The Double Irish Dutch Sandwich
FaceBook paid just £4 327 in Corporation Tax
last year, whilst Starbucks has only paid £8.56 bn in Corporation Tax since
1998, when it started trading in the UK. However, interestingly, their methods
may have been perfectly legal. The mechanism: the 'Double Irish and Dutch
Sandwich'.
Corporation Tax is a tax on profits.
Therefore, firms such as Google, Apple and Facebook want to ensure that the
difference between their sales revenue and their costs is as small as possible.
One way of ensuring this is for the US headquarters to finance the subsidiary
company in the UK. This would mean that the subsidiary company would need to
pay interest to the US HQ. As the US HQ sets the interest rate it could make
the interest rate as large as possible in order to absorb UK profit by
increasing the UK company’s costs. However, this inter-company interest charge should not be too large because HM
Revenue and Customs has the right to question absurdly high interest rates, for
example a rate of 50pc.
A further strategy employed is setting up a subsidiary company in the Netherlands,
where the tax rate is much lower. Therefore, royalty agreements could be made
in the Netherlands. This subsidiary then charges the UK company in the UK for
using the company’s brand. This figure is usually a percentage of the sales
revenue. Therefore, this increases the costs for the UK company and so
decreases the profits, meaning that less Corporation Tax needs to be paid.
Moreover, a further method used by global
companies is to carry forward net losses. This essentially means that the UK
company’s profits are reduced when they take into account any past losses that
they made in previous years.
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| Figure 2: How to decrease revenue and so decrease profits |
A further strategy employed by Google and
other Silicon Valley companies is the ‘Double Irish and Dutch Sandwich’. Figure 3 below outlines this mechanism.
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| Figure 3: A 'Double Irish and Dutch Sandwich' |
Google’s European HQ is in Dublin and this
company has a subsidiary in Bermuda, the Google Ireland Holding. Irish law
states that profits on subsidiary companies is taxable, but they are taxable in
the country in which it is based- in Google’s case this is Bermuda. However,
the Corporation Tax rate in Bermuda is 0pc, meaning that Google does not need to
pay Corporation Tax. In order to shift profits to Bermuda, and avoid further
taxes, Google uses another subsidiary company- Google Netherlands BV. Due to
European laws, Google does not need to pay withholding tax when it moves
revenue to the Netherlands, and the Dutch company also does not need to pay
withholding tax when it moves revenue abroad.
However, as of January 2015 for new
corporations, and 2020 for existing corporations, Irish companies must be tax
residents in Ireland. This effectively means that the Double Irish scenario
cannot operate. Osborne’s March Budget also introduced a tax on “diverted profits” meaning that such a scenario cannot
operate in the UK. This should increase government revenue by £3.1bn over 5
years. This is a step in the right direction; it will encourage a more
transparent environment in the UK. Coupled with lower Corporation Tax rates,
this should decrease the incentive for firms to offshore, thus increasing
revenues for the government.
Figure 1: http://i.imgur.com/jBOYAGF.png
