2024-09-17 15:51:04
conversableeconomist.com
I wrote a decade ago about the Double Irish Dutch Sandwich, a strategy for corporations to evade taxes that was widespread and large-scale enough to come to the attention of the International Monetary Fund. But due to various changes in national and international tax agreements, the strategy seems to have faded substantially. Ana Maria Santacreu and Samuel Moore of the St. Louis Fed provide some background in “Unpacking Discrepancies in American and Irish Royalty Reporting” (August 08, 2024).
For those who don’t keep up to speed on the details of international tax evasion schemes, Santacreu and Moore describe the Double Irish Dutch Sandwich works like this:
The Double Irish with a Dutch Sandwich tax scheme, as illustrated in the third figure, involved a complex arrangement between a U.S. parent company (USP) and three foreign subsidiaries. The first Irish subsidiary (I1) was incorporated in Ireland but managed from Bermuda, allowing it to avoid both Irish and U.S. taxes. The second Irish subsidiary (I2) was incorporated and managed in Ireland. The purpose of I2 is to control foreign distribution and collect income. A Dutch subsidiary (N) acted as an intermediary between I2 and I1 to avoid Irish taxes.
The scheme worked by exploiting specific provisions in Irish and U.S. tax laws. A USP would transfer intellectual property ownership to I1. Then, I2 would sublicense the intellectual property from I1 and pay royalties. These royalties would flow from I2 to N, and then from N to I1, taking advantage of European Union tax regulations. This structure allowed profits to be shifted to tax havens like Bermuda, effectively minimizing tax liabilities for the entire corporate structure.
However, a combination of Irish tax reforms in 2015 and changes in the US Tax Cuts and Jobs Act of 2017 made this strategy ineffective: “Consequently, Irish companies began paying royalties directly to American parent companies instead of routing them through tax havens.”
The shifts in royalty payments tell the story. This figure shows royalty payments by Irish companies to the US, which doubled from since 2019 to 2021.
Conversely, tax payments from Ireland and from Netherlands to Bermuda, well-known for it’s near-zero corporate taxes, went way down–showing a decilne in corporate profits being routed through Bermuda.
I’m sure the international tax lawyers around the world are strategizing new tax evasion strategies even as I write these words. But it’s worth remembering that there are two large costs at play here. The obvious loss is to government revenue, but the more subtle and still very real loss is the diversion of high-powered talent from what could have been gains in efficiency and productivity to focus instead on corporate reorganizations and tax evasion games.
Support Techcratic
If you find value in Techcratic’s insights and articles, consider supporting us with Bitcoin. Your support helps me, as a solo operator, continue delivering high-quality content while managing all the technical aspects, from server maintenance to blog writing, future updates, and improvements. Support Innovation! Thank you.
Bitcoin Address:
bc1qlszw7elx2qahjwvaryh0tkgg8y68enw30gpvge
Please verify this address before sending funds.
Bitcoin QR Code
Simply scan the QR code below to support Techcratic.
Please read the Privacy and Security Disclaimer on how Techcratic handles your support.
Disclaimer: As an Amazon Associate, Techcratic may earn from qualifying purchases.