What is the ‘Double Irish with a Dutch Sandwich’?

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I have been indexing my Quora answers of late. I came across a particularly interesting one which I thought I should share with a wider audience. So, here’s a light weekend read. Hopefully, you will have learnt something new and interesting.


‘Double Irish with a Dutch Sandwich’ is a tax-avoidance strategy famously employed by corporations such as Facebook, Apple and Alphabet (Parent company of Google) in order to minimize the tax they pay on their profits. In technical terms, it’s called a ‘Base Erosion and Profit Sharing’ (BEPS) tool.






These are just recent examples. This strategy has been employed by several multi-national corporations since the 1980s. By 2015, it was estimated that the amount so avoided reached a gargantuan $1 Trillion.

I personally like to call it the ‘Double Irish with a Dutch Sandwich and a Cherry on Top’. Here’s how it works.

The First Irish


Let’s say that there exists a company called Banana, incorporated in the USA. Banana Inc., begins by setting up a company in Ireland, say the First Irish Banana Inc., It then transfers all of its Intellectual Property Rights to the said company.


First Irish Banana Inc., although physically existing in Ireland, is registered and managed from a tax haven like Bermuda.



The Second Irish

First Irish Banana Inc., in turn sets up another company, say the Second Irish Banana Inc., and allows it to use its IP Rights in exchange for Royalties.


Where does Second Irish Banana Inc., get the money to pay the Royalties? Well, Second Irish Banana Inc., distributes the IP Rights to the affiliate/subsidiaries of Banana Inc., In turn, it receives Royalties too from them.

Then Banana Inc., Affiliates conduct the regular business of Banana Inc., i.e. They sell products and services to its customers, thereby generating Revenues.




This initial set-up is called the ‘Double Irish’.

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The Dutch Sandwich

To top it off, Second Irish Banana Inc., creates another intermediate company, say Dutch Sandwich Banana Inc., in another European Union country (Say, the Netherlands). The Royalty payments it owes to First Irish Banana Inc., are routed through this new intermediate company.



A Cherry on Top

To round things off, Banana Inc., declares that all the Intellectual Property it owns was jointly developed with First Irish Banana Inc.,



The Tax Strategy

So, what’s the use of this seemingly confusing set-up? The blunt answer is: To utilize the holes in the Tax Codes of different countries and virtually eliminate tax payments. Working backwards, let’s see how this can be done.

  1. Taxes are levied on Profits
    1. The company which serves as the last link of the chain is shown to operate with losses or very little profits. This way, no taxes or very little taxes need to be paid by it. It’s easy too, since it’s a shell corporation existing only as a medium to route the Revenues.
    2. That is to say, Second Irish Banana Inc., exists only for the purpose of transferring all the Revenues it receives as Royalties from all the Banana Inc., Affiliates to First Irish Banana Inc.,
  2. Irish Tax Laws rule that Royalty payments between two Irish companies are taxable
    1. This becomes a problem in the plain vanilla ‘Double Irish’ set-up.
    2. Enter the Dutch Sandwich. Irish Tax Laws charge no tax on Royalty payments between an Irish company and a fellow European Union country.
    3. In our example, Dutch Sandwich Banana Inc., is created in the Netherlands solely for the purpose of re-routing the Royalty payments from Second Irish Banana Inc., to First Irish Banana Inc., completely tax-free.
  3. Tax Havens charge zero tax
    1. However, Irish Tax Laws are such that companies are allowed to be operated from a tax haven only if they hold another tax resident company in Ireland.
    2. So, Banana Inc., creates Second Irish Banana Inc., specifically for the purpose of registering First Irish Banana Inc., as a Bermudan company, which is not liable to pay taxes on any of its operations, including the receipt of Royalties.
    3. As an additional benefit, no tax is levied in the USA on the money received from a tax haven like Bermuda, unless it is by way of dividends (Which is obviously not the case here).
  4. Royalties from a foreign subsidiary are taxed in the USA
    1. Laws in the USA treat all foreign subsidiaries and step-downs as ‘Controlled Foreign Corporation’ (CFC).
    2. Royalties are classified as ‘Passive Income’ under the US Law and any such amount received by the parent from a CFC are taxed in the USA.
    3. By Banana Inc., announcing that the Intellectual Property rights are jointly developed, First Irish Banana Inc., becomes a US resident and not a CFC.
    4. So, Royalties received from First Irish Banana Inc., are no longer classified as ‘Passive Income’ under the US Law and hence, not taxed in the hands of either company.



To avoid severe suspicion, peanuts of taxes are usually paid at several places in the chain. However, ultimately, a large chunk of the profits are sent back to the parent company safe and sound.

The Aftermath

After a lot of push, the EU forced Ireland to address this blatantly obvious issue. Obliging, Ireland amended its Laws in October 2014 to mandate that companies registered in Ireland need to pay taxes there compulsorily, starting from January 2015. However, it has allowed a grace period until 2020, within which all such complex corporate structures should be replaced with simpler ones. Large US corporations like Apple, Alphabet, Facebook and Pfizer will be the most affected by the new rules.



However, the on-going street talk is that these companies will find different ways to continue avoiding their tax liabilities, such as the Single Malt and CAIA.



Old habits die hard, I guess.

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Dinesh Sairam
Dinesh: Investor | Risk Consultant | Finance Geek | Writer @Quora | Blogger | Poet | MBA from XIME
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