The legacy of the “Double Irish” loophole

The “Double Irish” was one of the most notorious tax loopholes, used by large firms for decades since the 1990s. It was base erosion and profit shifting (BEPS) method used by many notable entities, including but not limited to Apple, Google, Microsoft, and more. Though closed in 2014, the loophole remained open to firms already using it until 2020. Even since its closure, there are concerns that firms that had used it previously will just shift to using different methods. Overall, this and similar methods used have had a substantial impact on Ireland’s financial system and records, something that is still being addressed today.

The Double Irish was conducted via the following steps. First, a U.S. corporate entity would develop a product or software for a price, and then sell it to a wholly owned subsidiary in Bermuda. Next, the company in Bermuda would revalue it as an intangible asset of a far greater price, as Bermuda is tax free. The Bermuda subsidiary would then license it to another subsidiary in Ireland for the same price. Important to note is that this first Irish subsidiary would itself be owned by a second Irish subsidiary registered as being owned by the Bermuda subsidiary. The first Irish subsidiary would then sell it to a customer in another EU country for that price, and then use that money to pay the royalty owed to the Bermuda subsidiary, who would hold on to it in perpetuity. Finally, the Bermuda subsidiary would return it to the U.S. parent through loans.

First used by Apple in 1991, this method allowed for U.S. corporations to avoid paying their corporate taxes (35% prior to the TCJA) on patents for decades. It also impacted Irish economic figures, resulting in inflated reports on Irish GDP per capita. The distortion became so great that the Central Bank of Ireland had to introduce an entirely new measure of economic activity, the Modified Gross National Income (GNI).

Eventually, the EU forced Ireland to close this loophole starting in 2015, but firms already using it (Google, Microsoft, etc.) were allowed to continue in the same way until 2020. Methods similar but not identical to the Double Irish, like the Single Malt, remain in effect. Additionally, though the U.S.’s Tax Cut and Jobs Act (2017) was written with the intention of preventing such behavior going forward, some believe the new tax code will actually lead to an increase in U.S. corporations’ use of tax havens.

The ultimate effect of these practices and how beneficial/detrimental they are to Ireland is open to debate. On one hand, they make Ireland very attractive to international firms. However, the aforementioned economic distortion, as well as their impact on Ireland’s international reputation, might make such loopholes a net negative. Irish governance should carefully weigh these positives and negatives when thinking about future policy, to ensure Ireland remains an attractive investment for international firms while protecting its global reputation.

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