Death of the Double Irish

BONO may front one of the world’s most popular rock bands, but the U2 singer did not earn many new fans when he recently defended Ireland’s controversial tax policies, which are widely seen as helping multinationals to avoid paying their fair share. Even Ireland’s government seems to be having doubts. On October 14th it announced plans to close the country’s biggest loophole, the “Double Irish”.

The Double Irish allows companies to shift their profits from high-tax countries to havens. This is typically done by transferring royalty payments for intellectual property to a firm in Ireland, then on to another Irish-registered subsidiary that is tax-resident in a country with no corporate-income tax, such as Bermuda. Users can thereby cut their effective tax rate—perfectly legally—far below Ireland’s already low 12.5% rate, in some cases down to less than 2%. The ruse is popular with American computing and pharmaceutical firms.

From January all new companies domiciled in Ireland will also have to be tax-residents there, making the Double Irish impossible. Ireland is acting under pressure from America, the European Commission and the OECD, which are working on multilateral reform of international tax rules to curb avoidance. This is not the first time it has buckled. Last year it made it illegal for firms registered in Ireland to declare themselves stateless for tax purposes.

The retreat has kindled fears that foreign firms, many of which moved to Ireland largely for its tax policies, will leave for more accommodating climes. (As it is, a clampdown on avoidance in America seems to have deterred AbbVie, a drugs firm, from taking over Shire, a rival based in Ireland.) Yet the government is giving with one hand even as it takes with the other. On the same day it did away with the Double Irish, it created a “knowledge development box”, which will allow firms to pay a lower tax rate on profits from intellectual property booked in Ireland. The OECD has tried, unsuccessfully, to limit this type of tax benefit, which is also known as a “patent box”. Moreover, the Double Irish won’t die overnight. Companies already registered in Ireland are being given six years to alter their accounting structures.

Ireland’s move will raise pressure on other countries that are seen as enablers of rampant tax avoidance, even if they are not themselves havens, thanks to their business-friendly networks of tax treaties. Chief among them are Luxembourg and the Netherlands. Bono knows all about the fiscal delights of the Low Countries: in 2006, U2 moved the firm that houses its publishing royalties from Ireland to the Netherlands, largely for tax reasons.