The Death of the ‘Double Irish’ and the Great Tax Convergence
By Lee Sheehan, Head of Tax, Radius
Big developments are afoot in the world of international tax. Ireland has announced that it will end the “Double Irish,” the tax loophole that’s allowed multinationals to organize their affairs in such a way that they pay very low effective tax rates — sometimes as low as 2 percent.
The way the Double Irish — which lowers tax on royalty payments for intellectual property that could be legitimately charged to related off-shore companies — interacts with the US tax code has made it especially attractive to US multinationals, and it helped make the island nation a major international business hub over the past 20 years.
So why is Ireland giving it up? The ability of multinationals to play different tax jurisdictions against each other and pay very low tax has become a cause of official consternation and public outrage. The OECD has made tax leakage a top priority, and EU countries are under pressure from their partners to avoid tax practices that could disadvantage other member states. Ireland has already been feeling the heat from its European partners over its 12.5 percent corporate tax rate.
The PR hits taken by the likes of Apple and Google for their feats of international tax acrobatics — as well as by American corporations that have pursued inversions and re-registered in Ireland and other low-tax locales — have softened the resistance in the business community to ending certain sweetheart tax deals.
Starting in January, the Double Irish will no longer be a legitimate structuring option for multinational businesses, although those that have already availed themselves of it have until 2020 to make appropriate arrangements. In tax terms, that is a long time to be given to close what many see as an unacceptable loophole.
Seeking to avoid a flight of multinationals (though the US National Foreign Trade Council, at least, has indicated that it doesn’t believe its members will leave Ireland), the Irish government is seeking to introduce a regime that lowers taxes on profits generated in a “knowledge development box,” though the details of the scheme remain to be hashed out. The UK and Belgium have similarly moved to lower taxes on profit generated by “ideas” or “innovation.”
Ireland’s move is part of a larger trend. The tax regimes of developed countries are too far apart and ill-suited to the realities of 21st century global commerce. While governments and transnational organizations seek to formalize better arrangements, diplomatic, economic, and media pressures are moving individual national governments to act. In the UK, which has lost business to Ireland in recent decades, that's meant lowering tax to compete. In Ireland, that's meant getting rid of a loophole that’s made it unpopular with its neighbors. Expect more of these moves to follow while we wait for more comprehensive solutions.
To learn more about implementing an efficient tax structure overseas, listen to Lee's recent webinar Building the Foundation for Successful International Expansion: Tax Structure & Strategy.