It is no secret that major corporations use tax havens and tax loopholes to reduce the amount that they pay on taxes. Google is one of the many companies accused of doing this in the past and not paying its fair share of taxes.
Recently, Google announced that it will stop using the tax loophole known as “Double Irish, Dutch sandwich,” which is a very famous loophole. The Double Irish part of the loophole refers to the taxable income starting in an Irish operating company and then being shifted to a firm that is registered in Ireland but in a tax haven offshore. The Dutch portion comes from the Dutch laws that let companies move untaxed profits into a tax haven without needing to pay any withholding tax. As such, the sandwich has the Irish portions as the “bread” and the Dutch portions as the “filling.”
Previous Use of the Loophole
Thanks to using this Double Irish, Dutch sandwich loophole in the past, Google has been able to put off paying U.S. taxes on its international earnings. At the same time, the loophole has allowed the company to pay lower tax rates overseas. The Dutch subsidiary of Google would move the revenue made from royalties outside of the United States into Google Ireland holdings. That affiliate is based in Bermuda so there is no income tax. The entire process was fully legal due to the loophole.
Estimates indicate that this loophole has let Google and other American companies reduce tax bills by at least hundreds of billions. The loophole, however, is finally being shut. By the time 2017 came to a close, figures estimate that Apple and many of the other most profitable American companies held more than $1 trillion offshore. They used the “double Irish” loophole to move billions into “ghost companies.” Other companies included in this figure include Google, Pfizer, Cisco, Coca-Cola, Merck, and Facebook. Each of these companies did so to avoid the corporate tax rate, which was 35 percent at the time in the United States. It has since been cut under the Trump administration.
Of course, all of the involved companies have been very clear throughout the years that they pay their taxes. They always point out that they have not done anything illegal. In 2013, for example, Tim Cook, the Apple chief executive, claimed that his company paid all of the owed taxes without using tax gimmicks or stashing money in the Caribbean.
What Google Will Do
A spokesman from Google confirmed that it will be scrapping its intellectual property licensing structure. This current structure channels international profits through Ireland before passing them to Caribbean tax havens. This process means that tax authorities in the United States cannot access the profits.
Getting rid of this complicated structure will make the tax arrangements for Google much simpler. It will also follow the efforts of the Organisation for Economic Co-operation and Development, which aims to reduce international tax avoidance.
Regulations Are Changing So It Was Not All Voluntary
While the announcement that Google will stop using the Double Irish, Dutch sandwich loophole seems impressive at first, the company did not make this decision for altruistic reasons. Starting in 2014, Ireland began cracking down on companies that abused this loophole thanks to European Union putting pressure on the country. Then, in 2017, the United States announced that companies had to end the system by the end of 2020.
As such, Google would need to stop using the tax loophole by the end of the year anyway. However, the fact that the company is doing so sooner than necessary is a strong point in its favor.
According to a statement, Google’s changes in structuring for tax purposes are a reaction to the changes in the tax law that will limit how much companies can reduce their tax bills.
Did you find this article useful?
Subscribe to our newsletter for more!