Irish finance minister Michael Noonan announced in his budget presentation that the controversial "Double Irish" tax avoidance arrangement is to be abolished. This has been used - along with another scheme called the "Dutch Sandwich" by several companies, notably Facebook and Apple, to avoid paying taxes on profits. Wiki explains how the scam works.
Typically, the company arranges for the rights to exploit intellectual property outside the United States to be owned by an offshore company. This is achieved by entering into a cost sharing agreement between the US parent and the offshore company, written strictly in terms of US transfer pricing rules. The offshore company continues to receive all of the profits from exploitation of the rights outside the US, but without paying US tax on the profits unless and until they are remitted to the US.
It is called double Irish because it requires two Irish companies to complete the structure. One of these companies is tax resident in a tax haven, such as the Cayman Islands or Bermuda. Irish tax law currently provides that a company is tax resident where its central management and control is located, not where it is incorporated, so that it is possible for the first Irish company not to be tax resident in Ireland. This company is the offshore entity which owns the valuable non US rights that are then licensed to a second Irish company (which IS tax resident in Ireland) in return for substantial royalties or other fees. The second Irish company receives income from the use of the asset in countries outside the US, but its taxable profits are low because the royalties or fees paid to the first Irish company are tax-deductible expenses. The remaining profits are taxed at the Irish rate of 12.5%.
For companies whose ultimate ownership is located in the United States, the payments between the two related Irish companies might be non-tax-deferrable and subject to current taxation as Subpart F income under the Internal Revenue Service's Controlled Foreign Corporation regulations if the structure is not set up properly. This is avoided by organizing the second Irish company as a fully owned subsidiary of the first Irish company resident in the tax haven, and then making an entity classification election for the second Irish company to be disregarded as a separate entity from its owner, the first Irish company. The payments between the two Irish companies are then ignored for US tax purposes.
Noonan announced that the scheme will be closed for new entrants next year and
phased out by 2020. After that all Irish companies will have to be tax resident in Eire. The measure was more or less forced on the Irish after the scheme became notorious along with another special arrangement for Apple that the EU has provisionally declared
illegal state aid. The UK Chancellor of the Exchequer had also announced a crackdown on such practices at the Conservative party conference last month.
The scale of the problem of legal tax avoidance can be seen through some examples.
Facebook
Facebook’s main UK operating company paid only £238,000 in corporation tax last year [2011] on an estimated £175m in revenues – part of a pattern of behaviour whereby big media companies exploit tax loopholes to avoid corporation tax. And it is happening on a rampant scale.
According to its UK accounts, filed to Companies House, Facebook generated £20m in sales and operated at a £14m loss. But in reality, the social networking website processes most of its UK revenue via Ireland, where corporation tax is much lower.
Facebook can do this because when an advertiser in the UK buys ad space on the site, the sale can be processed in Facebook’s Ireland office, even though the ad will be displayed to UK users in Britain.
Rupert Murdoch's shenanigans were exposed in 1999
A report in this week's Economist newspaper offers an intruiging update. It states that in the four years to 30 June last year, Mr Murdoch's News Corporation and its subsidiaries paid only A$325m (£128m) in corporate taxes worldwide. That translates as 6% of the A$5.4bn consolidated pre-tax profits for the same period.
-snip-
Further research reveals that Mr Murdoch's main British holding company, Newscorp Investments, has paid no net corporation tax within these shores over the past 11 years. This is despite accumulated pre-tax profits of nearly £1.4bn. Payments were made in some years, but in others rebates were claimed.
Amazon used a similar trick to Facebook in channeling orders from the UK through an Irish company (and I understand Murdoch's BSkyB does the same although its subscription offices might actually be in Ireland now).