The Organisation for Economic Cooperation and Development has declared war on international tax loopholes, and the Double Irish might be the first to fall.
The Irish finance minister, Michael Noonan, is set to unveil the 2015 budget next Tuesday and it is expected to include a closure of the popular Irish tax loophole referred to as the Double Irish used by big international companies like Apple, Google, and Facebook to reduced their tax rates on foreign profits.
The NYT made a good graphic explainer a few years ago on how this works. Basically, companies in Ireland are allowed to pay royalties that amount to most of their foreign profits to nominally Irish shell corporations in tax havens like the Cayman Islands.
The profits often also pass through the Netherlands, which is called a Dutch Sandwich.
Loopholes like these are understandably unpopular internationally, and the OECD is putting pressure on its member states to start closing them. In a paper titled “Neutralising the Effects of Hybrid Mismatch Arrangements” published last month, the OECD laid out a plan to start neutralising tax loopholes around the world. The OECD would like to “ensure that profits are taxed where economic activities generating the profits are performed and where value is created,” according to the report.
Lorcan Roche Kelly at Agenda Research thinks that, for Ireland, it’s a matter of “jumping before they are pushed”. Here’s why:
First, there is considerable international pressure on Ireland to end this loophole. By ending it themselves, Ireland is in a much stronger position to defend its very low headline corporate tax rate.
Secondly, Ireland should not be disadvantaged by ending this loophole, as international moves at the OECD and G20 level mean that there should be nowhere else for international corporations to go.
With nowhere else to go, global corporations might have to — gasp — start paying taxes where they are, which could ultimately be good for the Irish economy.
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