Brussels in crackdown on ‘double Irish’ tax loophole
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Brussels is challenging the “double Irish” tax avoidance measure prized by big US tech and pharma groups, putting pressure on Dublin to close it down or face a full-blown investigation.
As part of an ambitious and contentious tax clampdown, Europe’s top competition authority asked Dublin earlier this year to explain the controversial tax system used by the likes of Google, Microsoft, Facebook and Abbott Laboratories.
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The initial enquiries have signalled that Brussels wants Dublin to call time on the tax gambit, which has helped Ireland become a hub for American tech and pharma giants operating in Europe.
Several people familiar with the case say the threat of another full investigation is putting pressure on Michael Noonan, Ireland’s finance minister, as he considers closing the so-called “double Irish” in his 2015 budget on Tuesday.
The loophole allows groups to reduce their effective tax bill well below Ireland’s already low 12.5 per cent corporation tax rate. It involves an Irish operating company paying fees for intellectual property to a second, related Irish company, which benefits from tax residence outside Ireland.
This exploits different residence rules in US and Irish tax codes, allowing American companies to move profits into havens like Bermuda. Other tax reduction techniques rely on the differences in the way Ireland and the US view partnerships. Last year, Mr Noonan phased out provisions allowing some Irish registered companies to be stateless for tax purposes, a regime used by Apple.
One person who has seen the questions sent to Ireland said they reflect European Commission concerns the loophole offers “selective advantage” to certain eligible companies that may amount to illegal state aid. Such information requests do not mean the commission has concluded there is wrongdoing.
Brussels’ offensive against state-supported tax avoidance has so far targeted alleged sweetheart deals between various countries and Apple, Fiat, Starbucks and Amazon. While it is also looking at tax schemes – including the “double Irish” and “patent boxes” used by up to 10 countries – the commission is still weighing whether to launch formal probes.
The Irish finance ministry declined to comment on the questionnaire and said “the state aid investigation currently under way relates to one company only” — a reference to the formal probe into Ireland’s Apple tax deal. While it was co-operating with that specific investigation, it added that “general discussions on taxation do not form part of these discussions”.
Mr Noonan is considering closing the “double Irish” to new entrants from next year when he presents his budget on Tuesday. But ministers are said to be unwilling to act under so much pressure from Brussels, which wants to see the structure reformed with only a short transition period.
Although the tax cases were launched by the outgoing competition commissioner Joaquín Almunia, his successor Margrethe Vestager is making the probes a “high priority”. At her confirmation hearing she described the “double Irish” as “a very unfortunate arrangement”.
Lobby groups such as Ibec, the employers’ representative group, have said they are willing to see the loophole closed, arguing that it has become too controversial and that the vast majority of Irish companies gain no benefit from it.
But they want the government to ensure that closing the “double Irish” does not immediately put the country at a disadvantage relative to competitors such as the UK and Netherlands. “Most people would accept that the days of the “double Irish” are numbered. It’s just a question of when and how,” said Pat Wall, international tax partner at PwC.
The commission’s interest in the “double Irish” is prompted by the very low implicit tax rates – just 2.2 per cent in 2011 – reported by the Irish arms of US multinationals to the US Bureau of Economic Analysis. The Irish finance ministry rejects this number as flawed because it relates to profits that are not taxed in Ireland.
Some politicians and companies operating in Ireland are deeply suspicious of the Commission motives and see the state aid investigations as means to attack Ireland’s low tax regime through the backdoor. All the companies ensnared in the Commission probes reject any wrongdoing, saying they paid the taxes due in full.
The key question for any Commission state aid investigation would be whether the “double Irish” allows certain types of big multinational companies to benefit from a hidden state-subsidy unavailable to their smaller domestic rivals.
Irish pharmactical companies have also been able to make use of tax havens like Bermuda to achieve very low tax rates. But US businesses have a big advantage over those of most other countries, which cannot arbitrage residency rules and are normally blocked from using tax havens by anti-avoidance rules.
