TAX AVOIDANCE
Synopsis: Irish Government has announced that action to close the “Double Irish” corporate tax loophole will be taken
Date posted: Friday, October 17, 2014
So the ‘Double Irish’ tax avoidance/reduction strategy adopted by some ‘rich and famous’ global corporations is to close.
Question: What is/was the ‘Double Irish’ tax strategy?
Answer ‘Double Irish’ strategy enables businesses (particularly US businesses it seems) – via a complex system of royalty and fee payments – to move the tax base for revenues (via the use of two Irish companies) to locations which are described as ‘tax efficient’ – such as low-tax Ireland and no-tax Bahamas. Typically, while both companies are ‘Irish’ only one would be tax resident in Ireland.
Google and Facebook are two well-known exponents of this strategy.
The use of the Double Irish has had the effect of reducing the available taxes paid to countries where Google and Facebook operate, including the UK.
George Osborne raised the issue in his Conservative Party conference speech last month.
‘While we offer some of the lowest business taxes in the world, we expect those taxes to be paid – not avoided,’ he said.
‘Some technology companies go to extraordinary lengths to pay little or no tax here. If you abuse our tax system, you abuse the trust of the British people.’
A source close to the Chancellor is reported to have said that the legal changes needed to force multinationals to pay UK taxes on UK profits are relatively simple.
Some have said that introducing the changes earlier may have scared the companies away from the UK and the nation could have lost them as big employers. Now, however, it may be thought that the tide of global political opinion has changed so much that action must be taken. A theme we have referenced in past bulletins …i.e. the need to do something about perceived aggressive tax avoidance and to be seen to be doing something about it.
Google was accused of running tax arrangements that are ‘devious, calculated and … unethical’ when it appeared before the Commons public accounts committee last year. Google, which denied the accusations at the time, was unavailable to comment on Monday. However, when asked where all the tax that it was supposed to have paid was, the Google answer was a simple, ‘Search Me.’
Earlier this month G20 finance ministers promised to join forces to reveal plans to combat ‘base erosion and profit shifting’. Broadly speaking the proposals will force multinationals to reveal to tax authorities where they make their money and pay their taxes in an effort to expose those that shift profits to tax havens or low tax regimes.
So what will be the effect of the closure of the Double Irish strategy?
It has been reported that Google and Apple could face paying significant amounts of additional tax if the companies remain structured as they are and no other effective tax planning is carried out to ameliorate the removal of the Double Irish.
US firms have been, it seems, the main exponents of the ‘Double Irish,’ but the promise to axe the ‘Double Irish’ was apparently greeted calmly by Wall Street, where analysts noted it would be phased out over six years and forecast it would have, at most, a modest impact on earnings.
Dominic Caruso, chief financial officer at Johnson & Johnson, the healthcare company, told investors on Tuesday that Ireland wanted to stay competitive. ‘We expect that the grandfathering provisions will give us all enough time to adjust any plans that we might have as a result of any impact.’
The changes announced on Tuesday will stop companies putting their intellectual property into a country such as Bermuda using an Irish registered company that is controlled from the tax haven. But tax advisers said this measure would not stop a variation on the Double Irish, which involves companies putting their intellectual property into a tax haven registered company.
This strategy requires the use of the US ‘check the box rules’ – a quirk of Washington’s tax code that allows US subsidiaries to be treated as a single entity – and would allow companies to obtain a similar result to using the double Irish, according to several experts. It would tax US tax reform to block the structure, they said.
Separately, Ireland cheered companies by promising to introduce a ‘low, competitive and sustainable tax rate’ for intellectual property. It plans to mint a new ‘knowledge development box’ to compete with patent boxes that are used across Europe.
But as referenced above attempts to replace the double Irish may be blocked by the international action against avoidance under way at the Organisation for Economic Cooperation and Development. Governments have committed to stop ‘artificial shifting of profits’ to tax havens, as they try to push through new rules requiring companies to report profits where they have real activities.
The OECD is also attempting to impose constraints on tax incentives for intellectual property. It wants countries to base tax breaks on domestic research and development, in a bid to stop countries using the incentive to attract mobile profits. Although this constraint is being resisted by Britain and other countries, it might end up limiting the scope for companies to shift their intellectual property to Ireland.
COMMENT:
The commitment of the OECD (and all member states) to the fight against ‘unacceptable’ avoidance (even if it seems to be permitted by ‘the letter of the law’) should not be underestimated. The ‘tax gap’ (the difference between what the authorities expect to collect and what is usually collected) is very meaningful in a number of OECD countries so we can expect to see very little resistance to this kind of legislation.
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