Why Apple And Google Won’t Care About Irish Tax Law Changes

Ireland has this week moved to change its tax law, closing the “double Irish” tax avoidance technique widely used by multinational enterprises including Google and Microsoft.

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In very broad terms, the current Irish tax law allows a company incorporated in Ireland to be a tax resident of another country, typically a tax haven. It works as the perfect complement of the US tax law, as a subsidiary of a US multinational incorporated in Ireland can avoid taxation in both the US and Ireland.

Ireland’s Treasurer Michael Noonan claimed in the Budget speech that the corporate residency rule would be changed “to require all companies registered in Ireland to … be tax resident” of the country. The detailed legislation to implement the new rule will not been known until the government introduces its 2014 Finance Bill. However, based on available information, there are at least two catches.

Loopholes remain

First, existing companies incorporated in Ireland will enjoy a long “grandfather” period. In particular, the new rule will not be applicable to these companies – including the Irish subsidiaries of Google and Microsoft – until 2021. The long time lag provides ample opportunities for multinationals to respond and restructure their tax avoidance transactions.

Second, the devil may be in the detail. The Budget is accompanied by a document published by the Irish Treasury, titled: “Competing in a Changing World: A Road Map for Ireland’s Tax Competitiveness.” According to the document, the proposed new rule will be introduced as a “default” corporate tax residence rule. In the tax world, a default rule means there will be alternative rules, or the default rule will be subject to exceptions and/or exclusions. The actual effect of the new rule will remain a mystery until the detailed provisions of the new rule are released.

The proposed change to close the “double Irish” loophole brings a feeling of déjà vu. Ireland has made similar moves in the past when international anger over its tax law became too much to bear.

Before 1999, Ireland had no statutory definition of corporate residence in its tax law. This has led to an international perception of Ireland as a tax haven. In response, the country enacted a statutory definition of corporate residence in 1999 and adopted the incorporation test. However, the definition incorporates a couple of easy escape routes for multinationals. In practice a subsidiary of a US multinational that is incorporated in Ireland will find it embarrassingly easy to avoid being regarded as an Irish resident.

Ireland reacted to international pressure again in 2013, when it amended its definition of corporate residence by inserting a provision to address the issue of “stateless” companies, which refer to companies that are not residents of any country. This change was designed specifically to target Apple’s Irish subsidiaries, and will not apply until 2015. These companies were not tax residents of any country in the world, thanks to the perfectly complementary definitions of corporate residence in Ireland and the US.

However, the scope of this provision is so limited that it does not affect the more common structure of “double Irish Dutch sandwich” adopted by many US multinationals including Google and Microsoft.