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ONE OF THE TOPICS that is rarely broached for discussion in Ireland ahead of the Budget is any possible change to Ireland’s 12.5 per cent rate of tax on company profits.
In fact, such is the pedestal on which Ireland’s 12.5 per cent rate is held, that the political classes united in fury when former French president Nicolas Sarkozy demanded an increase in the rate in exchange for France’s contributions to the Irish bailout.
Ireland expects to make just under €4.2 billion in tax next year – but that’s nowhere near 12.5 per cent of the revenues that companies based in Ireland will make next year.
That’s because of a tax arrangement known worldwide as the ‘Double Irish’ – a setup which makes it possible to send funds between countries with little or no tax, and funnelling money into the countries where the least tax is payable, all entirely legally.
Here’s how it works.
The scheme is reliant upon a series of legal situations which, when working in harmony, allow for relatively routine tax avoidance. (Note: it should be pointed out that tax avoidance refers to an arrangement that minimises a tax bill. This is entirely different to tax evasion, which is illegal.)
There are four countries involved: Ireland, the United States, the Netherlands, and a counfrt in the Caribbean – usually Bermuda.
Each provides different ingredients for the mix – Ireland and Bermuda provide corporate tax rates, the Netherlands steps in as another EU state with conveniently generous tax laws, and the US offers laws which allow related companies to be treated as separate entities.
There are several well-known companies that use this practice – including Apple, Facebook, Google, Pfizer and Eli Lilly. For the sake of example – and because its setup is back in the news after it filed its Dutch accounts – we’ll explain by using the example of Google.
In practice, what happens is this. Google Ireland Ltd – with its registered address at Google’s Dublin buildings on Barrow Street, close to Grand Canal Dock – takes in all of Google’s worldwide advertising revenue, except for that of the US and Canada.
This is legitimate in Google’s case – because Google’s Dublin office serves as its headquarters for the EMEA region. That means Europe, the Middle East and Africa, which together account for pretty much all of the worldwide income.
This means that whenever an advertiser in South Africa, Dubai or Berlin pays Google to include an advert alongside its search results, the money is actually paid to Google Ireland Ltd.
The most recent accounts show that Google Ireland’s total revenue stood at €12.46 billion, and after expenses of €3.38 billion (much of which probably relates to the fees that Google pays other websites to put its ads there), it recorded a gross profit of €9.075 billion.
However, Google Ireland Ltd makes all of its money through selling ads – which are delivered and powered by search technology that isn’t owned by Google Ireland.
This technology is legally owned by Google’s main US company, Google Inc., which can charge Google Ireland the market rate for using it. (This is known as ‘transfer pricing’ – it is considered bad practice to charge a sister company more or less than you would charge a third party.)
In 2011, according to Dutch company records seen by Bloomberg, the US company charged the Irish one about €7.5 billion for using its search technology. When other administrative expenses are thrown in, Google Ireland’s administrative expenses ran to €9.054 billion.
Remember that the gross profit for 2011 was €9.075 billion – so when you take €9.054 billion back out of this, you’re left with only €21 million in operating profit. Add in €3.5 million that it made in interest, and Google Ireland’s pre-tax profit is a mere €24.369 million.
Only then does Ireland’s 12.5 per cent corporate tax rate kick in – so Google Ireland’s corporate tax bill is only €3.046 million.
But what about the other money – the €7.5 billion that was sent to another company? As it happens, this other company is also Irish – but Irish in name only.
Irish taxation law only recognises a country as being ‘tax resident’ in Ireland – as in, required to pay tax to the Irish authorities – if its main centre of business is in Ireland.
This means that the second Google company can declare its business address to be in another country – like, say, Bermuda – and avoid having to pay tax in Dublin. (This is why the setup is known as the ‘Double Irish’ – it involves the creation of two Irish companies.)
So, if Google’s US company tells the Irish subsidiary to pay the royalties to a second Irish company, with its trading address in Bermuda, then the money is only taxed in Bermuda and not in Ireland.
This doesn’t complete the whole thing – Irish law still regulates the payment of funds between related companies which are all under the same ownership. US law has similar concerns, and also kicks in here, because each of these companies is ultimately owned by Google Inc.
From a US perspective, however, this can be avoided by having the ‘main’ company (in this case Google Ireland Ltd.) fully owned by the second (in this case Google Ireland Holdings).
As long as this is the case, the company can apply to have the two separate companies treated as a single entity – meaning transfers between the two Irish companies are seen only as an internal reassignment of funds and therefore aren’t taxable within the US.
