The Double Irish Arrangement: An In-depth Analysis of One of the Most Controversial Tax Strategies

Introduction

The term 'double Irish arrangement' has over time become synonymous with tax optimization strategies that are pursued by multinational companies in the quest to minimize their tax liabilities. Borrowing its origin from the early 2000s, this strategy took advantage of the gaps in international tax laws with a particular focus on Ireland and other jurisdictions, such as the United States. Whereas this has saved corporations a fortune in taxes, Value-added tax, it has also raised eyebrows among governments and the public in equal measure. The paper will explore the mechanics of the Double Irish arrangement, implications for businesses and economies, recent regulatory changes, and the future of international tax planning.

What Is the Double Irish Arrangement?

Structure of the Double Irish Arrangement

Typically, the Double Irish arrangement involves creating two Irish companies:

• Company A: This holds IP rights and is often managed and controlled from a low-tax jurisdiction, such as Bermuda or the Cayman Islands. Since it is registered in a low-tax area, this would mean Company A does not have to pay Irish corporate tax on profits.
• Company B: Operates in higher-tax jurisdictions, takes a license to the IP from Company A, derives revenues from its operations, and pays Company A substantial licensing fees.

This structure gives companies the flexibility to shift their profits from high-tax jurisdictions to low- or no-tax jurisdictions for overall low-tax liabilities. In the process of paying hefty licensing fees, Company B reduces its taxable income, while Company A is able to enjoy very minimal tax obligations.

How It Works

Let us assume, for the sake of the explanation, a technology company called TechGlobal that wants to set up its hub in Ireland.

TechGlobal sets up an Irish Company A, which will supposedly house its IP. However, it operates this company from Bermuda, rendering it non-resident for all tax purposes in Ireland.

Company B is created and operated in Ireland, where the business operations are conducted. This company will pay licensing fees to Company A for the use of its IP.

This will, in turn, allow TechGlobal to report substantially lower profits in the high-tax jurisdictions where it operates, thereby minimizing its tax exposure.

Benefits of the Double Irish Arrangement

For Corporations

• Significant tax savings: an immediate benefit that comes with the Double Irish arrangement is the great reduction in effective tax rates. Profits shifted into low-tax jurisdictions allowing corporations to hold onto a larger part of their earnings.
• Increased Cash Flow: Money saved in the form of reduced liabilities can be reinvested into the business for enhanced growth opportunities and shareholder returns.
• Competitive Advantage: Such companies can give more competitive pricing or reinvest the money in R&D, thereby having an edge over their competition that is not aggressive in their tax strategy.
• Legality and Compliance: The Double Irish arrangement, if appropriately structured, is within the legal ambit of Ireland as well as the jurisdictions of the respective companies hence an attractive avenue to the corporations.

For Economies

Whereas corporations benefit, the Double Irish arrangement has some vast adverse effects on national economies:

• Tax Base Erosion: the corporation's revenues fall in high-tax countries, as businesses shift their profits into countries with favorable tax rates.
• Public outcry: has mounted over the past several years as major corporations have been perceived to avoid their bills, demands for reform, and transparency.
• Legislative reaction: The authorities are increasingly adopting laws to shut loopholes and aggressive tax planning, hence the revisiting of the existing tax structures.

HISTORY AND ITS EVOLUTION

Emergence of the Double Irish Arrangement

The Double Irish structure began to be adopted more widely in the early 2000s, led mainly by technology companies like Google, Apple, and Facebook. Companies created various tax structures where companies exploited particular loopholes present within both U.S. and Irish tax laws. The fact that Ireland had a low corporate tax rate of 12.5% and was allowed to be managed from countries with low taxes created a perfect atmosphere for tax optimization.

Regulatory Changes

Some changes have indeed been made in response to increased scrutiny and the erosion of tax bases. These include, among others:

• 2015 Irish Tax Reforms: The Irish government announced a number of measures aimed at reducing the use of the Double Irish arrangement. Changes included requirements that for tax residency, companies would need to have substantial management and control within Ireland.
• OECD BEPS Initiative: The BEPS project under the OECD aims to address aggressive tax planning practices using gaps and mismatches of tax rules. Indeed, it has led many countries to promulgate new tax laws with a view to preventing profit shifting.
• Closure to New Arrangements: The Double Irish arrangement has not been available for new entities since January 2020. Existing arrangements were allowed to continue until the end of 2021, and companies revisited their tax strategies in light of this change.

Aftermath of Regulatory Changes

For Companies

With the phasing out of the Double Irish arrangement, the paradigm that multinational corporations operate under shifts:

• Operation Restructuring: Companies that were dependent upon the Double Irish scheme would have to reconsider their corporate structure. Many are contemplating alternatives like the Dutch Sandwich, wherein the gains flow to a Dutch subsidiary before retransferring the same to the low-tax jurisdictions.
• Increased Compliance Costs: The shifting sands on the regulatory mechanisms could lead to heightened compliance costs whereby businesses attempt to ensure themselves that they remain within the ambit of the new laws and regulations about taxes.
• The substance of Operations: With this, companies may have to show more substance in their operations in low-tax jurisdictions as a means of evading the scrutiny of the tax authorities.

For Governments

The change in regulations due to the phasing-out of the Double Irish arrangement has wider implications for governments in that:

• Stronger Tax Base: By closing loopholes, countries can safeguard their tax bases and raise more revenues that could be put to use in public services and infrastructure.
• International Cooperation: It is a new era as far as international taxation is concerned in terms of how governments are showing more transparency and cooperation to combat tax avoidance.

Current Alternatives to the Double Irish Arrangement

Following the obsoletion of the Double Irish arrangement, corporations consider a number of alternatives:

• The Dutch Sandwich: The so-called Dutch Sandwich strategy has the profits routed through a Dutch company to take advantage of favorable tax treaties and avoid withholding taxes.
• IP Migration: Some companies are transferring their IP to low- or no-tax jurisdictions, just like under the old Double Irish arrangement.
• Controlled Foreign Corporation Rules: The multinationals have been restructuring their operations in such a way as to have minimal exposure to CFC rules back in their respective home countries.

The Future of International Taxation

Global Minimum Tax: The Organization for Economic Cooperation and Development recommended a minimum corporate tax to countries worldwide in its bid to deter profit-shifting practices.

More Transparency and Reporting: There is an increasing tide of demand for transparency in the matter of international taxation.

Continuing Problems: With the improvement in the global landscape of taxation, the challenges are not over.

Conclusion

The Double Irish arrangement has been an important example of the use of structures by multinational corporations in optimizing their tax liabilities. Since its phase-out for new entities, it has remained relevant to discourses on international taxation.