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Double irish with Dutch sandwich arrangement

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This is a famous tax avoidance strategy adopted by renowned multinationals like Apple, Google etc. This unique arrangement will leave you amazed and it is also very informative. Please read the detailed report to know more.

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Double irish with Dutch sandwich arrangement

  1. 1. Research paper Report on the topic DOUBLE IRISH ARRANGEMENT WITH DUTCH SANDWICH Submitted by Samyak Chaudhary
  2. 2. INTRODUCTION It is always considered to increase your profit margin by the method of saving taxes is quite risky yet essential, even in todays time where technology has enables transactions to be quicker and intangible objects to be easily transferred. When companies are earning millions as profits, then they seek these options. Double Irish with Dutch sandwich is just one of a class of similar international tax avoidance schemes. The prime focus is to analyze the Double Irish and Dutch Sandwich tax structures used by large multinational enterprises and any other inferences that can be made from these. These structures enable companies to shift significant profits to offshore tax havens through the use of wholly owned subsidiaries in Ireland and the Netherlands. This report is just an attempt to understand the arrangement. Hence, we have tried to explain this in the simplest way as we can. As far as our own interpretation is concerned, the priority of this report is to mention some alternatives available to undertake these strategies, the ways they are being monitored and analyzing the ethical nature of them, rather than coming out with groundbreaking innovative ideas to undertake them. The strategies explained ignore many practical problems that companies actually face who are involved in these arrangements and the later part of the report deals with our own interpretations.
  3. 3. EXPLAINATION As per the actual process is concerned, the proper name assigned to this strategy is “Double Irish with Dutch sandwich”. The question is how does a Dutch company get sandwiched between the 2 Irish ones? The fact to be kept in mind that large corporations follow this so the dealing are in billions. Now, these companies, first through one Irish company, then to a Dutch company and finally to a second Irish company headquartered in a tax haven, shift their profits. And large companies have indeed reduced their taxable income by dramatic figures. Nations can be really stubborn and irrational in terms of determining national tax codes. That is why smarter people take advantage of this. Companies form subsidiaries in different land, and make transactions between them, where they might pay in terms of the profit margin. It can be easily understood from here on that income once shifted to a low tax zone will still be white, so technically, legal. These techniques are most prominently used by tech companies because these firms can easily shift large portions of profits to other countries by assigning intellectual property rights to subsidiaries abroad. Hence, we found all the examples to be tech companies indeed! (Google, Amazon, Apple etc.) Why intellectual property? Because they are intangible so no real commodity transferred hence no costs associated, therefore only payments need to be made. Now, paying the subsidiaries to enable them to be licensed PRIME FACTORS The basis of this arrangement is the Irish law. It has a feature that companies based outside Ireland can be registered as an Irish company. This can be a reason of why Ireland is chosen as a destination. Other factors include a low corporate tax rate, favorable tax treaties that limit the tax on transactions between subsidiaries, and a well-educated and English speaking workforce.1 1. John Sokatch “Transfer-Pricing with Sofware Allows for Effective Circumvention of Subpart F Income: Google’s ‘Sandwich’ Costs Taxpayers Millions” (2011) 45 Int’l Law 725 at 732.
  4. 4. PROCEDURE The process goes like this that assuming A is a major tech company. It will set up a subsidiary in Ireland named B, which will further go on to set another subsidiary named C also in Ireland. At this position, company incorporated in Ireland will be treated as resident in Ireland for tax purposes.1 For a company to be an exception to this, it has to be a relevant company, that means, it is ultimately controlled by persons resident in the EU or in a country with which Ireland has concluded a double taxation treaty.2 US has a double-taxation treaty with Ireland3 , hence subsidiary B can be exempted from being called a resident company even though it is incorporated in Ireland. Now, subsidiary B makes themselves a tax resident of some other small nation like Cayman Island or Bermuda but B will own all the nine US rights to intellectual property(as being a subsidiary of the US company). The transaction takes place in this form that A will give for eg. Copyrights to B and B will give royalty fees in return. After that, The B will then license the intellectual property rights to C in return for some substantial royalty payments. C will then receive income from the use of the licensed assets in countries outside the US. The transfer of the rights means that when subsidiary receives rights then it is enables to receive all income from sales and use of the intellectual property outside of A’s home state and it will go to C. Subsidiary C will then pay substantial royalties and licence fees to Subsidiary B for their use of the intellectual property. This essentially transmits the majority of income to Subsidiary B, where it can sit tax free in an offshore tax haven like Bermuda. 