Ireland, a country known for U2 and Guinness, is better known in the business world as a tax haven. Ireland is in the same group as Luxembourg and Bermuda; countries without physical resources or human capital. However, they take advantage of their business regulation to attract companies by offering a favorable business environment and low taxation on incorporated companies.
Take Ireland, for example, which has been under the international spotlight for a while due to its “double Irish” tax law (“Dutch sandwich” in the Netherlands), and no, that’s not a drink. This little loophole is why Apple paid a staggering 2% on its profits in Ireland, where the corporate tax rate is 12.5%. The key to the law is the fact that parent companies and subsidiaries are separate legal and tax entities.
If companies could move goods and services away from each other, wouldn’t it be nice to funnel profits to a country with a low or 0% tax rate?
For example, imagine Subsidiary X in Ireland and Manager Y who controls it in the tax haven of Bermuda. Whenever the subsidiary makes a profit, it is transferred to Y. Therefore, it is taxed less or not at all, since that profit counts as manager Y’s profit. Since there is no need to repatriate the capital to the US, this results in a low flat tax rate. Had the subsidiary been headquartered in a country like the US, that same subsidiary would like to face a tax bill in the 40% range. This explains the large cash position that Apple has abroad, much more than the cash position in the US.
Of course, not all companies can take advantage of this double Irish loophole. The rules mainly benefit technology and pharmaceutical companies. Why? Because these companies own intellectual property. Why is that important? When transferring profits from subsidiary X to Y, the company requires a “legitimate” reason to pay Y. Even the rules state that companies cannot simply transfer profits from Ireland to a low tax haven for the sole purpose of paying higher taxes. low. The loophole around the legislation is to find a legitimate reason to have to pay Manager Y in Bermuda.
So the strategy is to make Manager Y own the IP and then a “royalty” contract is set up between X and Y. In this way subsidiary X sends the royalty to Y, so it counts as a royalty. profit for Y and a cost for X.
Fortunately, diamonds are forever, but tax havens are not. In 2015, Ireland repealed the Irish double taxation law and now requires companies incorporated in Ireland to be tax resident in Ireland. For companies that were incorporated before the ruling they will get an additional 5 years of the benefits of the law until 2020. However, this does not mean the end of an era for these companies as the corporate tax rate in Ireland is still 4 times minor. that the US Google says they remain committed to Ireland.