In the last few months, Germany, Britain and France have criticized the Irish corporation tax law, which allows major companies to avoid taxes all around the world. The European Commission is now taking the lead to improve corporation tax laws within the EU. Even though, the Irish Department of Finance recently repeated how proud it was of its “3 Rs system”: Rate, Regime, and Reputation. Ireland has managed to develop a very attractive corporation tax law, appealing to quite a few multinational companies such as Google, Apple, Facebook or Amazon. Nevertheless, the amount of the Irish national debt leaves a doubt lingering about the success of the operation.
Find Your Kitchen: The Irish Delaware Effect
Ireland has created a European “Delaware effect”: the company tax rate is so low in this American state that 58% of publicly traded companies within the US choose to incorporate there. Ireland did pretty well: They dropped their own rate to 12.5%, while the average in Europe is above 20%, up to 33.3% in France. Some might call it a race-to-the-bottom, the different states trying desperately to have the lowest rate to attract big business activity; Ireland and Google consider it a race-to-the-top: countries improve their tax laws to attract companies.
A First Bite at the Tax: The Double Irish
Now that we know where, let’s start the proper legal cooking. This whole system is absolutely legal, it is all about tax avoiding, not tax evasion. As the CEO of an American multinational, you want to decrease the amount of tax you are paying. Lucky you, American law offers you an opportunity. First, you need a subsidiary in a foreign country; then, you develop a product together – for instance software – in a joint venture contract; thanks to the Cost Sharing Agreement, you retain use of the rights in the US, while the foreign Subsidiary company uses the rights in the rest of the world. So instead of paying from 15 to 35% of tax rate in the US on your activity in the rest of the world, you pay 12.5% to the Irish government. But why stop here? You can spice it up a bit!
You incorporate in Ireland, but if the “actual activity” takes place in another country, you can pay your taxes there instead of Ireland. Then, why not choose to operate in Bermuda, where the tax rate is 0%? The problem is then, that your actual activity should take place over there. So the subsidiary creates a second subsidiary, this one taxed in Ireland, and licenses to the Sub2 the rights to use the created software at the market price. In theory it should be the market price, according to the transfer pricing rule adopted in many OECD countries: two related companies are not allowed to price transfers above or below the market price, otherwise it would be too easy to circumvent tax laws. But the Irish are not strict on this regulation, so you can put up the price. The Sub 2 deducts the high licence price of its benefits, paying a tax on a low tax base, and the money goes then to the Bermudan company.
In theory you should pay taxes on that transfer between the two subsidiaries. First, according to US tax law. But if the two Subs are considered as entities, no problem will be encountered with the US IRS, it is just seen as an internal reassignment of funds. As you can choose in the US if the companies have to be seen as separated or as a corporation, when you had to choose what Sub2 to Sub1 was, you “checked the box” so that Sub 2 is disregarded as one entity separate from Sub 1.
What about the Irish taxation on that money transfer? The icing on the cake is coming.
Still Hungry? Go for the Dutch Sandwich
On the one hand, Irish law allows you not to pay any taxes on certain International money transfers to other European Countries, such as the Netherlands. On the other hand, Dutch law does not tax them either. So you just need to create a shell company to transfer the money between the Irish companies, to transfer your money without to having to pay taxes. In the last Irish company paying tax in Bermuda, the corporate tax rate is 0%. You just need to let your money stew there until the next US tax amnesty allows you to repatriate it.
In 2011, on €12.4 billion profit made by Google in the rest of world, their tax bill in Ireland was €3.046 million.
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