Double Irish with a Dutch Sandwich

Well after reading the title, you may wonder if this is something related to food or especially sandwiches. But first, let me make one thing clear to you that this is not what you are thinking of. In fact, this concept is really interesting, and yeah a bit confusing too. 

So, be ready to explore and know more about this concept.

You must have seen that big firms and large multinational companies generate millions of dollars in the form of their revenues and since they are earning such a huge amount of money then obviously they have to deposit a huge sum of money in the form of taxes in the government treasury. So as a result what they try to do is that they try to find an alternative so that they can avoid the payment of taxes and obviously they have to go with an alternative which is legal as if the alternative came out to be an illegal one they obviously this can tarnish the image of the company and they will have to pay a huge sum of money as penalty also.

Now, this is what we call a Double Irish with a Dutch Sandwich. Okay, let me make this thing more clear to you.

Double Irish with a Dutch Sandwich is a tax avoidance technique famously employed by big firms and multinational companies like Google, Microsoft, Amazon, and Facebook. This method proved to be completely legal until it resulted in a loss of trillions of dollars to the government. Under this technique, companies pay no or a handful amount of tax to the government. In technical terms, it is termed as "Base Erosion and Profit Sharing tool (BEPS).

Let us understand the steps involved in this technique

Stage 1

Suppose there is a company named Dell Inc.(Inc after the name of a company means the company is incorporated and has completed all the processes in at least one of the states in which it is working and also is known in the eye of government), incorporated in the USA. So this Dell Inc. sets up its subsidiary company in Ireland and let's name it as First Irish Dell Inc. Company and the parent company transfers the Intellectual Property Rights to this first subsidiary company.

Stage 2

In the second stage, although the First Irish Dell Inc. is physically existing in Ireland but is controlled and managed from Bermuda or any tax haven territory. Why? I shall explain this further.

Stage 3

First Irish Dell Inc. sets up another subsidiary company in again Ireland and let's name it as Second Irish Dell Inc. and the First Irish Dell Inc. further transfers the IP rights to this Second Irish Dell Inc. In return, the Second Irish Dell Inc. transfers the royalties to the First Irish Dell Inc. But the twist here is that this transfer of royalties is through a Dutch subsidiary. So let's name this Dutch subsidiary as Dutch Dell Inc. and it is opened up in the Netherlands.

Confusing? I shall tell you the reason for this Dutch subsidiary.

Stage 4

Now the question is from where did the Second Irish Dell Inc. arrange funds for royalties which they pay to First Irish Dell Inc. (Through the dutch subsidiary). Well, the answer to this question is in this stage. Second Irish Dell Inc. distributes the IP rights to Dell Inc. and its affiliates. And in turn, it receives royalties too from them.

Stage 5

Dell Inc. and affiliates conduct their regular business and hence generate revenues and then it gives royalties to Second Irish Dell Inc.

Stage 6

In this stage, the parent Dell Inc. declares that all the IP rights, it owns was jointly developed with First Irish Dell Inc.

You can have a general idea from this diagram. Just ignore the name of the company in the above diagram.

Now, this diagram may seem confusing so here I am for all your queries.

Let's understand this diagram with reasons.

1. Dell Inc. and its affiliates conduct their regular business with the customers and hence transfer the royalties/revenues to the Second Dell Inc. and in return of IP rights But this Second Dell Inc. is shown to operate with losses or with little profit so that they have to pay a small amount of taxes or no tax at all.

This is easy for Dell Inc. to do so as this Second Dell Inc. is just a shell corporation and is existing to transfer the revenues. So it's for the transfer of revenues with no payment of taxes.

2. Now, this Second Dell Inc. can directly shift its's royalties in return of IP rights, to First Dell Inc., So, you might be thinking that what's the need to make this diagram even more confusing?

Well according to Irish Laws, the transfer of royalties from one Irish company to second Irish company is taxable. So they just set up one more subsidiary in and Dutch territory, in our example, Netherlands. In this way without directly engaging with First Irish Dell Inc., Second Irish Dell Inc. managed to transfer the royalties through a Dutch subsidiary and don't pay any tax. (Very Clever)

And yes, again in return there is a transfer of IP rights from First to Second Irish Dell Inc.

3.  Now, you might be scratching your head that why this First Irish Dell Inc. is controlled from Bermuda, although having a physical presence in Ireland?

Let me tell you first that Bermuda is a tax haven, which means free of tax.

And again according to Irish Laws, if you want to control and manage your Irish company from a tax haven territory then, in that case, you are required to have one more tax resident company in Ireland and so the companies have set up another Irish company namely Second Irish Dell Inc.

In this way by setting up one more subsidiary in Ireland, they avail the benefit of 0% tax rate.

4. This point will tell you the reason for stage 6

Laws in the USA treat all foreign subsidiaries as CFC(Controlled Foreign Corporations)

And royalties are considered as "Passive Income" and any transfer of royalties from a foreign subsidiary to the parent company is taxable in US.

So, the announcement by Dell Inc., that it has jointly developed the IP rights with First Irish Dell Inc., this First Irish Dell Inc. becomes a part of US and no longer termed as CFC and no longer has to pay the taxes. It can be like a cherry on the Double Irish with a Dutch Sandwich. So, thats why it can be said that this announcement by parent company benefits both the parent as well as the subsidiary company.

Now you might be thinking that how lengthy and complex is this technique but to save taxes legally they have to do this.

So What conclusion can be drawn? How do these companies benefit and how they are able to pay such a low tax in spite of earning millions of dollars?

These companies benefit from the loopholes in the economy and they make use of different tax rates and tax laws of various countries.

Have a look at this newspaper heading.

6

---