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Ireland to Phase Out Tax Break Used by Technology Firms

Ireland to Phase Out Tax Break Used by Technology Firms

By Stephen Castle and Mark Scott, The New York Times | Updated: 15 October 2014 20:51 IST

Ireland's government on Tuesday responded to the clamorous criticism of its business-friendly tax arrangements by closing a loophole used by multinational giants like Google.

The European Union and the Obama administration have been increasingly vocal about the tax-avoidance strategies of multinational companies and the countries that enable them. The European Commission is conducting a broad investigation into the relationships between multinationals and perceived tax havens like Ireland, Luxembourg and the Netherlands.

In recent decades, Ireland has based much of its economic growth and jobs strategy on its low corporate tax rate and other incentives that enticed foreign companies like Google, Apple, Microsoft and Abbott Laboratories. Joe Tynan, tax partner at PricewaterhouseCoopers in Dublin, estimates that the loophole collectively saved companies billions of euros, although it's difficult to pinpoint the exact amount.

But the change, announced on Tuesday as part of the annual budget statement, won't necessarily make Ireland any less alluring to companies. For one, the government isn't touching the country's tax rate.

Critics also point to the type of Irish tax strategies that have enabled Apple to potentially avoid billions of dollars in taxes over the years. Those deals, which are part of the separate investigation by the European Commission, do not appear to involve the tax loophole the Irish government says it will close.

"I am skeptical as to how big a deal this really is," said Crawford Spence, an accounting professor at Warwick Business School in Coventry, England. "In general, corporations don't see much legitimacy in corporation tax, and Western countries don't appear that interested in making them pay it, either."

The government is phasing out what is known as the "double Irish" provision. It allows corporations with operations in Ireland to make royalty payments for intellectual property to a separate Irish-registered subsidiary. That subsidiary, though incorporated in Ireland, typically has its home in a country that has no corporate income tax.

Take Google. Its Dublin headquarters are its main hub outside the United States, employing more than 2,500 people. A Dublin-based subsidiary for Google generates revenue, mostly from online advertising, and then pays it in royalties to a separate Google unit that is registered in Ireland but is resident in Bermuda for tax purposes.

Reuters reported that Adobe Systems and Yahoo were also among the multinationals with Irish-registered companies that were not tax residents of Ireland.

"Aggressive tax planning by the multinational companies has been criticized by governments across the globe and has damaged the reputation of many countries," Michael Noonan, Ireland's finance minister, told the Irish Parliament on Tuesday as part of a budget speech. "I am abolishing the ability of companies to use the 'double Irish' by changing our residency rules to require all companies registered in Ireland to also be tax-resident."

Google declined on Tuesday to comment on the specifics of the double-Irish technique.

"As we've always said, it's for governments to decide the law and for companies to comply with it," Google said in a statement. "We're deeply committed to Ireland and will work to implement these changes as they become law."

Apple and Microsoft declined to comment about their Irish tax strategies. Abbott Laboratories did not respond to calls.

Dublin's defending the double-Irish provision has become steadily more difficult in the growing political debate about the tax payments made by multinationals.

"I think this is part of an overall drive to try to get international companies to pay more tax," Tynan said. "Ireland wants to be very competitive, but it has to do that within international rules, and there was a feeling that this was at the boundaries of those rules."

Along with Ireland's tax dealings, the European Commission is also investigating Luxembourg's relationship with Amazon and a finance unit of Fiat, the Italian automaker. The commission is also questioning Starbucks' tax arrangements in the Netherlands. These investigations are separate from Ireland's efforts to phase out certain tax policies.

At a meeting in Luxembourg on Tuesday, European Union officials gave the Irish announcement a cautious welcome. The European Commission, the union's executive arm, "will have to look at the details and how it will work in practice," said Algirdas Semeta, the bloc's tax commissioner, "but the intention is a very good one."

A spokeswoman for the Irish Department of Finance said the government did not know how many of the many of 1,100 or so multinationals operating in Ireland use the double-Irish technique.

"As the measure largely relates to companies that are not currently within the scope of Irish taxation because they are not tax-resident here, accurate data on the number of companies affected by this change is not available," she said, asking not to be identified by name in keeping with the department's policy.

Even as Ireland announced the end of the "double Irish," it indicated that it was interested in creating something akin to an onshore alternative. Noonan said the government would explore developing a "knowledge development box," which would provide tax breaks for revenue and royalties derived from intellectual property.

Other European nations including Britain and the Netherlands have introduced similar programs or "patent boxes," which allow companies based in the country to apply for a lower tax rate on profits that result from certain patents. But Noonan indicated the Irish version would be "the best in class" and would offer a "low, competitive and sustainable tax rate."

And nothing Noonan announced on Tuesday would change what has long been one of the biggest sore points for some other countries in the European Union: Ireland's low official corporate tax rate, which is 12.5 percent. France and other countries with much higher business tax rates have long complained of being undercut by Ireland's tax policies.

The country's tax regime has helped the government lure foreign investment crucial to Ireland's now rapidly rebounding economy.

Ireland had about 161,000 workers at almost 1,100 international companies in 2013.

Approximately half of those companies are American, while about 60 percent of all the combined employees work in industries linked to computer services.

Edward D. Kleinbard, a professor at the Gould School of Law at the University of Southern California and a former chief of staff to the Congressional Joint Committee on Taxation, indicated that Ireland's abandoning the double-Irish provision was "a canny strategic move, because there is already tremendous friction between Ireland and the other members of the EU over its extraordinarily low corporate tax rate."

"In the long term," he said, "what's most important to Ireland is to preserve its low corporate tax rate - not artificial structures that reduce a firm's tax burden even further."

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