"Double Irish" Tax Loophole Shut Down

I've often written about the incentives that governments use to attract multinational corporations to "domicile"  in their home countries.  Chief among these incentives is the tax rate on company profits -  the lower the rate, the more chance a multinational will call your country "home".  Competition is fierce and tax accountants are always looking for unique ways to twist the law and beat the taxman.

Some genius in Ireland has developed the most creative tax solution I've seen.  It's called the "Double Irish"  and has the full support of the government.  To understand this concept, we have to separate corporate profit into 2 categories.  First is profit from "normal" business practices.   The second category is profit from the sale or rental of patents, commonly called intellectual property.  Until 20 years ago, most companies didn't have patents to sell or rent.  But the explosion in the technology sector -Microsoft,  Facebook, Apple etc.  changed that landscape forever.  Back to our Irish genius.  He/she found a loophole in the tax code that allowed companies to send royalty payments for patents (intellectual property)  from the Irish "mother company"  to a subsidiary in another country with no corporate income tax - without paying Irish tax!  So, for example, Google used this loophole in 2012 to send $11 billion in royalties to a subsidiary in Bermuda, a tax-free haven; and paid no Irish tax!

Now the question is what's in it for Ireland?  The answer is the "mother company"  registered in Ireland will pay tax on its income from other business practices.  What a great deal for the tech companies.  In fact, Facebook, Linkedin, Microsoft, VMware and others have all used the "Double Irish"  to avoid tax.

But now the bubble is about to burst.  For years, many governments, particularly the United States, and the European Union have pressured Ireland to plug the loophole.  So three days ago, Finance Minister Michael Noonan announced that he would shut it down:  "Aggressive tax planning by the multinational companies has been criticized by governments across the globe, and has damaged the reputation of many countries".  But while Noonan said the new rules would take effect on January 1st, he quickly added that existing "Double Irish" programs could be gradually fazed out over 6 years.  And the Minister said he would introduce incentives to persuade the multinationals to stay in Ireland, where tech companies have turned Dublin into a mini Silicon Valley.  He even hinted that he might create a new "home-grown Irish"  tax rate for income generated by intellectual property.

So the "Double Irish" is dead - for now.  But keep your eyes peeled for the next genius who will unlock a new corporate loophole in some other country's tax law - it's just a matter of time.