Ever wondered how the big Tech companies managed to end up with minuscule tax rates? Read on….oh, and by the way, this is the “simplified version”… anyone for a double Irish & dutch sandwich?
So, what is the Double Irish, or the Double Irish with a Dutch Sandwich? It’s a form of income moving that helps companies avoid huge tax bills. In the same report, Bloomberg states that Google saved $2.2 billion last year using the technique, and that companies overall slip past around $100 billion in taxes in the United States and Europe yearly through its effectiveness. So, the dollars at play here are not small.
Here’s how it works: Move your money to Ireland, then the Netherlands, and finally to a tax haven such as Bermuda, but in a very specific order.
- Develop technology or other intellectual property in the United States.
- Set up a corporate subsidiary in Ireland, and sell (or license) foreign rights to said intellectual property. However, ensure that this company is headquartered in Bermuda, or a different but similar tax haven.
- Foreign profits that come from revenue based on that intellectual property can now be assigned to that entity. This means that the parent company will not pay home-market taxes on the full profit bill. Instead, it will pay home-market taxes only on the fees that the Irish subsidiary remits to the parent corporation itself.
- Have the subsidiary pay as little as possible for the sold or licensed intellectual property. This shifts the maximum amount of profit to Ireland and away from the parent company’s home-market tax rate.
- Now, set up a second Irish corporation. Your first Irish company will own this company. The second company will do the work of selling products and recording revenue. However, its profits won’t stay put.
- Send the profits from the second Irish corporation through a third subsidiary corporation in the Netherlands. Ireland has tax-free transfers inside the European Union. The profits from the second Irish corporation are now safely ensconced in Holland.
- Now, route that profit from the Netherlands back to the first Irish subsidiary, which is headquartered in Bermuda.
- Thanks to Irish law, if a company is managed elsewhere (Bermuda!), its profits can, in the words of the New York Times, “skip across the world tax free.”
- Ship the profits sent to the first subsidiary to its headquarter location in Bermuda and no taxes are paid!
And that’s the kids’ version. The process can become vastly more complex once new entities are involved, primarily when you begin to extend the number of countries.