Definition
The Double Irish With a Dutch Sandwich is a tax avoidance strategy used by certain corporations. Essentially, the company uses Irish and Dutch subsidiaries to shift profits to low or no tax jurisdictions, reducing their overall corporate tax obligations. It involves two Irish companies and a Dutch one in complex transactions that exploit differences in the tax laws of the countries involved.
Phonetic
Double Irish With A Dutch Sandwich: _Dʌbəl aɪrɪʃ wɪð ə dʌʧ sændwɪʧ_
Key Takeaways
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- Double Irish With A Dutch Sandwich is a controversial tax avoidance strategy used by certain large corporations. It involves funneling profits through different countries, specifically Ireland and the Netherlands, to reduce tax liability.
- The method involves two Irish companies and one Dutch. The first Irish company is managed and controlled from a country with which Ireland has a tax treaty, the profits are then transferred to a Dutch company and then finally to a second Irish company headquartered in a tax haven.
- While it is legal, it has come under scrutiny for being unethical, as it allows companies to avoid paying taxes in countries where a significant portion of their business operations occur. Several companies have been critiqued for using this strategy, prompting calls for changes in international tax law.
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Importance
The “Double Irish With a Dutch Sandwich” is an important business/finance term because it refers to a legal tax strategy that some multinational corporations use to reduce their tax liabilities. It involves the use of a combination of Irish and Dutch subsidiary companies to shift profits to low or no tax jurisdictions. The company’s revenues are routed through these subsidiaries, thereby lowering their overall tax bill. This can result in substantial savings for multinational corporations, but it has also been criticized for contributing to the erosion of tax bases in higher-tax countries. The enforcement of new tax laws by Ireland in 2015 sought to curtail its use, although companies existing arrangements can remain in place until 2020.
Explanation
The “Double Irish with a Dutch Sandwich” is a tax avoidance strategy thoughtfully designed by multinational corporations with strategic interests in reducing their overall tax liability. The primary purpose of this controversial yet legal strategy is to shift profits to jurisdictions where they are taxed at lower rates or not at all. These strategic tax maneuvers are supposed to lessen the corporation’s overall tax load, thereby increasing its profits after tax and investing capability.The concept behind this strategy basically involves two Irish companies and a Dutch entity employed to shroud a portion of the corporation’s profits. Thus, the ‘Double Irish with a Dutch Sandwich’ terminology. Initially, revenue earned from the sales of products/services is transferred to an Irish company, then routed to a Dutch firm, and finally transferred into a second Irish company located in a tax haven country. Given the international differences in tax codes and leniencies in certain jurisdictions like Ireland or the Netherlands, it enables corporations, especially corporates with substantial revenues from intellectual properties, to exploit them and bypass heavy taxation.
Examples
The Double Irish With a Dutch Sandwich is a tax avoidance strategy that some multinational corporations use to cut their tax bills. This strategy uses the tax laws of three different countries, Ireland, the Netherlands, and typically a low to no-tax jurisdiction such as Bermuda or Cayman Islands. While legal, it has been the subject of criticism and controversy. Here are three real-world examples:1. Google: Among the most notable companies to use this tax arrangement was Google. Between 2007 and 2010, Google used the Double Irish with a Dutch Sandwich to cut its overseas tax rate to 2.4 percent, saving billions in taxes according to Bloomberg.2. Apple: According to a U.S. Senate inquiry in 2013, Apple utilized the Double Irish with a Dutch Sandwich strategy to pay minimal taxes on earnings outside America. The report claimed that Apple directed billions of dollars in profits into Irish subsidiaries with no tax residency anywhere in the world, sharply reducing its tax bill.3. Facebook: Facebook reportedly used this taxation structure to funnel profits through its Irish subsidiaries and onward to the Cayman Islands, cutting its tax bill significantly.It’s important to note that due to pressure from the EU and changes to Irish law, the Double Irish arrangement has been phased out for new setups since 2015 and will be completely prohibited after 2020. Moreover, many companies have since altered their tax strategies in response to the public criticism and legal changes.
Frequently Asked Questions(FAQ)
What is a Double Irish With a Dutch Sandwich?
The Double Irish With a Dutch Sandwich is a tax avoidance technique employed by certain large corporations, involving the use of a combination of Irish and Dutch subsidiary companies to shift profits to low or no-tax jurisdictions.
How does the Double Irish With a Dutch Sandwich strategy work?
This strategy involves using two Irish entities and one Dutch entity. Profits are moved from one Irish company to a Dutch company, then back to a second Irish company that is typically headquartered in a taxation haven. This structure enables certain corporations to reduce their overall corporate tax obligations significantly.
Is Double Irish With a Dutch Sandwich a legal practice?
While it is considered a legal way to reduce a company’s tax liabilities, many view it as aggressive tax avoidance. As such, it has been the subject of criticism and international reforms, especially by the EU and OECD.
What kinds of companies commonly use this strategy?
Double Irish With a Dutch Sandwich is a technique primarily used by multinational corporations, specifically tech and pharmaceutical companies, because these businesses can easily move intellectual property, a key asset, between different entities.
Has there been any backlash or reforms against this strategy?
Yes, due to criticism and increased scrutiny of such tax avoidance strategies, Ireland announced in 2014 that it would phase out the ‘Double Irish’ arrangement, and as of 2020, all existing structures will no longer be able to use this strategy.
Why is it called Double Irish With a Dutch Sandwich?
The name of this strategy refers to the two Irish companies and one Dutch company that are used to execute it. The Irish companies are the bread and the Dutch company is the filling , hence the name Double Irish with a Dutch Sandwich.
What is the purpose of using a Dutch Sandwich in this strategy?
The Dutch Sandwich aspect is used as a conduit between the two Irish entities. Dutch tax law allows for the transfer of royalties to tax havens without incurring taxes, thus making the overall scheme more effective in reducing tax liabilities.
Despite its phase-out, can companies still leverage similar tax strategies?
Yes, some multinational corporations have been reported to adopt similar tax avoidance maneuvers, although the rules and regulations have become stricter. It is essential for organizations to obtain qualified tax law advice when considering complex international tax strategies.
Related Finance Terms
- Tax Avoidance: Legal use of tax laws to reduce a company’s tax expenses.
- Offshore Corporation: A company that operates outside of its incorporated jurisdiction for certain tax benefits.
- Intellectual Property: Refers to creations of the mind like inventions, literary and artistic works, designs, symbols, names, and images used in commerce.
- Royalty Payments: Payment to an owner for the use of property, especially patents, copyrighted works, franchises, or natural resources.
- Transfer Pricing: Prices charged for goods, services or intellectual property provided by one part of a multicorporational entity to another part of same entity, often for the purpose of shifting profits to jurisdictions with lower tax rates.