This gets around the US difficulty, leaving only Irish laws surrounding internal transfers. This is made more complicated by the fact that the payments from the Irish company to the Bermuda one are still subject to tax.
This is where the Dutch company comes in. Ireland doesn’t levy tax on certain transfers of money to countries elsewhere in the EU, so the licencing revenue can be sent to the Netherlands without tax being paid at the Irish end.
Dutch laws, meanwhile, are generous enough to allow the funds to avoid tax on their way into the Netherlands – and to avoid tax when the funds are then moved onward.
Therefore, Google Ireland can pass its money to Google Netherlands Holdings without paying tax on it. This can then be passed onto the second ‘Irish’ company – the one which is actually taxed in Bermuda – without paying tax on it at either end.
This is why the system is also called the ‘Dutch sandwich’ – because instead of sending funds directly from one Irish-registered company to another, they are sent from an Irish one to a Dutch one and back again.
So at the end of the day, the royalties and licencing fees that Google Ireland Ltd pays to its US parent end up in Bermuda, and are taxed there.
Bermuda’s corporation tax rate is 0 per cent.
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Still .google does employ 2000 irish and they ( the employees) do pay lots of tax, and bring home 2000 wages.
So what ever we hear about tax avoidance , it is still a very positive thing for us ,that these Companies base themselves in Ireland.
The workers pay tax at source on nominal income, which goes to provides the educational and other infrastructure the corporations use to make mega-profits.
In other words the wage-slave subsidises his/her masters’ sociopathological exploitation. And well-schgooled paddy thanks his white-collar mugger for his courtesy in not making his chains clank too loudly.
‘..usually Bermuda..’.
Most offshore tax havens are former British colonies, The City of London remaining the hub of financial juggling it was since William the Conqueror was required to dismount and disarm before being allowed enter, the financing of both sides in every war being long a speciality of the bondholding wizards of numerology.
http://www.treasureislands.org
You can get the book, by Nicholas Shaxson, formerly of the FT and Economist Caribbean unit for 20 years. Well written sketch of this murkfest that never ceases.
Good article, more on that subject and you will do us all some service.
Damien, i wonder do you or John have further info on this:
Isn’t Google a publicly quoted company? I’m not sure the % ownership breakdown. But surely alot of the tax avoidance and “Dutch Sandwiching” ends up paying profits out to pension funds, government bonds, individual investors, insurance companies and yes, ruthless private financial pirates? So rather than some conspiracy theory about a global elite sucking money from the working man, is this not just a case (like all tax avoidance) of the way things work?
@Dermot
Partially agree.
It is just the way thing work.
But attempts to create a more egalitarian system are sabotaged, pre-empted, subverted and distorted.
And their are conspirators, always were, probably always will be, until we follow the logic of the way things work and exterminate ourselves by corpoatised insatiable gluttony(corporations are legally obliged to maximise shareholder returns on a short-loop quarterly basis).
Machiavelli was not a writer of fiction. But not all of us believe he should set the measure of human behaviour. Just the vast market-indoctrinated majority, apparently
What about making things a bit easier for the 2000 employees? Most of us have pretty decent income but a big chunk is given to the goverment in taxes. I dont see how “employing 2000″ has any relevance to Google using tax loop holes and that certainly doesnt justify them paying less tax. I’d rather see them paying more tax so I can pay less, and stop thinking about moving somewhere where i actually have more disposable income to give my family a better quality of life.
Too early in the morning to understand all of that.
Is it brilliant Governmental planning or is it a litany of errors which the large Companies can capitalise on?
Either way, it has brought many jobs to our shores which is most welcome.
I do not believe that Google employs 2,000 IRISH people and even if they did, that would not excuse it from its moral responsibility to pay tax on its profits. If the above article is accurate, then a very wealthy company is paying no tax on the greater part of its profits while many on very low incomes pay tax on theirs and others – such as carers – who both need and deserve support have had their allowances cut.
Just imagine how much more Kenny and co could pay themselves and their pals, if Google were paying them 12.5 % on all their profits!
Exactly. It’s good that the British and French are finally going after them.
Sean, a large proportion of googles 2000 employees may not be Irish but as they are resident here they pay tax here just as anyone other PAYE employee does, regardless of nationality.
Ireland has reached the high tax/rates levels that only foreign companies can deal with our communist system of governance and the available jobs are being taken up mainly by people not eligible for welfare. Eg. Aldi, Lidyl, Tesco, Ikea, etc are together with penal taxes decimating Irish retailers.
