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How to move profits to lower taxes: Tax Avoidance Strategy

Too attractive to be legal? The Dutch-Irish method

(PresseBox) (Berlin , ) Profits deriving from royalties on intellectual property, like the patents on software that run devices, are most suitable for the Dutch-Irish scheme. It is much easier for businesses earning royalties from intellectual property to move profits from high-tax jurisdictions to low-tax jurisdictions than it is for, say, grocery stores or automakers. A downloaded application, unlike a car, can be sold from anywhere in the world. Apple reported a profit of $34.2 billion in 2011. The Ministry of Finance in the Netherlands has calculated that, under normal circumstances, a tax bill of $5.7 billion (16.7%) should have been incurred on this profit. The use of the Dutch-Irish scheme in this case limited Apple’s tax bill to just $3.3 billion (9.6%), representing a saving of $2.4 billion (7.1%). Google, Facebook, Microsoft, and Oracle are just some of the other multinational corporations availing of the Dutch-Irish scheme.

How does it work?
First we start with two slices of bread; the so called Double Irish.

“Double Irish” arrangement
The Double Irish arrangementis a tax avoidance strategy that U.S.-based multinational corporations use to ower their corporate tax liabilities. The idea is to use payments between related entities in a corporate structure to shift income from high-tax jurisdictions to low-tax jurisdictions within the E.U.

Typically, the parent corporation in the U.S. arranges for ownership of the rights to exploit intellectual property in the E.U.to be transferred to an Irish company, often in return for the Irish company agreeing to help market or promote these products in the E.U. The Irish company receives all of the profits from exploitation of the rights in the E.U. without paying U.S. tax unless and until these profits are remitted back to the U.S.

It is called “The Double Irish” because it requires two Irish companies to complete the structure:

•The first Irish company owns the valuable E.U. rights. This company is tax resident in a tax haven, such as the Cayman Islands or Bermuda. Irish tax law provides that a company is tax resident where ist central management and control is located, not necessarily where it is incorporated, so that it is possible for the first Irish company not to be tax resident in Ireland. The first Irish company licenses the rights to a second Irish company, which is tax resident in Ireland, in return for substantial royalties or other fees.

•The second Irish company receives income from the exploitation of these rights in the E.U., but its taxable profits are low because the royalties or fees paid to the first Irish company are deductible expenses. The remaining profits are taxed at the Irish corporate tax rate of 12.5% and the royalties making their way back to the first Irish company are tax free.

For the parent corporation in the U.S., the payments between the two related Irish companies might be non-tax-deferrable and subject to current taxation as Subpart F income under the Internal Revenue Service’s Controlled Foreign Corporation regulations if the structure is not set up properly. This is avoided by organising the second Irish company as a fully owned subsidiary of the first Irish company resident in the tax haven, and then making an entity classification election for the second Irish company to be disregarded as a separate entity from its owner, the first Irish company. The payments between the two Irish companies are then ignored for U.S. tax purposes.

But why opt for the Double Irish over the Single Bermudan? Because of tax treaties. No withholding tax is operated on money transferred within the E.U. When money is transferred to an unregulated country like Bermuda, however, it suffers withholding tax at the origin country’s normal rate. But doesn’t Ireland also levy withholding tax on transfers to Bermuda? Yes, but adding some Dutch cheese to our Double Irish solves this problem.

“Dutch Sandwich” arrangement
To turn the Double Irish into a Dutch Sandwich, a third subsidiary is incorporated in the Netherlands. Instead of licensing the rights directly to the second Irish company, the first Irish company licenses them to the Dutch subsidiary, which then passes them on to the second Irish company. In this way, it is possible to pool income from the exploitation of the rights by the second Irish company in the Netherlands. And what good is that? Unlike Ireland, which operates a withholding tax, the Netherlands only takes a small fee for transferring money to the second Irish company. If the two Irish companies are thought of as “bread” and the Netherlands company as “cheese,” it is easy to see why this scheme is referred to as the “Dutch Sandwich.”

It goes without saying that schemes such as these are quite complex and require to be individually tailored by Ecovis professionals. When structured correctly, however, they make for very pleasant eating. Bon appetit!

Author
Marc Lodder, ECOVIS Lodder & Co International B.V., Den Haag, Netherlands, marc.lodder@ecovis.com

Co-Author:
David Spicer, ECOVIS BBT, Dublin, Ireland, david.spicer@ecovis.com

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ECOVIS AG Steuerberatungsgesellschaft

Ecovis is a leading global consulting firm with its origins in Continental Europe. It has over 3,800 people operating in over 43 countries. Its consulting focus and core competencies lie in the areas of tax consultation, accounting, auditing and legal advice. The particular strength of Ecovis is the combination of personal advice at a local level with the general expertise of an international and interdisciplinary network of professionals. Every Ecovis office can rely on qualified specialists in the back offices as well as on the specific industrial or national know-how of all the Ecovis experts worldwide. This diversified expertise provides clients with effective support, especially in the fields of international transactions and investments - from preparation in the client's home country to support in the target country. In its consulting work Ecovis concentrates mainly on mid-sized firms. Both nationally and internationally, its one-stop-shop concept ensures all-round support in legal, fiscal, managerial and administrative issues. The name Ecovis, a combination of the terms economy and vision, expresses both its international character and its focus on the future and growth. www.ecovis.com