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"Double Irish" Tax Loophole Used By US Companies To Be Closed
An anonymous reader writes: The Irish Finance Minister announced on Tuesday that Ireland will no longer allow companies to register in Ireland unless the companies are also tax resident. This will effectively close off the corporate tax avoidance scheme known as the "Double Irish" used by the likes of Google, Apple, and Facebook to route their earnings through their Irish holdings in order to garner an effective tax rate of, as in Google FY2013, 0.16%. Ireland's new policy will take effect in 2015 for new companies. "For existing companies, there will be provision for a transition period until the end of 2020."
I will mostly agree on you point. It ignores some of the difficulties of transfer pricing but it is the right principle. The double Irish worked because the US is the only country that does not charge taxes on where the profit is earned, but charges US taxes no matter where it is earned.
Great link here. It's a shell game complicated enough to make a mollusk blush.
For legitimate business this is true. This was not for legitimate business.
Each country has it's own tax laws as to when and what revenue they will tax. Because each country makes their own they don't dovetail like you think they should. The US has some crazy rules and Ireland had a gap. The results was that some income from intangible property (patents and trademarks mostly) fell into a gap between Ireland and US tax laws so it would never be taxed.
Is not that simple. This is not about the "sales tax" (VAT in EU) which is typically assessed and paid in a defined jurisdiction where the sale occurs.
This is about much more complicated corporate income tax. "Google" is not a company, but a brand. Under this brand there is a conglomerate of separate companies that are setup under different jurisdictions with different accounting rules.
Different Google companies ("legal entities" in corporate speak) provide services to each other under internal contracts. Each of these entities have costs. And most have revenues, even if that revenue is "internal" withing the conglomerate. For example, the Google subsidiary in Germany selling ads is charged a cost by the Google legal-entity in US that operates the data-center who physically hosts the ads (this is a simplistic example). There is a whole chapter in economics about Transfer Pricing and there are many laws about it, too (http://en.m.wikipedia.org/wiki/Transfer_pricing) on that topic.
The background of this issue is that revenue recognition rules and definitions of what exactly is "taxable income" varies across countries (jurisdictions).
What Google and other companies are doing is simply to optimize their setup of legal entities and the contractual relationships between them in all jurisdictions where they operate in order to maximize tax deductions and lower their overall tax liability. It is nothing illegal, this is NOT tax evasion.
It is a very good example of application of the Graph Theory: given a set of markets (countries with their tax rules) and relationships between them (free trade agreements, treaties on avoiding double taxation, etc), find the optimal legal setup of legal-entities that would allow access to those markets and maximize the tax deductions (minimize tax liabilities) for the set of entities as a whole (the "company")
P.S. Many US families do the same thing as Google, at a smaller scale. I personally know families in which the wife does not work and is stay-home mom because is "cheaper" vs. two working parents and kids in day care. This is because two spouses working would put them in a higher taxable income bracket which will also make them receive less or none of some tax deductions. Plus they will have to pay for day care. With the wife staying home, taxable income of just one working spouse is lower, there are higher tax deductions, and no day care costs. Tax evasion? No, simply a personal example of tax optimization.
Yes, but his informal and inaccurate observation with very limited scope was elevated to universal divine capital-T Truth by Americans.
They're not parking their billions there. They're funnelling money through Irish registered companies which are domiciled in places like the Cayman islands. Ireland might make some money but it doesn't get much out of it. Ireland is changing the rules so that Irish registered companies must be domiciled in Ireland and therefore liable to Irish corporate taxes.