1. Finance Act 1999, s 23A(1)(a) (Ireland). 2. www.revenue.ie/en/about/foi/s16/income-tax-capital-gains-tax-corporation-tax/part-02/02-02-03.pdf 3. https://books.google.co.in/books?id=O4w5iDPFQMIC&pg=PA1231&lpg=PA1231&dq=Convention+Between+the+Government+of+Ir eland+and+Government+of+the+United+States+of+America+for+the+Avoidance+of+Double+Taxation+and+the+Prevention+of+Fisc al+Evasion+With+Respect+to+Taxes+on+Income+and+Capital+Gains,+Ireland- United+States+%28signed+28+July+1997%29.&source=bl&ots=cBxcq1HaaX&sig=__HUgKFr4Sy7Iuz8lg1iDNKou8A&hl=en&sa=X&ei=S mEIVezQKc2LuASi44GICQ&ved=0CCMQ6AEwAQ#v=onepage&q=Convention%20Between%20the%20Government%20of%20Ireland %20and%20Government%20of%20the%20United%20States%20of%20America%20for%20the%20Avoidance%20of%20Double%20Ta xation%20and%20the%20Prevention%20of%20Fiscal%20Evasion%20With%20Respect%20to%20Taxes%20on%20Income%20and%2 0Capital%20Gains%2C%20Ireland-United%20States%20(signed%2028%20July%201997).&f=false
  5. 5. These taxable profits would then be taxed at the prevailing Irish tax rate of 12.5% will be reduced by the royalty payments of the first Irish company. However, this may not work if C is not considered as a fully owned subsidiary of B. Hence, B and C can be treated as a single company for tax purposes. Now, the Dutch sandwich or the introduction of a Dutch can further reduce the company’s tax liabilities as A can set up a 3rd subsidiary in Netherlands, lets say D, and bring it between the license and royalty transaction process of B and C. The factor here is that Ireland does not tax money being transferred among the EU neither Netherlands levy any such tax and only charges a small amount of fee for using its tax system. This allows the royalty payments to be transferred to the first Irish company virtually tax free except of the fee charged. Source: www.businessinsider.com
  6. 6. Now the company set up in Netherlands can be a shell company. As the Irish subsidiary can continue its operations, the Dutch one being in the middle can do nothing hence can save costs. But, the inference made from this shell structure is that the Dutch division of A will not be productive which is not good for Dutch economy and would be unfair as the Irish ones may be employing people but Dutch one would not be. What alternatively can be done is that US Company can directly transfer the IP to the Caribbean entity and pay royalties directly to them. But the problem to this is that if they just incorporated in the Caribbean and kept all their employees in the US, they would effectively have most of their profits taxed in the US. Along with that a subsidiary requires large levels of employment which would not have been possible in small island nations. The company A makes a million dollar. Now, while intellectual property is being transferred, fair price needs to be decided which is based on transfer pricing i.e. pricing within the subsidiaries which will be fair but can be changed hence necessary be low. Profit margin going out of the home country due to this and overseas profits ultimately ending up with the subsidiary in the tax haven will lead to the profit portion in haven to be not taxed and hence company saves on the overall taxable income. GOVERNMENT INTERVENTION Ireland has announced that beginning in 2015, companies will have to be a tax resident to be incorporated in Ireland, so the Double Irish tax strategy will no longer work quite as well as it has because an Irish entity will no longer be able to be incorporated in a Caribbean nation. Still the 12.5% tax rate in Ireland will be better than the US tax rate. So companies can open a new venture in Ireland and have less tax. CONCLUSION In short, companies transfer IP to Irish subsidiary and then transfer the royalties earned to an Caribbean entity because Caribbean nations are tax havens! The whole learning experience of this strategy was amazing as many facts were known during the process worth knowing. Subsequently, we understand that many Indian companies or other worldwide businesses can opt for tax saving strategies emerging from loopholes in law structure but this particular strategy or any similar one could not have been utilized by any company of nation other than US as the prime factor can be inferred as the exception of the US-Irish agreement therefore this case has turned out to be specific. We conclude with this strategy that measures to stop this arrangement are in the right direction. However, considering this to be unethical is not appropriate as we consider it to be a mere utilization of a loophole in law. Another argument that whether the companies following this earlier should be penalized or re-taxed is not right as it is similar to the situations of arbitrage where flaws in laws govern the actions.
  7. 7. References 1. https://www.youtube.com/watch?v=sYOQs575Qaw 2. https://www.youtube.com/watch?v=EFKGmmm-j5M 3. http://www.businessinsider.in/A-Popular-Irish-Corporate-Tax-Loophole-Is-Now-Dead-Here-Are- Three-Other-Loopholes/articleshow/44816350.cms 4. www.revenue.ie 5. www.citizensinformation.ie 6. books.google.co.in 7. http://researcharchive.vuw.ac.nz/xmlui/bitstream/handle/10063/3252/thesis.pdf?sequence=2 8. http://www.investopedia.com/terms/d/double-irish-with-a-dutch-sandwich.asp 9. http://arstechnica.com/business/2013/10/to-reduce-its-tax-burden-google-expands-use-of-the- double-irish/ 10. https://www.youtube.com/watch?v=nHC_BEqN0qY