Ireland to Close Tax Loopholes

There’s some bad news coming out of Ireland. You’re not likely to feel too sorry for the victims of this news but its noteworthy for investors.

Bloomberg reported that Ireland's Finance Minister Michael Noonan announced on Tuesday that he would take steps to plug a loophole that lets multinational companies have a corporate presence in the country but not pay the 12.5 percent tax on money crossing its borders.

“I will be bringing forward a change to ensure that Irish registered companies cannot be ‘stateless’ in terms of their place of tax residency,” Noonan said in Dublin as part of the 2014 budget today. “Ireland wants to be part of the solution to this global tax challenge, not part of the problem.”

That’s bad news for companies like Microsoft MSFT, Apple AAPL, LinkedIn LNKD, and Google GOOG just to name a few.

These companies take advantage of a loophole that allows for something called a “double Irish with a Dutch sandwich.” Sound like something off of a menu? Here’s how it works. First you (as in a company) set up an Irish subsidiary—like Apple did in Cork, Ireland. Then, you pay it profits on products or services sold in the United States as royalties on patents owned by the companies.

The patents are assigned to an offshore entity in a tax-free country like the Cayman Islands, for example. This means that Irish tax can’t be imposed on the money. (The loophole)

Profits made outside of the United States go to a second subsidiary in Ireland. This subsidiary exploits a treaty that allows money to move across borders with other European countries tax-free. That “Dutch sandwich” comes into play because The Netherlands is one of those countries where this applies.

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Once it goes through the Netherlands, it heads to the main subsidiary where it’s free to move to its tropical home in the Caymans or other tax-free country of choice.

Apple CEO Tim Cook testified before Congress saying that the company pays its taxes not only to comply with international laws as written but also with the spirit of the law. Bloomberg points out that Apple’s strategy may not be quite as fishy as the double Irish with a Dutch sandwich but it certainly does benefit by using Ireland as one of its bases of operation.

You don’t have to be a tax attorney to notice that some of these multinational companies (not just tech firms, by the way) have what appear to be overly complicated ways of handling their money. Now that you (kind of) understand one of the many complicated accounting “strategies”, you can see that there’s good reason for it.

Disclosure: At the time of this writing, Tim Parker was long Apple.