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Google employs over 2,000 people at its Dublin offices, which act as its headquarters for Europe, the Middle East and Africa. Mark Stedman/Photocall Ireland

How do Irish companies legally avoid paying billions in corporate tax?

It’s all to do with a happy coincide of tax laws in Ireland, the Netherlands, the United States and Bermuda.

ONE OF THE TOPICS that is rarely broached for discussion in Ireland ahead of the Budget is any possible change to Ireland’s 12.5 per cent rate of tax on company profits.

In fact, such is the pedestal on which Ireland’s 12.5 per cent rate is held, that the political classes united in fury when former French president Nicolas Sarkozy demanded an increase in the rate in exchange for France’s contributions to the Irish bailout.

Ireland expects to make just under €4.2 billion in tax next year – but that’s nowhere near 12.5 per cent of the revenues that companies based in Ireland will make next year.

That’s because of a tax arrangement known worldwide as the ‘Double Irish’ – a setup which makes it possible to send funds between countries with little or no tax, and funnelling money into the countries where the least tax is payable, all entirely legally.

Here’s how it works.

Multinational stew

The scheme is reliant upon a series of legal situations which, when working in harmony, allow for relatively routine tax avoidance. (Note: it should be pointed out that tax avoidance refers to an arrangement that minimises a tax bill. This is entirely different to tax evasion, which is illegal.)

There are four countries involved: Ireland, the United States, the Netherlands, and a counfrt in the Caribbean – usually Bermuda.

Each provides different ingredients for the mix – Ireland and Bermuda provide corporate tax rates, the Netherlands steps in as another EU state with conveniently generous tax laws, and the US offers laws which allow related companies to be treated as separate entities.

There are several well-known companies that use this practice – including Apple, Facebook, Google, Pfizer and Eli Lilly. For the sake of example – and because its setup is back in the news after it filed its Dutch accounts – we’ll explain by using the example of Google.

Ireland as a worldwide HQ

In practice, what happens is this. Google Ireland Ltd – with its registered address at Google’s Dublin buildings on Barrow Street, close to Grand Canal Dock – takes in all of Google’s worldwide advertising revenue, except for that of the US and Canada.

This is legitimate in Google’s case – because Google’s Dublin office serves as its headquarters for the EMEA region. That means Europe, the Middle East and Africa, which together account for pretty much all of the worldwide income.

This means that whenever an advertiser in South Africa, Dubai or Berlin pays Google to include an advert alongside its search results, the money is actually paid to Google Ireland Ltd.

The most recent accounts show that Google Ireland’s total revenue stood at €12.46 billion, and after expenses of €3.38 billion (much of which probably relates to the fees that Google pays other websites to put its ads there), it recorded a gross profit of €9.075 billion.

Making money with someone else’s stuff

However, Google Ireland Ltd makes all of its money through selling ads – which are delivered and powered by search technology that isn’t owned by Google Ireland.

This technology is legally owned by Google’s main US company, Google Inc., which can charge Google Ireland the market rate for using it. (This is known as ‘transfer pricing’ – it is considered bad practice to charge a sister company more or less than you would charge a third party.)

In 2011, according to Dutch company records seen by Bloomberg, the US company charged the Irish one about €7.5 billion for using its search technology. When other administrative expenses are thrown in, Google Ireland’s administrative expenses ran to €9.054 billion.

Remember that the gross profit for 2011 was €9.075 billion – so when you take €9.054 billion back out of this, you’re left with only €21 million in operating profit. Add in €3.5 million that it made in interest, and Google Ireland’s pre-tax profit is a mere €24.369 million.

Only then does Ireland’s 12.5 per cent corporate tax rate kick in – so Google Ireland’s corporate tax bill is only €3.046 million.

The ‘Double Irish’…

But what about the other money – the €7.5 billion that was sent to another company? As it happens, this other company is also Irish – but Irish in name only.

Irish taxation law only recognises a country as being ‘tax resident’ in Ireland – as in, required to pay tax to the Irish authorities – if its main centre of business is in Ireland.

This means that the second Google company can declare its business address to be in another country – like, say, Bermuda – and avoid having to pay tax in Dublin. (This is why the setup is known as the ‘Double Irish’ – it involves the creation of two Irish companies.)

So, if Google’s US company tells the Irish subsidiary to pay the royalties to a second Irish company, with its trading address in Bermuda, then the money is only taxed in Bermuda and not in Ireland.

This doesn’t complete the whole thing – Irish law still regulates the payment of funds between related companies which are all under the same ownership. US law has similar concerns, and also kicks in here, because each of these companies is ultimately owned by Google Inc.