To bring up morals of a company in a post with obvious racist overtones is a bit strange. The tax Google workers pay here does go into our economy. The nationality of the workers doesn’t bother me.
The loophole should be closed but we are dependent on such revenue so it is unlikely to happen.
It would have been nice to see U2 used as the example because I believe the do the same.
Spot on Sean. It’s a disgrace, using our country as a tax dodging haven. Did you hear what Facebook paid to the irish exchequer it is insulting.
Why or why would anyone pay extra tax to any modern government , when you see the way they blatantly waste it.
This may shock some people but all the jobs provided by American companies in Ireland is because of the low corporate tax rate not because we are so special as we think we are. You’d have to be the biggest moron to advocate increasing such taxes on corporations. We shouldn’t give a damn what any other EU leader thinks.
We’re only asking for the payment of our low corporation tax rate , not for an increase, it’s time for Europe to shut this tax avoidance loop- hole, and any others that exist, yes these companies are here to avoid tax , and we need a slightly lower tax rate than the rest of Europe,
We need global law to stop this piracy. These bucks are too big to give a bang about borders or nations. They, like taxes, are for the containment of us rabble.
It might interest some of you that the US Congress has just voted its military $631bn for a Christmas prezzy.
But there is still an estimated $31trillion swilling round the tax-haven trough, transnational mixed with drug/people/weapons trafficking, all happily hibernating under Alpine summits at Davos, long a stashpoint for imperial loot. Not least the Nazi legacy.
Global law? Ha ha ha
The only global law we will ever have is the law laid down by religious fascists and that’s Shira Law .
Damian some of the vast amount of postings u do are pretty Naive, you lean so far to the left that u r going around in circles.
If you took your head out of your anti-islamic ignorant bunker and visited a library you’d learn we have multiple layers of global law, from maritime to human rights and trade regulation.
Whats your definition of left?
That I’m not in goosestep with the neoliberal fascistic dictates of the Chicago Boys globalisation PNAC imperial looting?
Thats breaking OUT of your golden circles’ white-collar criminality, not going round in them.
Companies believe they are bigger than governments, governments lack balls, therefore companies can do as they please,
Shay, some companies are bigger (much) than governments, apples FY2012 has income of over $100Bn, and $25Bn profits, multiples of many countries total income and expenditure
Conor, they might be bigger than Ireland, but need to sell here to keep their share holders happy, we have a bigger say than they think, In the context of euro this problem could be solved, but thats difficult for us , as we need the advantage of a lower corporation tax rate, this is what is called a lack of leadership across politics in Europe , Believe me these companies need Europe more than Europe needs them
Why not admit that the amount of Irish wages and Irish commercial rates etc. paid is huge
Let’s bring this technical explanation up a level.
Governments don’t realise that to tax a GLOBAL company they need to take a GLOBAL approach.
Currently they try to resolve this by entering into thousands of agreements among themselves that they try to add huddles, but they create holes for companies to take advantage of them.
It will not be easy or painfree, but sooner or later they will have to work together and establish a GLOBAL system for GLOBAL taxes, leaving only the LOCAL taxes as tools to drive behaviours, etc
But the mafia accountants and corporate lawyers will fight that by the inch.
And the culprits own most of our ‘media’. And are busy mopping up anything that looks like rocking their luxury yachts.
Only the little people pay taxes. Hate that bullshit that cause they employ people here its allright that they don’t pay taxes. This is common place not only in Ireland but throughout Europe and the US. Massive corporations making massive profits, getting subsidised by taxpayers and then seeing their profits go offshore or into the hands of a few shareholders. If they bothered paying their fair share, austerity wouldn’t exist.
How about we take cash out of the economy and everyone use cards instead. No more black market. More revenue. Out of this terrible financial situation. The technology is already here to receive cards payments through your smart phone. In return the banks will have to waive fees for any transaction under 500 Euro. Sound good?
Sounds good to me
I can’t help but feel sorry for bermuda.. Their generous 0% corporation tax rate has attracted effectively no beneficial inward investment!nnObjectively speaking, it seems unfair that google revenues are deemed to be earned in Ireland when an ad is sold in south Africa for example! nnIt is getting to the stage where a global tax treaty will be required – particularly in relation to companies whose main operations take place online.
I can’t see how a global tax policy would help a small country like Ireland. Lets not kid ourselves, the main reason why Google, Microsoft, Twitter, Beats etc. are here is for our tax policy. As a small country we need to be clever about the way we do business.
