Irish tax changes may cost U.S. groups billions

Reuters) – Ireland’s plan to close a “Double Irish” tax loophole could cost U.S. companies including Apple and Google billions of dollars, although a new break and pressure to tackle tax avoidance elsewhere means they are unlikely to decamp.

Analysts and tax advisers predict that corporations which need access to the EU’s 500 million consumers will find it difficult to set up equally effective schemes in other member states as Brussels investigates arrangements that involve paying minimal tax rates.

“The question is where do you go to? There’s nowhere else in the European Union. It’s just getting too hot,” said George Bull, head of the tax practice at advisory group Baker Tilly.

Ireland has been an attractive base for U.S. multinationals for decades, thanks to a tax regime which allows companies to channel profits made in their major markets through the country and into tax havens, paying little tax along the way.

Following pressure from the United States and EU, the Dublin government said on Tuesday it planned to change a rule underpinning this system which allows a company to be registered in Ireland but not resident there for tax purposes.

This change aims to shut down “Double Irish” schemes, so-called because they involve multinationals setting up two Irish subsidiaries. But with the government anxious not to lose the jobs that multinationals have brought to Ireland, Finance Minister Michael Noonan said firms already operating such schemes would have until 2020 to comply with the new rules.

In his budget, Noonan also announced changes to the intellectual property tax regime in the hope of keeping Ireland an attractive destination for business.

International anger about corporate tax avoidance has made the Group of 20 biggest economies rethink international tax rules. It has also prompted EU investigations into tax deals between some member states and big companies.

The changes announced by Noonan are the latest in a series of international attacks on the contrived tax structures used to shift profits into tax havens.

“The bottom line is, with the increasing focus on low-tax jurisdictions around the world, Google, Apple, Amazon.com, and many others face the risk of rising consolidated tax rates over the long term. While not an operational issue, this would impact valuations,” analysts at Macquarie said in a research note.

Ireland does not publish a list of companies which are Irish-registered but not tax resident in the country, a spokeswoman for the tax authority said on Tuesday. It is therefore impossible to say how much income will be affected.

However, filings and comments from Google, Apple, software group Adobe Systems and Yahoo show they have Irish registered companies which are not tax resident in the country.

Allergan, which makes the Botox cosmetic treatment, uses the double Irish structure, analysts at Leerink Partners LLC said, while rival drugmaker Gilead Sciences will also be affected, according to Mark Schoenebaum, analyst at ISI Group.

According to the analysts, the drug companies said the plan to phase the Irish changes in over 5 years would moderate the impact on their bottom lines.

Google, Amazon, Yahoo, Apple and Adobe have said they follow tax rules in all the countries where they operate. “We’re deeply committed to Ireland and will work to implement these changes as they become law,” a Google spokesman said.

Gilead and Allergan did not respond immediately to requests for comment.

AN UNUSUAL RULE

Generally, a country deems any company registered on its territory to be tax resident there, but until now Ireland has exempted firms if their central management and control is outside the country. This typically involves holding board meetings in a jurisdiction that levies no corporate tax such as Bermuda, and saying it is managed from there.

Companies have saved on tax by establishing two Irish firms. One generates large revenues either by selling directly to customers internationally or to affiliates in other countries at prices which leave the affiliates with low reportable profits.

This first company will usually be tax resident in Ireland since it has activities there. But to make sure profits escape Irish tax, it pays large, tax deductible fees to the second Irish-registered company, whose headquarters may be a letter box in the Caribbean.

Thanks to a U.S. rule under which the Internal Revenue Service ignores transactions between subsidiaries of groups that are registered in the same country, the vast profits of the second Irish-registered, but Irish tax non-resident company escape taxation.

Tax campaigners welcomed the change. “The Double Irish has come to symbolize all the elaborate tax avoidance schemes that multinationals and their advisers have engaged in,” said Sorley McCaughey, Head of Advocacy and Policy at Christian Aid Ireland. “Many of these schemes have resulted in the poorest countries in the world losing billions every year in revenue.”

The impact on companies’ profits will be reduced by a new scheme announced by Noonan under which profits linked to the exploitation of patents will attract lower tax rates. Britain already has such a scheme, under which profits linked even tangentially to a patent can face a tax rate of 10 percent.

The Netherlands’ “innovation box” scheme applies a tax rate of just 5 percent, although the eligible profits are more restricted than under the British regime, tax advisers say.

Kevin McLoughlin, tax adviser with consultants EY said the new patent tax regime “will allow Ireland to continue to compete effectively for international investment”.

Corporate filings show that technology companies have channeled tens of billions of dollars in profits which attract little or no taxation elsewhere, through Ireland under the current rules.

Yet the huge amount of money currently escaping taxation means that if Ireland introduced even a 5 percent tax rate on loosely-defined patent income, it could still collectively cost the companies billions of dollars each year.

Also, many OECD and G20 countries oppose such inducements and the EU is also examining whether they breach bloc competition rules, raising the possibility that the impact on companies could be higher.

Ireland is not the only country that has allowed companies to channel profits into tax exempt firms. Amazon operates a structure whereby all its European sales are channeled through a Luxembourg company, which in turn channels profits into a tax-exempt partnership, also registered in the Grand Duchy.

However, this arrangement is being investigated by the European Commission, which suspects Luxembourg may have broken EU rules by giving the online retailer excessively generous treatment in return for creating jobs.

The company has denied it received a sweetheart deal.

The EU drive includes investigations into Apple’s arrangements in Ireland and tax rulings that the Netherlands gave to coffee chain Starbucks.