Revisiting the Double Irish

As of the moment we posted this, Bloomberg's most popular story of the day was titled Google Tax Probe to Focus on Offshore Units. Ladies and gentlemen, there would appear to be no better time than the present to reprint a very popular post from a year ago which explained the Double Irish tax scheme. For those unfamiliar with the Double Irish, it is an asset transfer pricing plan which allows Google and others to book profits offshore until repatriating the cash at a later date. As this allows the companies to avoid US taxes for the time being, such plans are not particularly popular among some circles, especially when the country is desperately in search of new sources of revenue. Without further ado, what follows is an unadulterated copy of last year's posting:

Over the past few weeks the media has been buzzing over a few exotic tax schemes with even more exotic names, the Double Irish and the Dutch Sandwich. Though such strategies have been utilized since the late 90's when a liberalization of tax laws in Ireland facilitated the ability to put them in place, the special attention given to them recently is a result of an article Bloomberg published in which the author threw around some truly eyecatching numbers.

For example, Google, which was used as the centerpiece of the article, has annual global tax savings in the billions of dollars and an effective foreign tax rate of under 3%. To put this in context, one analyst quoted in the Bloomberg piece estimated that keeping its tax rate so low has added as much as $100 to Google's approximate $625 share price. In other words, if true, this would mean that tax strategies alone are responsible for at least 16% of the tech giant's market value.

So, how exactly is Google able to concurrently avoid the IRS and delight shareholders? The actual details are quite complicated and explaining the parts of the tax code that the structure rely on would be neither easy to write nor rewarding to read. However behind the creative names and the seemingly labyrinthine corporate structures are some fairly easy to grasp concepts. Essentially an American company with some form of intellectual property rights (usually tech or pharma based) licenses an offshore entity to co-produce the product. That company is registered in Ireland, but typically located in a slightly sunnier locale. That company then licenses yet another subsidiary, which is both registered and located on the Emerald Isle, to sell the product in overseas markets.

A slightly more traditional Double Irish...

For this, the selling subsidiary pays the producing subsidiary royalties. Due to the liberal offshore tax treatment of royalties as well as lower corporate taxes in Ireland, corporations can manage to take incredible percentages off tax bills on sales abroad. In toto, the transactions which take place during this process can also be referred to as asset transfer pricing.

The Double Irish name comes from the fact that two Irish subs are used, while a potential short-term transfer to The Netherlands reduces the tax bill even further and provides the name Dutch Sandwich (for a meaty Dutch transaction between two slices of soda bread). If any of our readers prefer very simple, interactive and easy to understand diagrams to verbosity, the Bloomberg article provided just such a visual which can be found here.

While most of the press Google has received for the structure has been, to put it diplomatically, unfavorable, blaming companies for reducing their taxes is akin to disliking your neighbor for taking deductions on April 15th. It is perfectly legal, and companies even negotiate with the IRS to come to terms before they establish the subsidiaries. Companies exist to serve shareholders, not pay taxes. It is also worth noting that companies are not avoiding taxes indefinitely. Indeed the Double Irish is really a tax deferral scheme rather than a tax avoidance scheme, and if the company ever wished to repatriate assets, ie return funds to domestic soil, it would owe a fairly hefty tax bill at that point. However, during a time of budget cuts and revenue problems and in the wake of an angry public, it would not be surprising to see asset transfer pricing become a more visible item on The President's agenda going forward.


  1. Fascinating, thank you! I may enjoy the phrase 'soak the rich' as much as FDR ever did, but schemes like this bring to my mind why temporary tax cuts can bring in more revenue than permanent tax hikes.

    Whether it's a state sales tax holiday or a temporary cut in capital gains, when taxes can be deferred, a temporary cut in rates spurs taxpayers to pay NOW. If Google can repatriate much of these assets when it wants or needs to, a temporary corporate tax cut (as opposed to the 'temporary' income tax cuts that Congress seems dedicated to endlessly extending) could spur Google to pay taxes now, to get a discount. It's the same time-tested theory that leads stores to hold sales, knowing customers will stock up on necessities.

    Instead of auditing Google, which both costs the government money and drains Google's job-creating resources, the gov't could offer it and other Double Irish companies a temporary (say six months?) tax break, and use the resultant rush of tax revenue to either (gasp!) pay down debt, or (double-gasp!) fund jobs programs.

  2. Josh Sturtevant17/10/11 11:37

    Thanks for reading and thanks for the comment.

    You are correct that a tax holiday would have the potential to bring a huge amount of taxable income into the US that would otherwise go unbooked indefinitely. My understanding is that many companies, including Google, have reportedly been in talks with lawmakers and the IRS to try to get such an arrangement in place.

    Of course repatriation alone wouldn't solve the ills of the country by any means, but I agree with you that it would certainly provide a boost, and would be more efficient than an investigation into a strategy which was preapproved by the IRS.

    Unfortunately, when Democrats seem to want to eliminate such strategies entirely and repatriate assets at normal tax rates, while Republicans seem happy to allow the arrangement to continue indefinitely with little thought to booking income from the operations in the US. Neither position really provides enough space for a tax holiday-driven repatriation.

    However maybe with a everyone looking for low hanging fruit as far as revenues right now, the time is ripe to put the idealogy aside to get something done. It is easy to see that everyone involved, from the corporations to the American people, could potentially benefit