Corporate Tax

Company tax avoidance in accordance with the “Double Irish” – Bercan Begley

After Ireland closed its notorious corporate tax loophole, one might have assumed that tax avoidance would have come with it. Not so.

Bercan Begley

Ireland is an excellent reference point for understanding what comprehensive corporate tax avoidance looks like in a macroeconomic statistical system. The closure of the “Irish double” avoidance system has resulted in foreign-controlled multinational corporations (MNCs) listing more of their business and profit shifting activities in the Irish national accounting system.

In the aftermath of the ‘Double Irish’ in particular, intellectual property (IP) appears to be of paramount importance for multinational corporations to maintain their Irish-based profit-shifting activities. Ireland has significant tax incentives for foreign controlled multinational corporations – with the necessary financial engineering skills – that engage in Irish trading activities in the development and exploitation of intellectual property.

Corporate tax tool

The “Double Irish” was a corporate erosion and profit shifting (BEPS) corporate tax tool used by overseas controlled multinational corporations. It took advantage of the difference between tax regimes in Ireland and the United States: in the former, liability depends on control, in the latter on the domicile of incorporation. Companies could therefore register an affiliate in Ireland but control it in a tax haven like Bermuda. If profits were attributed to the Irish company, they could remain off-balance sheet and not be taxed by any state.

When the “Doppeliren” were in full effect, large portions of the business rents remained outside the Irish economic accounts. The system finally closed in 2020. An interesting feature of the settlement was that foreign-controlled multinational corporations reported increasing business activity within the Irish system of national accounts – much of which was previously “stateless” and was not reported. However, that did not mean that corporate tax avoidance was over.

Widespread interest in the 2015 Irish National Accounts, dubbed the “goblin economy” by Nobel Prize winner Paul Krugman, followed the publication of balance of payments data in July 2016 by the Irish Central Statistics Office (CSO). These showed phenomenal real gross domestic product (GDP) growth of over 25 percent in 2015 – the year the “Irish double” gap began to close. Former Governor of Ireland’s Central Bank, Patrick Honohan, said the impact on the national accounts of multinationals in Ireland “mocked” conventional uses of GDP.

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Facilitating laws

“Kobold Economy” includes both income and expenditure items in the national accounts. As the void closed, reported MNC income in Ireland soared – but so did the expenses that were considered tax deductible, made possible by hugely simplified IP tax laws. This kept corporate profits in check even though incomes rose. In 2013-19, Ireland’s 361 percent increase in foreign-owned MNC value added was offset by a 507 percent increase in IP service costs and a 975 percent increase in IP depreciation.

The Irish legislature, under the auspices of the Office of the Parliamentary Counsel, had drafted a series of laws to accommodate foreign-controlled multinationals in increasing their IP cost base in Ireland and driving the oversized flows of Irish phantom IP trading. Two specific parts of the Irish tax system were relevant.

From an intellectual property perspective, there are two ways to generate costs and thus reduce corporate taxation. A company can import IP services or buy IP assets from sister organizations in tax-exempt countries. MNCs in Ireland do both. Importing IP services and depreciating IP assets increases costs and decreases profits in the host jurisdiction, thereby maximizing corporate profits elsewhere.

Irish tax legislation offers very generous treatment in both cases. With services, the withholding tax on patent fees is a crucial issue. Ireland has a history of withholding taxes on royalties in offshore financial centers. The Irish Finance Act of 2010 removed this restriction.

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The steep rise in IP costs after the “double iren” is fully confirmed in the Irish national accounts. In 2013, CSO data shows imports of royalties and other business services from offshore financial centers amounting to EUR 5.5 billion. By 2019, imports of IP services from offshore financial centers had risen to a staggering 110 billion euros.

The second Irish simplifying tax component concerns a tax deduction for the relocation of intellectual property rights to Ireland. These intellectual property rights, which include patents, copyrights, trademarks, licenses, copyrights, computer software, trademarks, know-how and goodwill, are referred to as certain intangible assets under Irish tax law. They are treated similarly to machines and systems, which can reduce corporate profits.

The CSO figures show that IP depreciation has multiplied from EUR 5 billion in 2013 to EUR 47 billion in 2019. The sharp rise in Irish foreign-owned intangible stocks due to the phantom IP relocation provides multinational multinational corporations with great depreciation privileges.

Grossly inappropriate

Ireland’s intellectual property trade is in no way equal to the size of its economy. The rapid increase in IP imports, IP assets and depreciation between 2013 and 2019 does not bring the economic substance in line with the statutory profit formation.

After the “Doppeliren”, intellectual property trading appears to have become the new mode for foreign-controlled multinational corporations to unearth the Irish corporate tax base. Profit shifting is facilitated by specific provisions in Irish law relating to withholding taxes and capital relief.

In this new era that has closed the void, IP transactions are emerging as a new business tool in the tax avoidance toolbox. Weaknesses in Ireland’s centuries-old tax regime reveal a globalized corporate world that lacks adequate regulatory constraints.

The international tax architecture urgently needs to be reformed. Withholding taxes on unsavory IP structures should be at the center of this debate.

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