No inward investment, but setting up an offshore company in Bermuda has setup fee and then annual fees to maintain it although the fee is only around 650EUR/year, if you take into account several millions of offshore companies use this mechanism, in exchange for 0% tax and complete anonymity, Bermuda earns in billions by just registering offshore companies.
As a society we encourage innovation and a survival of the fittest type ideology, so we have no right to lambast Google or any other institution that legally manipulate the tax system in their favour
As far as I know, the tax rate is not the no1 reason global companies come to Ireland, am open to correction but I think it is no4 or 5. There is no reason why the corporate tax rate should not be increased, even if it is temporary like the pension levy so that the corporate world can also contribute and I heard recently that Michael Smurfit had even suggested that. And I don’t know how or why it became so important that corporate Ireland didnt contribute extra like everyone else. When I was studying to be an accountant, the term used was tax planning. I remember asking the lecturer the difference between tax planning and tax avoidance and there were a few blank stares. The ethics part of the training was a bit perfunctory. I am no longer ambivalent about Ireland’s tax haven regime having read Treasure Islands, it will explain things like why Bermuda would allow this happen, read it and weep.
Spot on Orla.
Nicholas Shaxson wrote the book after 20 years in the Caribbean with the FT and Economist, hardly loony left agitprop organs.
http://www.treasureislands.org
As for the ‘perfunctory ethics’…ethics would be anathema in the Church of Lucre. Their definition of intelligence is ruthless amorality, the ethics of psychopathology. See The Wisdom of Psychopaths by Kevin Dutton in October’s Scientific American(he also has a book of the same title published by Macmillan).
Damien !
Do you spend your whole life reading up then typing on this site?
John!
You have a problem with my literacy and educational level??
Do you spend your whole life making ad hominem off-topic comments because you are stalker?
Or are you just allergic to information and facts interrupting your fantasy life?
I Have a problem listening to, and reading from persons pushing their hate for employers, people who take financial risks by hiring and providing jobs for people who often bring home more pay with no stress then the employer .
I have a particular problem with people bloated with self importance,who steal from their employer , by spending countless hours pushing their own vitriolic agenda by posting long winded comment after comment DURING WORKING HOURS.
Thats quite a few problems there Johnny boy.
Take a chill pill.
Oh and you can get out from under the boss now, its Sunday.
Does he never give you a day off to think for yourself?
@john, no problem with employers making profits, have a problem with them avoiding tax through loop-holes, the problem is with the governments of Europe and not the employers whose first taught is profit for their share-holders ,
John, not sure where you are getting a sense that this is about hate for employers. Have a read of that book which is about how large corporations use tax havens (of which Ireland is one) to avoid paying their fair share of the infrastructure which supports their super profits. This issue is not at all about SMEs, many of which are happy to get decent wages for themselves and their employees, and at the moment the CT rate is of little consequence. And perhaps check out the UK based Tax Justice Network, their work is a real eye-opener. It is a must-read for anyone interested in justice for developing countries also, which are being ravaged because of the presence and use of tax havens. Corporate U2 please copy. And just to let you know, I’m on my holidays.
Ps risk is small under the PLC system of ownership and taxes are only payed on profit
These companies pay far over the odds in taxes even here, if this tax trick works , theyd want to be saving a serious amount to warrant paying our insanely high commercial rates and staff prsi
We have every right.
Their billions are made on the back of the common wealth of the earth’s resources and labour. Their wealth does not create a generalised prosperity, it creates a polarisation of obese financial obscenity, and cruel vicious poverty and exploitation, from child-labour to the heroin trade(a rifinement of the mineteeenth century Opium Wars).
The system is designed by mafia lawyers and accountants, so its appropriate that its rationale if the neoliberal economics of Milton Friedman and the Chicago Boys, the lads who brought Pinochet to power in 1973(9/11, no less)and spread it through the Operation Condor Gestapo methodology.
More than a right, we have a responsibility.
Is this article supposed to be criticising Ireland? This article seems to say that the Google company that owns all the key technology is not Irish but Bermudan. The Bermudan company charges the other Google companies a fair price for the use of that technology and ends up with almost all of the profits. The 2000 Irish employees provide a back-office or administrative function and don’t own any of the technology so their profits are not very high. But Bermuda, which ends up with most of the profits, doesn’t charge any tax. So why are we criticising Ireland?
Its not about Ireland, as such.
Its about globalised white-collar criminals so big they not only cannot fail, but they make the law through their lobby/bribe control of legislatures, thus subverting democratic egalitarian justice.
Tax avoision is not a crime
Vacuous posts are posted by vacuous egos.
Hi Damien blame the Brits again, get your head out of your backside and come into the real world.
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