Overview
Typically, the company arranges for the rights to exploit
intellectual property outside the United States to be owned by an
offshore company. This is achieved by entering into a
cost sharing agreement between the US parent and the offshore company, written strictly in terms of US
transfer pricing rules. The offshore company continues to receive all of the profits from exploitation of the rights outside the US, but without paying US tax on the profits unless and until they are remitted to the US.
[6]
It is called
double Irish because it requires two Irish companies to complete the structure. 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 US, 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 US tax purposes.
[1]
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 percent, 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 of Ireland, in
Bermuda or another
tax haven.
Ireland does not levy
withholding tax on certain receipts from
European Union member States. Revenues from sales of the products shipped by the second Irish company (the second in the double Irish) are first booked by a
shell company in the
Netherlands, taking advantage of generous
tax laws there. Overcoming[
clarification needed] the Irish tax system, the remaining profits are transferred directly to
Cayman Islands or
Bermuda. This part of the scheme is referred to as the "
Dutch sandwich".
[7][8] The Irish authorities never see the full revenues and hence cannot tax them, even at the low
Irish corporate tax rates.
Countermeasures
In 2010, the Obama administration was said to propose to tax excessive profits of offshore subsidiaries to curb
tax avoidance in the United States.
[9] A 2010 Irish law brought Ireland into line with most of its trading partners by introducing a formal regime 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.
[10]
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 January 2015; those already engaging in the tax avoidance scheme have a five year window until 2020 to find another arrangement.
[11]
Companies using the arrangement
Major companies known to employ the double Irish strategy include:
- Abbott Laboratories[12][13]
- Adobe Systems[14]
- Apple Inc.[2]
- Eli Lilly and Company[14]
- Facebook[9]
- Forest Laboratories[14]
- General Electric[9]
- Google[9][14][15]
- IBM[16]
- Johnson & Johnson[9]
- Microsoft[14]
- Oracle Corp.[14]
- Pfizer Inc.[14]
- Starbucks[9]
- Yahoo![17]