From a US perspective, however, this can be avoided by having the ‘main’ company (in this case Google Ireland Ltd.) fully owned by the second (in this case Google Ireland Holdings).

As long as this is the case, the company can apply to have the two separate companies treated as a single entity – meaning transfers between the two Irish companies are seen only as an internal reassignment of funds and therefore aren’t taxable within the US.

…and the ‘Dutch sandwich’

This gets around the US difficulty, leaving only Irish laws surrounding internal transfers. This is made more complicated by the fact that the payments from the Irish company to the Bermuda one are still subject to tax.

This is where the Dutch company comes in. Ireland doesn’t levy tax on certain transfers of money to countries elsewhere in the EU, so the licencing revenue can be sent to the Netherlands without tax being paid at the Irish end.

Dutch laws, meanwhile, are generous enough to allow the funds to avoid tax on their way into the Netherlands – and to avoid tax when the funds are then moved onward.

Therefore, Google Ireland can pass its money to Google Netherlands Holdings without paying tax on it. This can then be passed onto the second ‘Irish’ company – the one which is actually taxed in Bermuda – without paying tax on it at either end.

This is why the system is also called the ‘Dutch sandwich’ – because instead of sending funds directly from one Irish-registered company to another, they are sent from an Irish one to a Dutch one and back again.

So at the end of the day, the royalties and licencing fees that Google Ireland Ltd pays to its US parent end up in Bermuda, and are taxed there.

Bermuda’s corporation tax rate is 0 per cent.

Read: Google’s Irish operation may be examined by UK tax investigation

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49 Comments
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    Mute windbag
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    Jun 8th 2020, 11:45 AM

    Two of my friends work for two different companies in the city centre and they have been told to work from home till January. Not only that but come January there companies have said more than likely they will be in office 2 days a week and home 3 forever…. They are delighted…

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    Mute ed w
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    Jun 8th 2020, 12:24 PM

    @windbag: were been told September. but as my broadband coverage of any kind is terrible I cant wait to go back and work properly although a couple of days a week might work.

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    Mute Forest Hump
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    Jun 8th 2020, 5:03 PM

    @ed w: makes sense, this should’ve been put in place years ago. Better for the environment, better for workers and there will be almost no impact to most businesses. Cafes/restaurants may lose out though

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    Mute Disabled Junkie
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    Jun 8th 2020, 12:22 PM

    If this pandemic has taught us anything it’s remote working is practical and should become part of the “new normal” where possible. Hopefully the days of having to commute to the office just to be seen are behind us.

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    Mute Rochelle
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    Jun 8th 2020, 11:34 AM

    This is what the “open up for business” crowd don’t seem to understand, most customers aren’t interested and want to avoid unessential visits and shopping.

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    Mute Sven Gilmore
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    Jun 8th 2020, 11:20 AM

    The money just isn’t there folks!!!

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    Mute Cynical
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    Jun 8th 2020, 11:29 AM
    52
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    Mute Sam Greene
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    Jun 8th 2020, 1:34 PM

    @Cynical: oh shuttup

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    Mute Dave Nomates
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    Jun 8th 2020, 4:42 PM

    @Cynical:
    AGAIN, TAKEN FROM A FACE MASK BOX.

    THIS PRODUCT IS AN EAR LOOP MASK.
    IT IS NOT A RESPIRATOR AND WILL NOT PROVIDE PROTECTION AGAINST COVID-19 (CORONA VIRUS) OR OTHER VIRUSES OR CONTAMINANTS.

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    Mute Cynical
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    Jun 8th 2020, 4:50 PM

    @Sam Greene: Bless you, its a cornerstone for all the other countries that are currently re-opening and could allow us to reduce the 2 meter distance.

    Also expressly recommended by the World Health Organisation:
    ‘The World Health Organization has said that people in Ireland should get into the habit of wearing face coverings, even if it’s not mandatory to do so.’
    https://www.rte.ie/news/coronavirus/2020/0606/1145825-coronavirus-facemasks-who/

    I’ll just wait here while you find a link for a Facebook group that links mask wearing to developing autism.

    7
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    Mute Cynical
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    Jun 8th 2020, 4:57 PM

    @Dave Nomates: Stop shouting! You do realise that is a legal disclaimer to protect from anyone that does contract the disease from claiming from them? Masks are not perfect, but they are much better than no protection.

