Last week, Ireland’s Finance Minister, Michael Noonan, announced plans to close the “Double Irish” tax loophole to implement a new tax scheme dubbed the “Knowledge Development Box.” Large tech companies such as Apple, Microsoft, and Adobe Systems have been using Ireland to transfer profits in order to virtually pay no taxes along the way. It seems Ireland has finally succumbed to the complaints and criticisms voiced by the United States and European Union. There has been much international anger in the past few years about corporate tax avoidance, prompting EU investigations into tax deals between member states and big companies.
The “Double Irish” loophole allowed a tax resident in Ireland to be exempt from paying taxes because their central management and control was outside the country. It consisted of setting up two Irish subsidiaries. One subsidiary would collect profits and pay large, tax deductible fees to the second Irish-registered company. This second Irish-registered company would then have its headquarters in a Caribbean country which levied no corporate tax (such as Bermuda). There is also a rule in the United States where the Internal Revenue Service ignores transactions between subsidiaries of groups that are registered in the same country. Therefore, much of the profits of the second Irish-registered but Irish tax non-resident company escape taxation. Starting January 1, 2015 no company will be allowed to set up a Double Irish tax scheme. For those already in one, they must phase out of it by 2020.
The new planned tax scheme dubbed “Knowledge Development Box” is linked to the exploitation of patents that will attract lower tax rates. Other countries such as Britain and The Netherlands implement a similar tax scheme which applies very low tax rates. This setup would allow tech companies to pay a small percentage in taxes when they license intellectual property to Irish subsidiaries. The government said it was considering a rate of 6.25 percent. Under this arrangement, the effects of “transfer pricing” would be reduced but not entirely eliminated. While this arrangement is better than a zero percent rate, it is still considered a very low tax rate.
I think that Ireland is making the right move by getting rid of its old tax scheme. Although these tax schemes are great for the companies, the United States is losing billions of dollars of taxable income from foreign profits. In a time of economic recovery, the United States and especially countries in the European Union can use this vital income. Although I think the new tax scheme is not a drastic improvement, it is a step in the right direction. In the long run, with a purported 6.25% tax rate under the new plan, billions of dollars from tech giants such as Google will be taxable. Also, the new tax scheme will still allow Ireland to continue to compete for international investment instead of losing all of its investors.
Although it is an improvement in Ireland’s tax structure, do you think it is enough? Do you think the change in Ireland’s tax scheme will drive these major companies away from the country and cause Ireland to lose international investments? Should we leave tech companies such as Google and Apple alone and applaud them for being so tax savvy?