Double Irish Arrangement
Encyclopedia
The Double Irish Arrangement is a tax avoidance
strategy that U.S. based multinational corporation
s use to lower their income tax
liability. The idea is to use payments between related entities in a corporate structure to shift income from a higher-tax country to a lower-tax country. It relies on the fact that Irish tax law
does not include U.S. transfer pricing
rules.
outside the United States to be owned by an offshore company. This is achieved by entering into a cost sharing agreement between the U.S. parent and the offshore company, in the terms of U.S. transfer pricing rules. The offshore company continues to receive all of the profits from exploitation of the rights outside the U.S., without paying U.S. tax on the profits unless and until they are remitted to the U.S.
It is called "The Double Irish" because it requires two Irish companies to complete the structure. The first Irish company is the offshore company which owns the valuable non-U.S. rights. This company is tax resident in a tax haven
, such as Bermuda
or the Cayman Islands
. Irish tax law provides that a company is tax resident where its central management and control is located, not where it is incorporated, so that it is possible for the first Irish company not to be tax resident in Ireland. The first Irish company licenses the rights to a second Irish company, which is tax resident in Ireland, in return for substantial royalties or other fees. The second Irish company receives income from exploitation of the asset in countries outside the U.S., but its taxable profits are low because the royalties or fees paid to the first Irish company are deductible expenses. The remaining profits are taxed at the Irish rate of 12.5%
.
For companies whose ultimate ownership is located in the United States, the payments between the two related Irish companies might be non-tax-deferrable
and subject to current taxation as Subpart F income under the Internal Revenue Service
's Controlled Foreign Corporation
regulations if the structure is not set up properly. This is avoided by organizing the second Irish company as a fully owned subsidiary of the first Irish company resident in the tax haven, and then making an entity classification election
for the second Irish company to be disregarded as a separate entity from its owner, the first Irish company. The payments between the two Irish companies are then ignored for U.S. tax purposes.
member states. Revenues from income of sales of the products shipped by the second Irish company are first booked by a shell company in the Netherlands
, taking advantage of generous tax laws there. Funds needed for production cost incurred in Ireland are transferred there, the remaining profits are transferred to the first Irish company in Bermuda. If the two Irish holding companies are thought of as "bread" and the Netherlands company as "cheese", this scheme referred to as the "Dutch Sandwich". The Irish authorities never see the full revenues and hence cannot tax them, even at the low Irish corporate tax rates
. There are equivalent Luxembourgeois and Swiss sandwiches.
Tax avoidance
Tax avoidance is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. The term tax mitigation is a synonym for tax avoidance. Its original use was by tax advisors as an alternative to the pejorative term tax...
strategy that U.S. based multinational corporation
Multinational corporation
A multi national corporation or enterprise , is a corporation or an enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation...
s use to lower their income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
liability. The idea is to use payments between related entities in a corporate structure to shift income from a higher-tax country to a lower-tax country. It relies on the fact that Irish tax law
Taxation in the Republic of Ireland
In the Republic of Ireland there is an income tax, a VAT, and various other taxes. Employees pay pay-as-you-earn taxes based on their income, less certain allowances. The taxation of earnings is progressive, with little or no income tax paid by low earners and a high rate applied to top earners...
does not include U.S. transfer pricing
Transfer pricing
Transfer pricing refers to the setting, analysis, documentation, and adjustment of charges made between related parties for goods, services, or use of property . Transfer prices among components of an enterprise may be used to reflect allocation of resources among such components, or for other...
rules.
Overview
Typically, the company arranges for the rights to exploit intellectual propertyIntellectual property
Intellectual property is a term referring to a number of distinct types of creations of the mind for which a set of exclusive rights are recognized—and the corresponding fields of law...
outside the United States to be owned by an offshore company. This is achieved by entering into a cost sharing agreement between the U.S. parent and the offshore company, in the terms of U.S. transfer pricing rules. The offshore company continues to receive all of the profits from exploitation of the rights outside the U.S., without paying U.S. tax on the profits unless and until they are remitted to the U.S.
It is called "The Double Irish" because it requires two Irish companies to complete the structure. The first Irish company is the offshore company which owns the valuable non-U.S. rights. This company is tax resident in a tax haven
Tax haven
A tax haven is a state or a country or territory where certain taxes are levied at a low rate or not at all while offering due process, good governance and a low corruption rate....
, such as Bermuda
Bermuda
Bermuda is a British overseas territory in the North Atlantic Ocean. Located off the east coast of the United States, its nearest landmass is Cape Hatteras, North Carolina, about to the west-northwest. It is about south of Halifax, Nova Scotia, Canada, and northeast of Miami, Florida...
or the Cayman Islands
Cayman Islands
The Cayman Islands is a British Overseas Territory and overseas territory of the European Union located in the western Caribbean Sea. The territory comprises the three islands of Grand Cayman, Cayman Brac, and Little Cayman, located south of Cuba and northwest of Jamaica...
