The Death of the Double Irish?

In early November of this year, the media was in a minor uproar about the tax dollars that the US Treasury was losing out on due to corporate use of tax strategies which allowed profits to be booked in foreign jurisdictions with lower brackets. The most prevalent strategy, named the Double Irish due to the use of Irish subsidiaries to shift around tax burdens, is thought to save US corporations billions of dollars in taxes every year. Though shareholders are undoubtedly fans of the creative tax strategies, many feel that they are simply a way of cheating the government of tax revenues.

For the curious, details on the strategy may be found here. For purposes of this article, it is probably enough to note that the Irish have lower corporate tax rates than many other developed countries. In addition to a well-educated and naturally English-speaking work force, this makes the Emerald Isle a perfect location for US-based international companies to claim profits from foreign jurisdictions and avoid the higher taxes of the US. This worked out for everyone involved (save the US government) as US corporations were able to pay less in taxes, shareholders saw share value increase due to increased cash flow, and workers in Ireland were able to get well-paid jobs that wouldn't otherwise have been available.

However, Ireland is currently in trouble. After the bursting of a housing bubble that was, perhaps, more severe than that of the US, unemployment is high and banks are in trouble, a combination of factors which led to the recent EU/IMF bailout. So now that Ireland has put itself EUR 72 billion in debt to its EU neighbors and the International Monetary Fund, how does the country plan to pay this money back? The answer is probably that many factors will come into play. However, at least one source of revenue has become clear; the government is going to raise taxes to meet its shortfall.

Beautiful scenery, toxic mortgages

As the government puts additional tax pressure on its population, it is only natural (and perhaps fair) to think that it will at least strongly consider tightening up tax loopholes for foreign corporations as well. This could potentially mean the death of strategies such as the Double Irish. Putting aside any discussion of whether raising taxes in a downturn is the best strategy, there are nonetheless a number of obvious impacts of such a potential move.

US corporations might shut down the Irish operations and possibly repatriate assets back home. The impact of closing offices is obvious; such a move impacts everyone from the high earners to the staff, maintenance crews, groundskeepers and even workers at lunch spots in the area. The US corporations would likely have to find alternate means to save tax dollars, perhaps in locations which aren't as convenient due to geography, workforce or other concerns. Or, if no other jurisdiction makes sense, the corporations would likely have to bite the bullet and pay higher taxes, losing value for shareholders (though putting smiles of the face of the Treasury Department).

There are negatives, but there may be positives as well. After all, Ireland is in a serious situation, and such times call for serious measures. Most nations that overextended themselves during the housing boom are now paying the price in one way or another, and it makes sense to pay the piper sooner than later (a lesson the US could well learn). It is also a certainty that Irish accountants and actuaries are hard at work figuring out what levels of tax will allow them to lose, break even and gain if certain foreign operations were to leave their shores. Therefore, though it may lose some foreign corporate revenues, it could likely make them back and then some from higher taxes for domestics (again, it is possible to find problems with this strategy, but if it is necessary it can be made to work in the short term).

It is also uncertain that the Double Irish is destined for doom; the strategy may yet be spared the tax man's scrutiny. If the Irish government does indeed decide to close the loop on the one of the most creatively-named strategies in accounting history, it might help get it through the current economic malaise. This and other austerity measures may, in time, even help the country regain the prosperity of recent years. However, uncertainty remains and the situation will require careful watch by debtors, corporations, workers and shareholders alike.