October 16, 2014

By: Kelly Diamond, Publisher

Ireland got creative with its tax regime: businesses loved it, the EU… not so much.

Condemning tax competition by a country doing its level best to recuperate from bailout conditions only 5 years ago is cruel, to say the very least.

Back in August I wrote a piece called “Economic Patriotism”, discussing all the various corporations looking to become “multi-nationals” by inverting out of the U.S. and merging with corporations outside the U.S. in more business-friendly countries.

One destination country happens to be Ireland. Its taxes are generously low! Whereas the U.S. corporate tax rate is somewhere close to 40%, Switzerland is about 18%, Ireland’s is 12.5%! Granted, there are countries that don’t have a corporate tax rate at all, but Ireland is aggressive enough to be competitive in the West, that’s for sure. (For a full list of corporate tax rates around the world, click here!)

Ireland’s corporate tax rate isn’t news or even newsworthy. Most U.S. corporations know and have known about Ireland’s competitive tax regime. The ones taking advantage of it the most are Pharmaceutical and Tech companies… for now.

What is news is U2 front man, Bono’s hearty endorsement of Ireland’s tax regime. He’s made quite the transformation during his time helping the poor. And indeed he has helped them, but more so through his transformation in favoring and even advocating free trade and capitalism than through giving money to poor people in Africa.

On a more somber note, Ireland might be closing one of its larger tax loopholes: the Double Irish. Robert W. Wood at Forbes explains: “The double Irish involves forming a pair of Irish companies to turn payments on intellectual property into tax-deductible royalty payments. The U.S. parent company forms a subsidiary in Ireland. The parent signs a contract giving European rights to its intangible property to the new company.

“In return, the new subsidiary agrees to market or promote the products in Europe. Thus, all the European income—that previously would have been taxed in the U.S.—is taxed in Ireland instead. Then the Irish company changes its headquarters to Bermuda. No Irish tax, no Bermuda tax, and no U.S. tax.

“Finally, the parent forms a second Irish subsidiary that elects to be treated as disregarded under U.S. tax law—by filing a one-page form. The first Irish company (now in Bermuda) can license products to the second Irish company for royalties. The net result is one low 12.5% Irish tax compared to 35% in the U.S. Even this tax can be reduced, since the royalties going to the Bermuda company are deductible.”

Sweet deal, isn’t it!? The key here was doubling down on the already low taxes in Ireland with some zero-tax offshore jurisdictions. I’ve said it before, there is no one brass ring, cookie cutter solution to mitigating one’s tax obligations. Depending on your goals and needs, there are jurisdictions that can help you. What was particularly cool about the Double Irish was it was in part created to lure large corporations to Ireland and funnel taxes to Ireland rather than the U.K. or E.U.

(Side note: this kind of reminds me of how the nearly iron clad trust laws of the Cook Islands came about. A jurisdiction is approached by a group of businesses that are looking to protect their assets, drinks were had, words were said, one thing leads to another… a brilliant wealth protection law is born! *Angels are singing, the planets are aligned*)

This little scheme saved Apple BILLIONS (with a B!!) in taxes: approximately $12 BILLION (still with a B!!) over the course of just two years in fact. Google was also the benefactor of this structure.

Sounds too good to be true, doesn’t it? That’s what the Euro-crats in Brussels thought too, so they put up a stink alleging that this was corporate aid of an ILLEGAL nature. While the technical legalities of the Double Irish are still yet to be determined, the EU has said, “Lowering rates is unfair tax competition.” Unfair? I’m sorry, I didn’t realize that a pre-pubescent, social outcast who wasn’t hugged enough as a child was heading up the EU!

What exactly is stopping the rest of the EU from competing? Certainly not Ireland!

Never mind that a tiny country like Ireland with no industry or resources to speak of salvaged its deteriorating economy by lowering its corporate taxes and winning businesses over to their shores! You would think that the EU would cheer this on considering Ireland is one of the few EU countries that received a bailout, but is turning its economy around. Apparently a sound economic recovery backed by commerce won’t be found on any economic Get-Well-Soon cards from the EU.

Sadly, the Double Irish will be no more as of 2015. The good news is the grandfather laws will allow those who are already enjoying the Double Irish benefits will go another five years with them! That five years will give Ireland ample time to draft a replacement regime that will retain the existing corporations and draw in new ones… perhaps once again risking becoming “criminally competitive”.

I can’t help it! I cheer for competition especially when it comes to lowering prices and tax burdens. Seems like Ireland sold its soul to the Devil the day it decided to join the EU. It got its bailout… but it lost its sovereignty.

The Double Irish might be going away, but it is a marvelous example of some creative navigation through the world of taxes out there, and clearly worth the effort for the likes of Apple and Google! If you want to learn what options are out there for you, click here to schedule a consultation.