. Irish tax law provides that a company is tax resident where its central management and control is located, not where it is incorporated, so that it is possible for the first Irish company not to be tax resident in Ireland. The first Irish company licenses the rights to a second Irish company, which is tax resident in Ireland, in return for substantial royalties or other fees. The second Irish company receives income from exploitation of the asset in countries outside the U.S., but its taxable profits are low because the royalties or fees paid to the first Irish company are deductible expenses. The remaining profits are taxed at the Irish rate of 12.5%
Corporation tax in the Republic of Ireland
Corporation tax in the Republic of Ireland is a levy on a company’s profits. The tax is charged on both a company's income and chargeable gains. The corporation tax in Ireland is quite low, and is often cited as an example of tax competition, as it is used as an incentive for foreign companies to...
.
For companies whose ultimate ownership is located in the United States, the payments between the two related Irish companies might be non-tax-deferrable
Tax deferral
Tax deferral refers to instances where a taxpayer can delay paying taxes to some future period. In theory, the net taxes paid should be the same. Taxes can sometimes be deferred indefinitely, or may be taxed at a lower rate in the future, particularly for deferral of income taxes...
and subject to current taxation as Subpart F income under the Internal Revenue Service
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
's Controlled Foreign Corporation
Controlled Foreign Corporation
Controlled foreign corporation rules are features of an income tax system designed to limit artificial deferral of tax by using offshore low taxed entities. The rules are needed only with respect to income of entities that is not currently taxed to the owners of the entity. The basic mechanism and...
regulations if the structure is not set up properly. This is avoided by organizing the second Irish company as a fully owned subsidiary of the first Irish company resident in the tax haven, and then making an entity classification election
Entity classification election
For United States income tax purposes, a business entity may elect to be treated either as a corporation or as other than a corporation. This entity classification election is made by filing Internal Revenue Service Form . Absent filing the form, a default classification applies. U.S...
for the second Irish company to be disregarded as a separate entity from its owner, the first Irish company. The payments between the two Irish companies are then ignored for U.S. tax purposes.
Dutch Sandwich
The addition of a Dutch Sandwich to the Double Irish scheme further reduces tax liabilities. Ireland does not levy withholding tax on certain receipts from European UnionEuropean Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
member states. Revenues from income of sales of the products shipped by the second Irish company are first booked by a shell company in the Netherlands
Corporate Tax in the Netherlands
A Dutch company is subject to 25.5% corporate tax on its worldwide profits. Certain items of income, however, are exempt from tax and certain costs are non-deductible.-Worldwide profits:...
, taking advantage of generous tax laws there. Funds needed for production cost incurred in Ireland are transferred there, the remaining profits are transferred to the first Irish company in Bermuda. If the two Irish holding companies are thought of as "bread" and the Netherlands company as "cheese", this scheme referred to as the "Dutch Sandwich". The Irish authorities never see the full revenues and hence cannot tax them, even at the low Irish corporate tax rates
Taxation in the Republic of Ireland
In the Republic of Ireland there is an income tax, a VAT, and various other taxes. Employees pay pay-as-you-earn taxes based on their income, less certain allowances. The taxation of earnings is progressive, with little or no income tax paid by low earners and a high rate applied to top earners...
. There are equivalent Luxembourgeois and Swiss sandwiches.
Companies using the arrangement
Major companies known to employ the Double Irish strategy are:- Eli Lilly and CompanyEli Lilly and CompanyEli Lilly and Company is a global pharmaceutical company. Eli Lilly's global headquarters is located in Indianapolis, Indiana, in the United States...
- FacebookFacebookFacebook is a social networking service and website launched in February 2004, operated and privately owned by Facebook, Inc. , Facebook has more than 800 million active users. Users must register before using the site, after which they may create a personal profile, add other users as...
- Forest LaboratoriesForest LaboratoriesForest Laboratories is a pharmaceutical company headquartered in New York City, USA. Its revenues for the year ended 31 March 2007 were US$3.4 billion. The company's research and development spending has grown rapidly in recent years, and as of 2007, approached almost a billion US dollars a year,...
- GoogleGoogleGoogle Inc. is an American multinational public corporation invested in Internet search, cloud computing, and advertising technologies. Google hosts and develops a number of Internet-based services and products, and generates profit primarily from advertising through its AdWords program...
- MicrosoftMicrosoftMicrosoft Corporation is an American public multinational corporation headquartered in Redmond, Washington, USA that develops, manufactures, licenses, and supports a wide range of products and services predominantly related to computing through its various product divisions...
- Oracle Corp.
- Pfizer Inc.