Bowing to international pressure (and the threat of some potentially nasty consequences), Ireland has announced that it will put an end to tax-favored breaks used by companies like Apple and Google.
You know, the tax scheme that they liked to pretend didn’t really exist.
The one which allowed Apple and other similarly situated companies in Ireland like Google, Microsoft and Twitter to aggressively avoid higher taxes in their home countries.
The one that Ireland and the involved companies called a “tax planning opportunity” but others called tax avoidance via the “Double Irish” (or, in conjunction with the Netherlands, the “Double Irish and Dutch Sandwich” which sounds delicious but is frowned upon).
Yeah, that one. In a nutshell, here’s how it worked: parent companies and subsidiaries are typically separate legal and tax entities – which is key to the “Double Irish” arrangement. When companies move goods, services, and assets from one separate company to another – including subsidiaries – those transactions are supposed to be “arm’s length” meaning that the goods, services, and assets are transferred for the same price as they would have between unrelated parties. However, if a company can shift enough goods and services around without paying tax on the transfer, it can avoid taxation by redirecting profits to countries with little to no tax payable – like Ireland which has a corporate tax rate of about 12.5%.
It gets even better since, under Irish law, if an Irish subsidiary is controlled by managers outside of the company like one in a tax-haven such as Bermuda or the Isle of Man, certain kinds of income can escape tax altogether – so long as it remains out of arm’s length of taxing authorities. Ireland’s tax laws make this easy and Irish disclosure laws make those assets tricky to track down.
Technically, that money should be taxed when (and if) it is repatriated but reality, most of those funds stay parked in a series of offshore companies in tax-friendly countries (read: low to zero tax rate and limited reporting requirements). That typically means that sales made in other countries never enter the stream of U.S. taxation even though we have a global tax system. While the U.S. requires all domestic corporations to file an income tax return reporting global sales, creating multiple subsidiaries allows for some tricky interpretations. Since our corporate tax rates can be as high as 39.1%, one of the highest in the world, corporations have been creating subsidiaries in countries like Ireland and using a series of controversial maneuvers and structures to whittle “taxable income” down significantly – sometimes below zero. Whether that’s a legitimate tax strategy has been under fire for some time.
The combination of low rates and complicated tax structures – and the resulting tax benefits – caused the European Commission to announce earlier this year that it would formally investigate tax practices of certain companies including Apple’s dealings in Ireland. The pressure finally paid off for the Commission when Irish Finance Minister Michael Noonan all but labeled the “Double Irish” deal dead 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 scheme have a five-year window to wind down. Significantly, all companies registered to do business in Ireland must be a bona fide tax resident in Ireland – not that Ireland is admitting that companies previously registered in the country were not tax residents (it’s worth noting that the European Commission has questioned Ireland’s tax residency rules).
Ireland will hang onto its 12.5% corporate tax rate with Noonan claiming, “The 12.5% tax rate never has been and never will be up for discussion. The 12.5% tax rate is settled policy. It will not change.” The rate, one of the lowest in the world, may still make it attractive for some companies. However, the loss of the “Double Irish” means that the 2% tax rate paid by Apple may become a thing of the past – at least in Ireland.
Realistically, companies like Apple and Twitter are mobile and have the capacity to pick up shop and go. And while, for example, Google claims to remain “deeply committed to Ireland,” I suspect it’s just a matter of time before those companies go tax forum shopping and find themselves in a new relationship with another country. Tere tulemast Estonia?