The “Double Irish With a Dutch Sandwich” is a tax avoidance strategy employed by some multinational corporations to shift profits from high-tax jurisdictions to low-tax or no-tax jurisdictions, minimizing the overall tax burden. This technique leverages the tax laws of multiple countries, primarily Ireland and the Netherlands, utilizing subsidiaries in these countries to create an intricate web of financial transactions that reduce taxable income.
Origins and Historical Context
First noticed in the late 1990s, this strategy became prominent among tech giants and pharmaceutical companies. Companies leveraged differences in national tax regimes, exploiting loopholes that allowed them to allocate profits away from higher-tax countries. The method has been publicly scrutinized, leading to legislative changes in participating nations to curb such practices.
Mechanics of the Strategy
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Step 1: Establish Two Irish Subsidiaries
One subsidiary holds intellectual property (IP) rights and is registered in Ireland but controlled from a tax haven. The second Irish subsidiary carries out business operations and pays royalties to the first. -
Step 2: Use a Dutch Subsidiary
The royalties are first sent to a Dutch subsidiary, which is exempt from withholding taxes due to EU regulations. -
Step 3: Redirect Royalties to the First Irish Subsidiary
From the Dutch subsidiary, royalties are funneled back to the first Irish subsidiary (the one in a tax haven jurisdiction).
Examples
Some well-known companies have been reported to use the “Double Irish With a Dutch Sandwich” strategy, including:
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Google
Reports have suggested that Google used this strategy to save billions by rerouting their profits through Ireland and the Netherlands to Bermuda. -
Apple
Before legislative changes were introduced, Apple also benefited significantly from this tax avoidance method.
Legislative Changes and Its Impact
By 2015, facing increasing pressure from the European Union and the United States, Ireland announced the phasing out of the Double Irish loophole. Companies were given until 2020 to find alternative tax structures. Such legislative efforts aim to increase transparency and fairness in global tax systems, countering aggressive tax planning strategies.
Implications for Multinational Corporations
While phasing out such strategies signifies a movement towards a more equitable tax system, it also compels multinational corporations to reassess their tax planning strategies. These changes could have financial impacts on their global operations and profit margins.
Related Terms
- Tax Avoidance: Legal strategies to minimize tax liabilities.
- Tax Evasion: Illegal practices to escape tax obligations.
- Transfer Pricing: Setting prices for transactions between subsidiaries under common control.
FAQs
Q: Is the “Double Irish With a Dutch Sandwich” illegal?
A: No, it was a legal tax avoidance strategy, but legislative changes have aimed at closing the loopholes that allowed such practices.
Q: Why did Ireland phase out this tax strategy?
A: Primarily due to international pressure and efforts to create a fairer global tax system.
Q: What are the alternatives to such tax strategies post-2020?
A: Companies may explore other jurisdictions with favorable tax laws but must comply with updated international tax regulations.
References
- OECD Reports on Base Erosion and Profit Shifting (BEPS)
- European Commission Taxation Documents
- Industry Case Studies from Google and Apple
Summary
The “Double Irish With a Dutch Sandwich” was once a prominent tax avoidance technique allowing multinationals to significantly reduce their tax liabilities. However, due to international pressure and legislative changes, this strategy is no longer viable, pushing corporations towards compliance with more equitable tax principles.
