Seamus Coffey: Multinational tax flowing in the  right direction

Seamus Coffey: Multinational tax flowing in the  right direction

The subsidiaries of US multinationals in Ireland have annual revenues of around €400bn.

This year had a number of high-profile developments such as the Covid-19 pandemic and the Brexit negotiations that dominated the headlines.

A change that went somewhat under the radar was the practical end of the “double-Irish with a Dutch sandwich” tax structure.

In 2019, close to €30bn of royalty payments went from Ireland to The Netherlands and then on to no-tax jurisdictions such as Bermuda. 

Figures for the first half of 2020 suggest this year the figure will fall significantly short of €10bn.

These flows from Ireland to The Netherlands almost exclusively originate from the subsidiaries of US multinational companies operating here and are royalty payments for the license to sell the products, brands and technologies of these behemoth companies in markets outside the US.

These include pharmaceutical medicines and computer chips which are manufactured at Irish plants and online advertising sold on platforms such as Google and Facebook which have their international headquarters in Ireland. 

All told, the subsidiaries of US multinationals in Ireland have annual revenues of around €400bn.

It is non-controversial that the Irish operations of these companies should pay for the technologies and brands they use to generate these revenues. 

In 2019, outbound royalties from Ireland totalled €85bn and on their own were probably enough to offset around 20% of the sales revenues of US multinationals flowing into Ireland.

Controversial route

What is controversial is where these royalties ended up. As noted above, most of the royalties paid to The Netherlands were subsequently re-routed to Bermuda.

The reason for the diversion via The Netherlands is that, up to 2013, Ireland levied a withholding tax on outbound royalty payments to non-treaty countries with some of the payment withheld from the recipient and paid to the Revenue Commissioners to cover possible tax liabilities. 

Residents of non-treaty countries would not get this money back.

There was a fairly easy workaround for companies to avoid this. 

Patents and Royalties directive

Under the EU’s Patents and Royalties directive, EU member states cannot levy a withholding tax on royalty payments made to a resident of another member state.

The Netherlands does not levy a withholding tax on outbound payments to locations such as Bermuda. 

So, the Dutch sandwich was put between the Ireland and Bermuda parts of the structure. After 2013 this was not necessary.

A central issue, though, is that these are supposed to be payments for technologies developed in the US. 

So, while the Irish subsidiaries are correctly paying for the use of technology generated from R&D undertaken elsewhere, these payments were going to locations where the US companies had no substance

It is only US companies with these structures as they depended on provisions in the US tax code. German companies did not face the same tax rules. 

The primary tax payments affected by these structures was the deferral, sometimes indefinitely, of US tax. 

The structures had no impact on the amount of tax due in market countries where the customers of these companies are located.

There are a number of reasons why these strategies will no longer be effective.

The OECD’s BEPS project means that such payments to jurisdictions which lack the substance to produce the service or technology being paid for may no longer be tax deductible. 

The Tax Cuts and Jobs Act (TCJA), passed by the US Congress, abolished the principle of deferral in the US tax code which was a primary motivation for the creation of these structures.

The structures achieved their aim. Without them these US companies would have paid US tax of up to 35% on the relevant profits. 

The companies did not repatriate the profits to the US and engineered a deferral of the US tax due.

In part, this was in the hope that there would be an amnesty for companies to return the profits to the US but subject to a much lower tax rate. 

The Tax Cuts and Jobs Act delivered that sweetener.

One of the most high-profile companies with a “double Irish” structure was Google. 

But this time last year a Google spokesperson said: “We’re now simplifying our corporate structure and will licence our intellectual property from the US, not Bermuda.” 

This change became effective on January 1 2020 and the impact can be readily seen in Ireland’s Balance of Payments data compiled by the Central Statistics Office. 

In the final quarter of 2019, there was an €8.1bn flow of royalty payments from Ireland to The Netherlands. Company filings indicate that the bulk of this can be attributed to Google. 

The latest data show that in the second quarter of 2020 these payments to The Netherlands had fallen to €1.9bn.

This change doesn’t make a huge amount of difference to Google’s operations in Ireland or to the corporate tax due in market countries —  in the short-term at any rate. 

Google’s subsidiary in Ireland must still pay for the right to use Google’s technology. 

As the company, itself, has said it will now licence its intellectual property from the US.

Reduction in payments

Again, we can see the impact of this in the CSO’s data. In the final quarter of 2019, royalty payments from Ireland to the US were €3.4bn. In the first quarter of 2020 they jumped to €8.6bn. 

The reduction in the payments to The Netherlands was pretty much fully offset by an increase in payments to the US. Just as Google said it would.

So, now, rather than being parked offshore in no-tax Bermuda — as was allowed under the old US tax regime —  this income will be taxed under the provisions of the TCJA though will likely be at a rate that is less than the current 21% headline rate of the federal US corporate income tax.

And it’s not just Google making these changes. Up to recently, Facebook’s outbound royalties from Ireland were paid to the Cayman Islands —  with no stopover in The Netherlands.

Facebook has now said that: “Facebook International Holdings Unlimited is being wound up as part of a change that best aligns with our operating structure. 

In preparation for the unlimited company winding up, FIH’s assets were distributed to its US parent company.

Intellectual property licences related to our international operations have been repatriated back to the US. 

This change, which has been effective since July this year, best aligns corporate structure with where we expect to have most of our activities and people. 

We believe it is consistent with recent and upcoming tax law changes that policymakers are advocating for around the world.” 

In the first half of 2020, due in part to Google’s new structure, royalty payments from Ireland to the US were nearly €16bn.  With Facebook directing the royalty payments from its subsidiary in Ireland to the US since July rather than the Cayman Islands the amount for the full year is set to exceed €30bn 

They were €11bn in 2019.

The practical ending of the ‘double Irish’ does not mean that huge sums are not passing through Ireland but now a greater and greater share of them are ending up where the R&D that generates the technology behind the sales is actually undertaken. 

This is as it should be and should not be considered controversial.

Seamus Coffey is a UCC economist

 

More in this section

IE_logo_newsletters

Select your favourite newsletters and get the best of Irish Examiner delivered to your inbox

LOTTO RESULTS

Saturday, January 16, 2021

  • 12
  • 17
  • 22
  • 32
  • 38
  • 39
  • 40

Full Lotto draw results »