Ireland leaves the door ajar for artful tax dodgers

Ireland has finally bowed to international pressure and abolished every multinational's favourite tax loophole, the "double Irish". But with the country's best hope for prosperity being foreign investment, don't be surprised if it comes up with some alternative tax incentives in the near future.

The double Irish is the most notorious of tax avoidance schemes, so-called because it enables multinationals to route profits through Ireland to tax havens.

Mostly used by American technology and pharmaceutical groups, it involves transferring royalty payments for intellectual property to an Irish subsidiary and then routing them through another subsidiary registered in Ireland but that is tax resident in a tax haven such as Bermuda.

The loophole allows companies to radically cut their effective tax rates to the low single digits. And when combined with the ‘Dutch sandwich', where the transfer between the two Irish companies goes via another subsidiary in the Netherlands, it further reduces the amount of tax paid.

Under pressure from the EU, US and OECD, Irish finance minister Michael Noonan confirmed this week that the double Irish will be abolished from next year, with the requirement that all new companies registered in Ireland will have to be tax-resident in the country.

But for those already in on the game, there will be a very lengthy transition period: six years, in fact. This will allow them enough time to amend their accounting structures -- or find a new way of avoiding tax.

It's evident that Ireland isn't just feeling the heat from countries worried that it's stealing their tax dollars. The transition period was supposed to be just four years, but was pushed out following lobbying from pharmaceutical firms, which were worried that the initial timeframe was too short. Right.

The closure of the loophole wasn't much of a surprise. It had been flagged in the Irish media and comes as a global crackdown on tax avoidance gathers pace. Indeed, the EU is currently probing Apple's tax arrangements in the country that were agreed upon in 1991 on suspicions it amounted to state aid. It also follows the closure of another loophole last year that firms incorporated in Ireland didn't have to have any registered tax domicile.

But it seems the Irish may have another trick or two up their sleeve.

In the document outlining the changes to the tax code, Competing in a changing world: a road map for Ireland's tax competitiveness, the new corporate tax residence rule is described as a 'default' rule, leaving scope for alternative rules to be applied, or for there to be exceptions to the default rule. Thus multinationals may still be able to shift profits through Ireland to avoid paying tax.  

And at the same time that Ireland closes the door on the double Irish, it's also opening another one with plans to introduce a 'knowledge box'. Known in other countries as a patent box, this will offer companies big incentives to develop new technology in Ireland, ensuring the multinationals don't skip out of the country and take their jobs with them.

Patent boxes aren't new. The UK introduced its own patent-box scheme last year, offering companies a 10 per cent tax rate on profits coming from newly patented technology. Similar schemes can also be found in the Netherlands, Belgium and Luxembourg.

Ireland could potentially undercut these countries and again employ a minimal tax rate for its ‘knowledge box'. Indeed, the same scheme in the Netherlands has a 5 per cent tax rate, which sounds right up Ireland's alley.

In the document, Ireland also made clear its intention to continue its fierce competitiveness in attracting multinationals, albeit within the rules.

“Now is the right time for Ireland to take stock of recent international tax developments and plot out its strategic direction for the future that will ensure a sustainable and competitive tax regime that plays  by the rules but also plays to win for foreign direct investment,” it said.

Outsiders should expect nothing less. In a small country with few natural resources, Ireland's best hope for prosperity is to keep attracting the big technology companies. But Brussels will be watching closely.