Are the days of the ‘Double Irish’ numbered?

The alarm bells began to ring within minutes of the US Senate hearings into the tax practices of Apple last May.

Over in Washington DC, Ireland was being labelled a "tax haven" as Apple was accused of avoiding tens of billions of dollars in US taxes by sheltering profits in Irish "ghost companies", which did not have to pay taxes anywhere.

Back at the Department of Finance headquarters on Merrion Street, senior officials were scrambling to assess the damage and how to react officially.

“In our view, the reputational damage to Ireland (while too early to estimate with any degree of certainty) of Apple’s appearance before the US Senate sub-committee on investigations is likely to be substantial,” wrote Gary Tobin, head of the department’s business tax team, in an e-mail. “Certainly, our efforts to resposition Ireland in terms of tax policy issues during our EU presidency have been dealt a severe blow.”

Tobin warned acting too quickly could be seen as an admission of guilt or lead to a view “we were bullied or shamed into making the change”.

On the other hand, not reacting involved risks as well, given that the European Commission was saying informally it might see if there was a breach of EU state aid rules. "And there is the possibility that the controversy may significantly damage our ability to continue to protect and promote the 12.5 per cent corporation tax rate."

Officials also drew up a range of policy options. In the end, the Government opted to close off the loophole that allowed Apple to avoid tax on more than €30 billion of income through its “tax resident nowhere” status. On budget day, Michael Noonan announced the change, insisting Ireland was not a tax haven.

The Government might have hoped the controversy would end there. But the move to close off the stateless arrangement has left an even bigger loophole intact – the “double Irish” – under which multinationals can continue to trim global tax bills.

Google is one of the most high-profile beneficiaries, using an elaborate structure that routes its European sales through Dublin. The unit pays billions in royalties to another Irish company for the rights to Google's various patents.

This second unit is managed in Bermuda and isn't tax-resident in Ireland. As a result, it doesn't owe Irish taxes. The majority of Google's worldwide profits avoid income tax, reducing the income tax bill by $2 billion in 2012. It's not alone. Facebook operates a similar system, sending profits from Ireland to jurisdictions such as the Cayman Islands. LinkedIn has reportedly used Ireland to send funds tax-efficiently to the Isle of Man.

The Government argues the State isn’t facilitating tax avoidance. Accountants are simply able to exploit the tax codes of various countries. The only way of addressing these issues is through combined international action or through bodies such as the Organisation for Economic Co-operation and Development, officials claim.

But an internal Department of Finance report shows real concern at potential reform and how it might impact on Ireland. The document, Principal Risks to Ireland's Corporation Tax Strategy, contains proposals to help mitigate the risks.

The stakes are high. Corporation tax is a vital source of revenue – more than €4 billion in 2012 and 11.5 per cent of our tax take that year. The IDA estimates about 167,000 people are employed in client companies, mostly US multinationals.

The report identified key risks in four areas: harmonisation of corporate tax rates; co-ordinated international action on “harmful” tax practices; increasing tax competition for foreign direct investment; and high dependence on US multinationals for corporation tax.

Ireland’s biggest concern is the second issue and potential minimum tax rates.

“If the issue of minimum tax rates was to get traction in discussions around anti-abuse rules, it could present difficulties for Ireland”, the report states. “The concern is that . . . multinational company subsidiaries located in Ireland could suffer additional foreign tax – this could erode the attractiveness of jurisdictions with relatively low tax rates.”

It also points to the possibility of US tax reform targeting excessive profit-shifting.

Fergal O'Rourke, head of tax services at PricewaterhouseCoopers, has been a staunch defender of Ireland's tax regime, telling Bloomberg recently that Ireland was not a tax haven and played "by the rules".

'Double Irish' Tax rates of US subsidiaries
Tax rates reported by subsidiaries of US multinationals in Ireland have fallen from about 9 per cent to about 3 per cent in the decade leading up to 2010, according to US Department of Commerce data.

