Explainer: Google and its double Irish tax scheme
Why is Ireland’s most notorious tax loophole back in the news?
It is estimated that US multinationals were holding more than a $1 trillion (€890 billion) in profits offshore via mechanisms such as the double Irish by the end of 2017. Photograph: AFP via Getty
First things first, what is the double Irish?
It’s best described as a loophole or a quirk in the Irish tax code that allows companies to incorporate or set up here while remaining tax resident elsewhere. It meant Google and other companies could place their intellectual property (IP) patents in subsidiaries that were legally based in the Republic but not treated as being domiciled here for tax purposes. Instead, these companies put their IP in vehicles located in tax havens such as the Cayman Islands or Bermuda, where companies pay no income tax. This allowed them to channel billions of euros of profits through Ireland and on to Irish-incorporated entities elsewhere, avoiding tax on a grand scale.
It is estimated that US multinationals were holding more than a $1 trillion (€890 billion) in profits offshore via mechanisms such as the double Irish and the Dutch sandwich by the end of 2017. In 2015, the Government bowed to international pressure and abolished the double Irish loophole for new companies arriving here but controversially allowed those already using it until the end of 2020 to phase it out.
Why is it back in the news?
Internet search giant Google has been using the double Irish to funnel billions in global profits through Ireland and on to Google Ireland Holdings, the parent company for Google Ireland, which is located in Bermuda, effectively putting them beyond the reach of US tax authorities. Google Ireland Holdings recorded $14.5 billion in untaxed profits in 2017 on turnover of $22.3 billion while having zero staff on its books. The company has now decided to drop this arrangement and consolidate all of its IP back in the US.
“We’re now simplifying our corporate structure and will license our IP from the US, not Bermuda,” a spokesman said. The move comes on foot of changes to the US tax code. The Trump administration’s tax reform, passed two years ago, imposed new taxes on companies’ excess profits from IP held overseas to encourage them to relocate their assets back to the US and stop “offshoring profits”.
What’s the impact on Ireland going to be?
Because the bulk of Google’s taxable IP was located outside the State for tax purposes anyway, the impact here will be minimal. Google is one of the largest employers here – it has more than 7,000 staff across its sprawling Dublin campus – and is one of the largest payers of corporation tax here.
In 2017, Google Ireland recorded a profit of €1.2 billion on revenue of €32.2 billion, according to company filings, and paid €167 million in corporation tax. Nonetheless its decision shows just how quickly companies can shift their arrangements and how vulnerable Ireland, as a small open economy in receipt of billions of euros of tax from mulitnationals, is to changes in the international tax environment.
The Irish Fiscal Advisory Council (Ifac) recently warned that up to €6 billion, or 60 per cent of the Government’s corporation tax windfall may be temporary, leaving the public finances extremely exposed to a potential reversal.
Five years ago there was a global outcry about multinational tax, and Ireland, which hosted so many of these companies and their elaborate tax-avoidance schemes, looked to be in an extremely vulnerable position. The State was vilified as a tax haven and there were multiple warnings about the potential exodus of investment, a vital component of the economy. However, instead of posing a threat, the outcry and subsequent reform programme led by the OECD turned out to be a boon for Ireland with many big tech companies relocating their assets here and contributing to a massive surge in corporation taxes. So it’s very difficult to predict which way these things go.
Whether Google’s decision signals another shift in the global tax environment and potentially the start of a longer-term plan to reduce its presence in Ireland with a negative impact on employment, corporation tax and economic growth, remains to be seen.