Double Irish and Dutch Sandwich Taken off the Menu

Written by Simon Marsh on 21 October 2014

The media have recently publicised the issue of tax avoidance; whether this is Jimmy Carr using an offshore tax scheme or HMRC looking to grab the cash from our bank accounts, as the government seek to fill the ‘tax gap’ of £35bn –  tax which should in theory be collected but which never reaches the Treasury. At the same time, press reports detail the minimal tax paid by Google, Apple, Microsoft, Starbucks, Yahoo and many more technology and pharmaceutical companies on the profits earned by their European businesses. 

There seems to be two different sets of rules on tax avoidance.

A big step towards changing this was taken by the Irish government this week, as part of the efforts of the OECD, the European Commission and the American government to control tax avoidance by multinational companies. A change in Irish tax law will see the end of the ‘Double Irish’ tax avoidance used by these companies, to reduce the effective tax rate on profits from Europe and elsewhere.

The Irish tax rules allowed two companies to be incorporated in Ireland, one subject to Irish Corporation Tax at 12.5% and the other company effectively stateless for tax purposes, as it was controlled from a tax haven. Into this Double Irish sandwich was placed a Dutch filling – a Dutch company which invoiced royalties to the Irish taxed company to remove all its profits. The result – all the profits appear in the tax haven largely untouched by Corporation Tax.

The change will not result in an overnight exodus of companies from Ireland; the Irish Corporation Tax rate remains 12.5% and the full impact of the removal of the Double Irish will not come in to effect until 2020. However, technology companies will no doubt be looking at other locations for their businesses meaning the Dutch filling, and also the popular alternatives offered by Luxembourg and Switzerland, will be redundant without the Double Irish sandwich.

No doubt the government will be keen to attract those companies to the UK and will point to the 10% Corporation Tax on Patents and a world beating R&D Tax Credits scheme as legitimate tax schemes and will no doubt be hoping the companies join with the rest of us in filling that £35bn gap!