How Abbott Labs devised its formula for ‘single Malt’ taxation

In recent years, efforts by governments to close off loopholes allowing multinationals to cut their tax bills have resembled a game of whack a mole – hit one on the head and another soon appears.

However the latest news, from research by Christian Aid, that Abbott Laboratories is using a tax structure involving Ireland and Malta is surprising, as it involves an arrangement which the Government had tried to close off in 2018. It also comes at a bad time for Ireland, under pressure to sign up to a new OECD tax regime designed to reduce these types of opportunities by tightening rules and imposing an agreed global minimum tax rate.

For years, companies here legally used what was called the double Irish tax structure, where multinationals typically had two Irish companies, both incorporated here but one of which was tax-resident elsewhere, usually in a tax haven. Companies used specific parts of Irish and US tax legislation – and the different definition of tax residency in both regimes – to funnel tens of billions of dollars in earnings to offshore tax havens, where they could remain untaxed unless they were returned to the US.

Ireland has abolished the double Irish – the announcement came in 2014 and it was phased out by last year – and new US tax rules introduced in 2017 legislation aim to impose a minimum tax rate on the overseas earnings of its companies. Subsequently Christian Aid was one group to highlight that even without the double Irish, multinationals based here were able to establish similar structures using countries with which Ireland has a tax treaty, with a company incorporated in Ireland but tax-resident overseas. Malta, given its corporate tax regime, was the country of choice and the “double Irish” was replaced by what was called the “single Malt”.

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Closing a loophole

Given the furore, the previous government entered an agreement with Malta in late 2018 to try to close down this loophole. But it seems Abbott Laboratories has found a – legal – way around this and is using three companies incorporated in Ireland but tax resident in Malta as a central part of their tax planning for money earned around the world from the sale of their rapid Covid tests. This was part of what appears to have been a tax-driven restructuring in 2019, after the Government announced measures to end the single Malt.

Christian Aid find that, as a result, €65 million of income moving through these Irish incorporated companies in 2019 was earned without any tax being paid in either Ireland or Malta. This is a small amount for such a big company, but we can safely conclude that sales of diagnostic kits soared during the pandemic and the cash moving through the structure will have risen sharply in 2020 and this year. Because of the way Malta allows companies to value their intellectual property – the patents, copyrights, licences and trademarks behind their products – Christian Aid calculates that at least €477 million in earnings from 2019 on can be sheltered from Irish and Maltese tax.

Intellectual property (IP) is the key tool behind multinational profit shifting over many years. Investment in these assets can be written off and payments between group companies can be arranged to ensure money ends up in low- or no-tax locations.

IP regime

Two questions remain about the Abbott Laboratories structure, as Christian Aid points out. One is how it was possible to set it up despite the deal between Ireland and Malta? The researchers speculate that the narrow way the agreement was drawn may be a factor here. And Malta’s generous IP regime was clearly a major attraction. Second, will the earnings eventually be caught for some tax by the US offshore earnings regime introduced on foot of the 2017 tax bill, the global intangible low-tax income (“gilti”) tax, which would kick in at a rate of 13.125 per cent?

Christian Aid says this is not clear and points to divergent opinion on the issue among tax experts. However, for Abbott the complex structure clearly has some significant advantage. Otherwise why bother set it up?

The news also comes at a bad time for Ireland, which is arguing at OECD level that the country is trying to do its bit to shut down opportunities for aggressive tax planing. This is part of ongoing talks where Ireland is so far holding out against signing up to an agreement to introduce a new way of taxing multinationals, including a minimum tax rate of at least 15 per cent.

Ireland is looking for more clarity, particularly on the minimum rate. But news of aggressive tax planning will only add to accusations that the country remains a tax haven for multinationals.