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.
Ireland as a worldwide HQ
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.
Making money with someone else’s stuff
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.
The ‘Double Irish’…
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.
…and the ‘Dutch sandwich’
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.