11.07.2012

Time to Run Back the Double Irish?

With the recent news that Apple has reduced its foreign tax bill to a somewhat confoundingly low 2%, it would seem an appropriate time to run a reprint of a post we published a few years back explaining some exotic tax deferral schemes. The latest installment of what seems to have become an annual exercise, what follows is a description of the colorfully named 'Double Irish' scheme. Anyone interested can find the original post here.

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 labyrinthian 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 many 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.

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