Taking a bite out of the Double Irish-Dutch Sandwich

Written By: Prem Sikka
Published: November 3, 2013 Last modified: October 30, 2013

As austerity bites, many people are struggling to keep their head above water. They are being ripped-off by energy companies and pay exorbitant rates of interest to payday lenders. However, one thing is constant and is not being addressed by the Government – organised tax avoidance, which is losing billions of pounds of much-needed tax revenues.

The House of Commons Public Accounts Committee hauled Google, Microsoft, Starbucks, Amazon and others before, but this has not been followed-up by any investigations by HM Revenue and Customs or the Treasury. No attempt has been made to close of the loopholes exploited by the companies. So the financial chicanery and usual tax avoidance continues.

Despite the dressing-down from the Public Accounts Committee, Google remains addicted to tax avoidance. Its 2012 audited accounts filed with the Securities and Exchange Commission (SEC) in the United States provides further food for thought. The company had global revenues of $50.175 billion and reported pre-tax operating profits of $13.386 billion, a profit margin of some 27 per cent. The US filing shows revenues of $4.872 billion (£3.25 billion) came from the billing addresses of customers in the United Kingdom.

However, this revenue is not entirely booked in Britain and therefore the resulting profits are not taxable in this country. The UK operations often act as part of a marketing mechanism. In many cases, the final step resulting in a sale is completed in Ireland. The resulting profits are booked in Ireland which taxes trading income at 12.5 per cent –lower than the 24 per cent levied on companies in the UK in 2012.

In contrast to the data filed with the US SEC, Google’s UK operations have reported a turnover of only £506 million and a profit of £36.2 per cent – a profit margin of barely 7 per cent. On this, Google says it paid corporate tax of £11.2 million. But this is not the full story.

Google employs about 46,000 people worldwide. Of them, about 2,500 are thought to be in Ireland. Its Irish operations reported revenues of 15.5 billion euros (£13 billion). Some 11 billion euros of this is wiped out by “administrative expenses”. A profit of 154 euros million (£131 million) is reported. On this, Google paid 17 million euros (£14.5 million) in tax. There are some clues about Google’s foreign taxes in its US filing with the SEC. It shows that Google had foreign operating income before corporate taxes of $8,075 million for 2012.

Most of this was recorded by an Irish subsidiary. The foreign corporate tax paid/payable was $358 million, equivalent to a rate of only 4.43 per cent.

So how has Google reduced its taxes? Complex corporate structures and royalty payments are a key part of Google’s strategy for shifting profits. For example, Google’s intellectual property is held in Bermuda, a British Overseas Territory. Various subsidiaries pay royalties for the use of intellectual property. This counts as a tax-deductible cost in the paying country and depletes taxable profits in places such as Ireland and the UK. The royalties are amassed in places, such as Bermuda, which does not levy corporate taxes. So the income is virtually tax-free. Bermuda does not require companies to publish audited financial statements. This opaqueness makes it impossible to track the full story about profit shifting.

The tax avoidance strategy of Google is often explained by a technique known as “Double Irish Dutch Sandwich”. The scheme arbitrages the international tax systems and is works as follows:

A multinational corporation headquartered in the US identifies an opportunity to make profit in UK and believes that its products can be delivered remotely. Company X wants to trade in the UK, but is not keen to pay taxes.

To avoid UK taxes, it sells the product directly from Ireland through company B, with a UK company, Y, providing services to customers. Y is reimbursed for its efforts on a cost basis by B. This leaves little taxable profit in the UK. The profit is mostly booked in Ireland, but X wants to shift it to a jurisdiction with even lower tax rate.

The next step is transfer the patent from which the value of the service is derived to company H incorporated in a low/no tax jurisdiction, such as Bermuda. The patent needs to be transferred at an early stage of its development. This would justify a transfer at a low value and thus avoid any taxable gain which might arise in the US. Company H can now collect royalty payments and the income is


The next problem is how to transfer profits from B to H. The US might consider H to be a sham structure and use its anti-avoidance rules (known as controlled foreign company legislation, or CFC) to bring H into tax. To avoid this, another company, A, is incorporated in Ireland, controlled by H. If all this is carefully established, the US will treat A and B as a single Irish company, not subject to its CFC rules. At the same time, the Irish rules will treat A as though it is resident in Bermuda, so that it does not pay any corporation tax. Irish law permits companies to register in Ireland without being tax resident there. So a company based in a Bermuda can be an “Irish” company.

The next problem is to get the money from B to H, while avoiding paying cross-border withholding taxes. This is fixed by setting up a conduit company S in the Netherlands. The payments from B to S and from S to A benefit from the absence of withholding on non-portfolio payments between companies in the European Union, and those from A to H benefit from the absence of withholding under domestic Dutch law.