This is because much of the profit they report is attributed to units which are not tax resident here and don’t owe Irish taxes, a technique known as a “double Irish”.

Google
Turnover: €15.5 billion
Corporation tax: €17 million
Google's Irish-based operation had revenues of around €15.5 billion during 2012 – but ended up paying corporation tax of just €17 million. That's because it charged "administrative expenses" of almost €11 billion, which includes royalties paid to other Google entities abroad, some of which are ultimately controlled from tax havens such as Bermuda.

Facebook
Turnover: €1.8 billion
Corporation tax: €1.9 million
Facebook Ireland had a turnover of €1.8 billion in 2012, but only generated Irish corporation tax charges of €1.9 million. Its gross profits turned into losses when "administrative expenses" paid to other group companies, were taken into account. These expenses included royalty payments of €770 million to its immediate parent, Facebook Ireland Holdings, an unlimited company registered in Ireland but not believed to be tax-resident here. Its shareholders include a number of Facebook companies based in the Cayman Islands, where there is no corporation tax.

Microsoft
Turnover: €13.7 billion
Corporation tax: €132 million
Profits at Microsoft's Irish subsidiary rose in 2012, as revenues climbed to €13.7 billion. Its corporation tax bill, at €132 million, almost doubled compared with 2011. It attributed this to a number of reasons, including depreciation that exceeded capital allowances and incurring non-deductible expenses. Microsoft Ireland Operations Limited sells, distributes and markets software globally from Dublin. It is one of a number of subsidaries owned by the company and based here.

The firms helping multinationals to cut their tax bills
Multinationals have been very successful in finding legal ways to avoid taxes – and there is no shortage of firms in Ireland offering to help them. The "big four" audit firms have well- staffed units that specialise in providing advice to companies on how to trim their tax bills. In addition, most big legal firms have experts to assist in creating tax-efficient corporate structures. Legal firms providing one-stop-shops for multinationals include Matheson Ormsby Prentice (MOPS) and Arthur Cox.

PricewaterhouseCoopers
As one of the "big four", PricewaterhouseCoopers has several hundred tax accountants and lawyers in Dublin and other locations such as Silicon Valley, New York and London. Feargal O'Rourke heads this section of the business. He has advised many multinationals on their tax arrangements and, according to Bloomberg, played a key role in persuading the Government to eliminate a withholding tax on profits that corporations move out of the State.

Deloitte
Deloitte says it helps multinationals secure lower effective tax rates through the use of tax-efficient structures. Among its listed clients is Microsoft. Its team includes a former member of the Revenue Commissioners ,Tadgh O'Connell, who served in the anti-avoidance unit of the State body. He also served as the Revenue's representative on the board of the Irish Auditing and Accountancy Supervisory Authority – the regulatory body for the accountancy sector – before stepping down in 2012.

EY
Formerly known as Ernst & Young, EY is another of the "big four". It also has a unit aimed at helping multinationals to reduce their tax bills and avail of legal loopholes across different tax codes. The company advised Forest Laboratories, the maker of anti-depressants, which has moved billions of dollars in profits through Ireland to a Bermuda-based subsidiary.

Arthur Cox
Arthur Cox, one of Ireland's biggest law firms, has acted as tax and legal advisers for major multinationals which have migrated into Ireland, including Accenture, Cooper Industries, Shire Pharmaceutical, Covidien, Charter, Ingersoll Rand, James Hardie and Warner Chilcott.

Much of this migration involves what tax experts call “corporate inversion”, where firms re-locate their corporate headquarters to another jurisdictions for tax reasons, although the majority of its operations may be carried out elsewhere.

The law firm has told potential clients it is possible to secure effective tax rates of as low as 2.5 per cent for Irish-registered companies whose trade involves the use of intellectual property.

“A generous scheme of capital allowances as well as a tax credit for money invested in research and development in Ireland offer significant incentives to companies who locate their activities in Ireland,” it said in a circular to potential clients in 2011.