Here’s What U.S. Businesses Order When They Have a Tax Headache
At a glance, a Double Irish sounds like the type of drink someone would order at 6 o’clock on a Friday night in an attempt to wash away the stress of the workweek (we imagine a double shot of Jameson or Connemara, if you’re into that). If, sitting at this hypothetical bar on a Friday night, someone also ordered a Dutch sandwich, you may expect to see them served some sort of vegetable sandwich (perhaps with Gouda, if you’re into that). Nothing worth writing home about here.
But to torture the metaphor (something that we are into), instead of a stiff drink and a delicious sandwich, this hypothetical patron at a hypothetical bar would be served with a stack of papers by a tax lawyer in a snazzy suit. As much as a Double Irish with a Dutch sandwich sounds like something you could order at any respectable pub, it’s actually just jargon for a tax arrangement that multinational corporations use to limit their tax liability.
The scheme was written about in the May 2007 issue of Practical US/International Tax Strategies. The authors of the article (Double Irish More than Doubles the Tax Savings) explain that “Ireland is attractive for low corporate tax rates because it has yet to implement (or enforce aggressively) some of the more familiar ‘anti-abuse’ mechanisms.”
The article notes that Ireland enacted a uniform income tax in 1999, under which corporate earnings were split into two buckets: trading and non-trading. Both have a flat tax rate, 12.5 percent for trading income and 25 percent for non-trading income.
“When these tax benefits are combined with Ireland’s well-educated, English-speaking workforce,” the authors write, “it is easy to see why Ireland has become a preferred foreign base of operations for U.S. software companies and other U.S. technology-driven enterprises.”
With the advent of the Internet and revenue mechanisms –at the center of which is intellectual property — American corporations began to engage in a type of tax gamesmanship that is now commonplace. Major international companies like Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB), Google (NASDAQ:GOOG), and Microsoft (NASDAQ:MSFT) maintain a presence in Ireland and employ some iteration of the Double Irish strategy.
The Dutch sandwich is a mechanism that further reduces tax liability, and it is used in addition to the Double Irish. According to ValleyWag, big shots like the aforementioned Apple, Facebook, Google, and Microsoft aren’t the only ones gaming the system. Internet darling Twitter (NYSE:TWTR) is also reportedly getting in on the action, having ordered a Double Irish with a Dutch sandwich a long time ago.
ValleyWag reports that Apple, employing a similar mechanism, has saved itself more than $74 billion in American corporate taxes since it started gaming the system. Google, Microsoft, and Facebook — and a number of other U.S. corporations known to use the scheme — have saved billions more.
ValleyWag obtained slides from Matheson, a law firm that specializes in building this clever bit of tax arbitrage for multinational corporations.
It’s worth pointing out that regulatory officials are well aware of this situation, and could put an end to the practices as soon as 2015. A report compiled by Ireland’s finance department states that the government will be considering “a change to our company residence rules aimed at eliminating mismatches — that can exist between tax treaty partners in certain circumstances — being used to allow companies to be ‘stateless’ in terms of their place of tax residence.”
The country is also working on reform to increase tax transparency. Such measures could make it easier for regulators to make a case against those trying to game the tax system.