.
The Double Irish is only one of many strategies that tech companies use for reducing their tax burden. The way the EU operates is particularly susceptible as companies can base themselves in the country with the most favourable tax laws and sell freely into all the other member nations. For example, the EU has recently begun investigating Amazon’s tax dealings with Luxembourg. Amazon uses their subsidiary in Luxembourg to handle all European transactions.
With the closure of the Double Irish, tech companies based in Ireland will start having to pay more tax. Ireland’s corporate rate of 12.5 percent is one of the lowest in the world. The companies it affects will have to balance the cost of moving operations to a country where tax strategies still work with the costs of remaining in Ireland and paying higher taxes.
The tide, however, is turning against these strategies in general. The EU is cracking down on member nations using them and President Obama has expressed his opposition to them. Public opinion is also changing with the revelations about Google’s low effective tax rate in Ireland causing outcry.
The change won’t be immediate but large tech companies will begin to have to pay higher tax bills as loopholes are closed and strategies that are now “technically legal” become “definitely illegal”.
Two Ways It Might Effect You
Changes in tax legislation have a very real effect on international companies bottom lines. Paying millions or billions in taxes can significantly reduce their profits. This can have a knock on effect that may affect you directly.
Changes in tax laws mean that the cost of doing business for large international tech companies is going up. Unfortunately for consumers, this means that prices will likely increase to compensate. Tech companies already charge international customers more than US customers and changes in international tax laws will only increase this disparity.
Luckily, at MakeUseOf we have you covered. Even if prices go up, with Nancy’s guide on getting good deals online you should still be able to save some cash.
Reduced Job Security
Google currently employs more than 2000 people in Ireland. Despite reassurances from the Irish government, there is still a risk that they, and other large tech companies, could relocate elsewhere. If you work for a company that is using your country’s tax laws to reduce their tax burden, there is a chance your job is at risk if they decide to move their operations elsewhere.
Again, MakeUseOf is here to help. We’ve got plenty of information on ways to get a job.
What do you make of tech companies using strategies to reduce their taxes? Is it just an accepted business practice or are companies dodging their responsibilities to society?