The profits can be amassed offshore because the US will charge taxes on foreign profits when the money is paid as dividends H to X, but this tax can be postponed by not paying dividends. The parent company can still use the cash amassed abroad.

Google is not alone in using complex corporate structures and royalty programmes to shift profits and avoid taxes. Technology companies such as Apple, Twitter, Facebook, Adobe, LinkedIn, Microsoft, Abbott Laboratories and many others take advantage of Irish laws and Britain’s failure to reform its tax havens.

US Senator Carl Levin, chairman of the influential Permanent Subcommittee on Investigations, has estimated that the offshore games are losing the US Treasury some $100 billion of tax revenues each year. Earlier this year, his Committee said that Apple avoided paying taxes on some $44 billion of its earnings by using Irish companies. Levin said that Apple’s tax structures caused the US Treasury to lose $1 million per hour in tax revenues. The UK Government has failed to provide any estimate of the taxes lost.

Behind the emergence of Ireland as a tax avoidance hub are big accountancy firms – in particular, PricewaterhouseCoopers. Its partners advise multinational corporations and the government on tax policies. In September, the EU announced a probed into Ireland’s tax practices,

but there is still no investigation

into the tax avoidance industry which dreams up complex schemes to undermine the public purse.

The Double Irish Dutch Sandwich and most offshore tax avoidance schemes rely on profit shifting strategies through royalty and management programmes. All these practices are internal to companies and do not create any economic value. But they result in loss of tax revenues.

This is because corporate taxation is based on a fiction. We all know that Microsoft, Google, Apple and Twitter are integrated entities. They have a single set of shareholders, company board, logo, website and strategy. They publish one set of consolidated accounts for their worldwide operations. These accounts are signed by the directors and state that intergroup transactions – in other words, transactions within the group of companies – do not add any economic value, and thus have zero impact on corporate profits. However, for tax purposes, it is assumed that these multinationals consist of autonomous and separate legal persons. Thus Google is not treated as a single taxable entity, but as hundreds of separate taxable entities.

This fiction enables multinationals to arbitrage the international tax system and shift profits. This system of taxing corporations is the outcome of treaties and models drawn up under the League of Nations, when the multinational corporation was in its infancy.

The need for reform is urgent. For tax purposes, a multinational corporation needs to be treated as a single integrated entity. Its global profits need to be allocated to each jurisdiction, in accordance with a formula that takes account of wealth generation.

These may be sales, location of assets or the existence of employees in each country, or a combination of all three. Once allocated, then each state can tax the profits in accordance with its local social settlement. So the tax-raising powers of the state remain intact.

Under this approach, hardly any of Google’s profits will be allocated to Bermuda and little to Ireland, as these places will not have massive sales, employees or the company’s assets. This approach will also help developing countries, as their wealth cannot be siphoned off to tax havens.

The above proposal is known as unitary taxation and has much in common with the Common Consolidated Corporate Tax Base (CCCTB) proposed by the European Union for over a decade. The proposals are opposed by major corporations, big accountancy firms, the Organisation for Economic Cooperation and development and the British Government. Their preference is to tweak the current system and it is hard to see how that can address the fundamental flaws.

Unitary taxation does not constrain the mobility of capital. For example, in pursuit of low cost and higher profits, a company can still locate its factories in developing countries. What the above proposals do is to negate the effect of internal transactions that do not add any economic value.

Elements of unitary taxation already exist in some countries for internal allocation of corporate profits. For example, the US is a federal system of states, and a company may trade in California and seek to avoid taxes there by claiming that it is registered in the tax haven of Delaware. However, this is not permitted. All profits made in the US are allocated to various states, generally on the basis of sales, and each state levies tax at the appropriate rates. A similar system is also practiced in Canada and Switzerland. Thus there is already some working experience of unitary taxation. The same arrangements can easily be applied by the EU member states.

An international agreement on allocation of profits would be helpful, but is not essential. Britain already unilaterally levies taxes – flight tax, energy tax, for instance.  There is no reason why a state cannot act unilaterally to preserve its tax base. Some object to unitary taxation on the ground that it contains arbitrary allocation of profits. Such an argument ignores the fact that the current system is based on allocations through transfer pricing, a system that enables companies to determine prices for intergroup transactions. Indeed, any system of taxation of profits involves estimates and allocations.

This current system has been so arbitrary that large chunks of corporate profits have escaped taxes altogether. This would not be possible under unitary taxation.


Prem Sikka is Professor of Accounting at the University of Essex

About Prem Sikka

Prem Sikka is professor of accounting at Essex University