The ‘double Irish’ structure enables US companies to pay very low rates of tax on European sales. Income is earned in an Irish trading company, which pays significant royalties to a tax haven company incorporated in Ireland. Most of the profit ends up in the tax haven, with no tax payable. The recent 2015 Irish budget announced that the structure would be closed down, with a transitional period to 2020.
What exactly is the double Irish structure?
It is a structure used by US multinationals, particularly in the tech and pharma sectors, to reduce their taxes on European sales income. The steps involved are as follows:
Is tax paid where the customers are?
In the case of online sales, there is usually no local permanent establishment, so there is no local corporation tax charge. All sales are booked as Irish source income in IrishCo.
The UK Public Accounts Committee has complained about this, and there may be changes announced in the Autumn Statement. But unless the base erosion and profit shifting (BEPS) process changes the definition of a permanent establishment for digital companies, it will be hard to make unilateral changes to increase the UK taxable income.
What is the Irish position?
IrishCo has significant sales income, but this is reduced by the payment of a significant royalty to HavenCo. The royalty must be calculated on an arm’s length basis under OECD principles.
Although HavenCo is incorporated in Ireland, it is not regarded as resident there because it is controlled and managed outside Ireland.
Ireland could impose withholding tax on the royalty payments, but does not do so if the Irish Revenue Authority is satisfied that the royalties are not Irish source income (SP CT/01/10).
Why don’t the US CFC rules apply?
The US controlled foreign company (CFC) rules, or ‘sub part F’, can impose US tax on passive income such as royalties. However, the US regards HavenCo as Irish resident, because it is incorporated there. Income paid from IrishCo to HavenCo is therefore regarded as a payment between two Irish companies, so is exempt under the ‘same country exception’.
What changed in the Irish Budget?
In the 2015 Budget, Ireland announced that the double Irish structure would be stopped. From 1 January 2015, all companies incorporated in Ireland will be tax resident there; for existing companies, there will be a transitional period to the end of 2020.
What else is happening?
Tax planning which results in low taxed income for multinationals is being reviewed in great detail, as part of the OECD BEPS project. If Ireland had not announced the closure of this structure, BEPS might have closed it down by other routes. Note also the EU state aid investigation into Ireland’s tax ruling given to Apple. It has been reported that the EU had asked Ireland for information about the double Irish structure, possibly in preparation for launching a formal investigation.
What about the US?
The US tax system, unlike that in most of the rest of the OECD, is a global tax system. However, extensive use of tax planning techniques such as the double Irish structure, and more generally ‘check the box’ planning, means that many US companies, particularly in the tech sector, pay very low rates of tax on their non-US income.
Whether the US will be able to enact fundamental reform remains to be seen. Many proposals have been put forward, but achieving political consensus is likely to be extremely difficult.
Is tax planning still possible?
Ireland still has a low rate of corporation tax, at 12.5%, and has also announced that it will consider offering a ‘knowledge box’ incentive for IP. A number of other EU countries (including the UK) offer patent box incentives, although the EU is currently considering whether any of these constitute harmful tax competition.
Merely closing the double Irish structure will not stop tax planning by US multinationals. However, achieving very low effective rates is likely to become increasingly difficult as BEPS moves to a conclusion, and there may be a move towards structures which pay at least some tax, but are seen as less aggressive.