    Depending on the type of mask used, they are between 77% and 96% effective at stopping transmission.
    https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(20)31142-9/fulltext
    https://www.livescience.com/face-masks-eye-protection-covid-19-prevention.html

    5
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    Mute Isabel Oliveira
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    Jun 8th 2020, 12:01 PM

    No widespread usage of masks in buses is ridiculous. Absolutely reckless.

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    Mute Eugene Tyson
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    Jun 8th 2020, 11:38 AM

    So… buses were less busy as they returned to normal-ish operating hours.

    Basically, they were busier when there was fewer buses. Which means returning to normal is the right thing to do, with fewer people on buses because there are more buses, is a good thing right?

    Give it a week and it will be crazy again. Especially with more workers returning. Increased traffic will be huge as more people won’t want to get public transport, and take their cars instead.

    Once the schools and colleges are back it will be bedlam. Typically when schools and colleges are off the traffic is ok anyway.

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    Mute Eileen O'Sullivan
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    Jun 8th 2020, 11:51 AM

    @Eugene Tyson: that’s a logical analysis. really well argued.

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    Mute Dave Nomates
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    Jun 8th 2020, 11:21 AM

    Great to see the majority of right thinking people refuse to wear a stupid mask,
    Insert Idiotic reply below.

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    Mute Robert
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    Jun 8th 2020, 11:24 AM

    @Dave Nomates: have a nap Dave

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    Mute Fabio Dillon
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    Jun 8th 2020, 11:27 AM

    @Dave Nomates: masks greatly reduce the spread of droplets which is what spreads flu.

    If you disagree you disagree. Majority agree. Including any doctor or biologist you will speak to.

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    Mute Eugene Tyson
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    Jun 8th 2020, 11:39 AM

    @Dave Nomates: Wear the mask, it’s only a mask.

    50
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    Mute Eileen O'Sullivan
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    Jun 8th 2020, 11:50 AM

    @Eugene Tyson: Dave’s face covering of choice is no doubt a balaclava.

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    Mute David Jordan
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    Jun 8th 2020, 11:51 AM

    @Dave Nomates: Peer review research found that people who refuse to comply with social distancing guidelines e.g. wear masks, are more likely to be psychopathic and narcissistic:

    “Psychopathic traits linked to non-compliance with social distancing guidelines amid the coronavirus pandemic”

    New research provides some initial evidence that certain antagonistic personality traits are associated with ignoring preventative measures meant to halt the spread of the novel coronavirus SARS-CoV-2.

    The study has been peer reviewed and accepted for publication in the journal Social Psychology and Personality Science. It is currently available on the PsyArXiv preprint website.

    “One potential implication from this research is that there may be a minority of people with particular personality styles (on the narcissism and psychopathy spectrum) that have a disproportionate impact on the pandemic by failing to protect themselves and others.”

    https://www.psypost.org/2020/06/psychopathic-traits-linked-to-non-compliance-with-social-distancing-guidelines-amid-the-coronavirus-pandemic-56980

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    Mute NotMyIreland
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    Jun 8th 2020, 11:52 AM

    @Dave Nomates: So childish. “stupid mask”

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    Mute Kate Flaherty
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    Jun 8th 2020, 11:54 AM

    @Dave Nomates: here’s an idiotic reply for you Braveheart, how comfortable would you be on public transport should the person beside you start to cough or sneeze and have the same idiotic attitude as yourself and choose not to wear a mask?, do you actually believe people are happy about having to wear a mask?, probably not but they do it out of respect and regard for others, so the next time you see someone wearing a mask just think they’re wearing it to protect not only themselves but you too…

    47
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    Mute Delboy79
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    Jun 8th 2020, 12:19 PM

    @David Jordan: bit OTT there David . Some people are just self conscious about attracting attention/looks by wearing a mask . It’s not the norm yet . I find myself unintentionally looking at people in Tesco who are wearing a mask .

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    Mute Gary Kearney
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    Jun 8th 2020, 12:57 PM

    @Dave Nomates: Nothing can top your idiotic remark

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    Mute SaveTheTrees
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    Jun 8th 2020, 1:18 PM

    Staggering the opening hours for retail was a great idea, props

    17
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    Mute conex
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    Jun 8th 2020, 12:42 PM

    Them numbers will quadruple…….on dole day !

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    Mute Mislav Smok
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    Jun 8th 2020, 3:49 PM

    Aha you will see how many people will lose jobs now. But stay home fake virus

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    Mute Evelyn Keely
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    Jun 8th 2020, 2:46 PM

    I beg to differ it is very busy frightenly so Luas is a hell of a lot busier I live in the city centre and can see a huge difference in footfall and transport I appriciate some are on their way to or from work but not all…just stay safe if coming into town…

    7
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