Double Irish With A Dutch Sandwich

The term “Double Irish with a Dutch Sandwich” might initially sound like a peculiar dish from a gourmet cuisine menu, but it is actually a sophisticated tax avoidance strategy used by some multinational corporations. This strategy involves structuring international operations to minimize tax liability by exploiting differences in tax systems of various countries. This article aims to provide a comprehensive exploration of the Double Irish with a Dutch Sandwich tax arrangement, including its components, mechanisms, historical context, legal implications, and the attempts made by jurisdictions to curb this form of tax avoidance.

What is the Double Irish with a Dutch Sandwich?

The Double Irish Component

The Double Irish tax structure leverages the tax laws of Ireland. This arrangement typically requires two Irish companies. The first Irish company, often a subsidiary of a U.S. parent company, holds intellectual property (IP). This company is incorporated in Ireland but is managed and controlled from a tax haven like Bermuda or the Cayman Islands, which results in it being treated as a non-resident for Irish tax purposes.

Steps in the Double Irish Arrangement:

1. Establishment of Two Irish Companies: The U.S. parent company establishes two Irish subsidiaries: IrishCo1 (which will hold and exploit the IP) and IrishCo2 (a fully taxable Irish entity).
2. Transfer of IP: The parent company transfers its IP rights to IrishCo1, often exploited through licensing fees or royalties.
3. Royalty Payments: IrishCo2 pays significant royalties to IrishCo1 for the use of the IP, transferring a substantial portion of its profits.
4. Residence and Taxation: Since IrishCo1 is managed from a tax haven, it pays minimal or no taxes on the royalties. IrishCo2 deducts the royalty payments from its tax base, resulting in low taxable profits in Ireland.

The Dutch Sandwich Component

The Dutch Sandwich technique adds another layer involving a Dutch entity to avoid withholding taxes. This is necessary to complete the transfer of profits from Ireland to the tax haven while avoiding intermediate taxation.

Steps in the Dutch Sandwich Arrangement:

1. Incorporation of Dutch Company: A Dutch company is inserted between the two Irish companies.
2. Routing of Payments: IrishCo2 makes the royalty payments to the Dutch entity first, which then passes these payments to IrishCo1.
3. Withholding Taxes: As per European Union (EU) tax directives and bilateral treaties, the payments between EU countries often face reduced or zero withholding taxes, making the transactions efficient in terms of tax liability.
4. Flow to Tax Haven: Finally, the profits flow from the Dutch entity to IrishCo1 located in a tax haven, effectively minimizing global tax obligations.

Practical Example

Consider a hypothetical multinational tech company named TechGiant Inc. headquartered in the U.S.:

1. Formation of IrishCo1 and IrishCo2: TechGiant Inc. forms two Irish subsidiaries: Tech IP Holdings (IrishCo1) and Tech Sales Ltd. (IrishCo2).
2. Creation of Dutch Intermediary: TechGiant Inc. also establishes a Dutch entity, Tech Netherlands BV.
3. IP Transfer and Licensing Agreement: Tech IP Holdings acquires TechGiant’s IP and enters into licensing agreements with Tech Sales Ltd., which uses the IP to operate in Europe.
4. Royalty Payments and Routing: Tech Sales Ltd. pays royalties to Tech Netherlands BV, which then forwards the payments to Tech IP Holdings, benefiting from EU tax directives and avoiding withholding taxes.
5. Tax Savings: Tech IP Holdings, managed from Bermuda, pays little or no tax on the income received, resulting in substantial tax savings for TechGiant Inc.

Historical Context

Rise in Popularity

This strategy rose to prominence in the 1990s and early 2000s as multinational companies like Google, Apple, Facebook, and others sought to minimize their tax liabilities. For instance, Google was reported to have used both the Double Irish and Dutch Sandwich strategies to reduce its effective tax rate significantly.

Scrutiny and Backlash

The complex arrangement faced strong criticism from several quarters, including governments, tax authorities, and activists. The backlash was particularly intense in countries such as the U.S. and various EU member states losing tax revenues:

• Public Outcry: There was increasing public opposition to tax avoidance strategies benefiting large corporations at the expense of small businesses and individual taxpayers.
• Government Pressure: U.S. and EU governments facing budget deficits began to critique these strategies openly, pushing for more stringent regulations to curb tax avoidance.

Legislative Responses

Ireland’s Actions

Facing mounting pressure, Ireland announced measures to phase out the Double Irish scheme. In October 2014, the Irish government declared it would close the loophole starting from January 2015, with a grandfathering provision for existing arrangements until 2020.

EU and OECD Initiatives

The European Union launched investigations into the tax practices of member states and individual companies:

• State Aid Rules: The European Commission investigated whether tax rulings for companies like Apple constituted illegal state aid.
• OECD BEPS Project: The Organisation for Economic Co-operation and Development (OECD) initiated the Base Erosion and Profit Shifting (BEPS) project to develop guidelines and coordinate international action against tax avoidance mechanisms.

Legal Implications

The legal implications of using the Double Irish with a Dutch Sandwich strategy are multifaceted:

Compliance and Disclosure

Multinational corporations must navigate a complex web of tax laws and comply with relevant legal requirements in each jurisdiction. Failure to disclose such arrangements accurately can result in penalties and reputational damage.

Ethical Considerations

Beyond legal compliance, the ethical considerations of aggressive tax avoidance are increasingly scrutinized by stakeholders. Companies face pressure from investors, customers, and the public to adopt more transparent and fair tax practices.

Case Studies and Enforcement

Significant legal battles and rulings shaped the landscape. For instance:

• Apple’s Case: In its 2016 ruling, the European Commission found Apple’s tax arrangements in Ireland constituted illegal state aid, ordering Apple to pay €13 billion in back taxes plus interest.
• Google’s Settlements: Google faced several investigations and entered settlements in countries like France and the U.K., agreeing to pay back taxes and fines.

Conclusion

The Double Irish with a Dutch Sandwich is a striking illustration of the lengths to which multinational corporations can go to minimize their global tax liabilities. While these strategies were once lauded for their effectiveness, they now exist under significant legal and ethical scrutiny, with governments and international organizations taking measures to close loopholes and enhance tax fairness.

This detailed overview highlights the importance of understanding both the mechanisms behind such tax avoidance strategies and the continuing efforts to address them. It serves as a case study on the broader themes of tax policy, international cooperation, and corporate responsibility in the 21st century.