What Is A Double Irish Dutch Sandwich And Why Is It So Popular?
What To Know
- The royalties paid by the Dutch subsidiary (1) to the Dutch subsidiary (2) are then distributed to the Irish subsidiary (2), which is subject to the low Irish corporate tax rate.
- As multinational corporations continue to seek ways to minimize their tax liability, it is essential for governments and tax authorities to cooperate to ensure a fair and equitable global tax system.
- The Dutch subsidiaries are used to receive royalties from the Irish subsidiary and to pay royalties to the Irish IP holding company, taking advantage of tax treaty benefits.
The Double Irish Dutch Sandwich (DID) is a complex tax avoidance structure that was commonly used by multinational corporations to reduce their global tax liability. It involves setting up a series of subsidiaries in Ireland and the Netherlands to take advantage of tax loopholes and treaty benefits.
How Does the Double Irish Dutch Sandwich Work?
1. Irish Subsidiary (1): A holding company is established in Ireland, where it benefits from a low corporate tax rate of 12.5%.
2. Dutch Subsidiary (1): A Dutch subsidiary is created, which is used to receive royalties from the Irish subsidiary. The Netherlands has a favorable tax treaty with Ireland, which allows for a reduced withholding tax on royalties.
3. Irish Subsidiary (2): Another Irish subsidiary is set up to own the intellectual property (IP) used by the multinational corporation. This subsidiary charges royalties to the Dutch subsidiary.
4. Dutch Subsidiary (2): The Dutch subsidiary pays royalties to the Irish subsidiary (2). Under the Dutch-Irish tax treaty, this royalty payment is not subject to withholding tax.
5. Tax Avoidance: The royalties paid by the Dutch subsidiary (1) to the Dutch subsidiary (2) are then distributed to the Irish subsidiary (2), which is subject to the low Irish corporate tax rate. This effectively reduces the multinational corporation’s overall tax liability.
Advantages of the Double Irish Dutch Sandwich
- Reduced global tax liability
- Ability to shift profits to low-tax jurisdictions
- Exploitation of tax treaty benefits
Disadvantages of the Double Irish Dutch Sandwich
- Regulatory scrutiny and potential legal challenges
- Reputational damage
- Increased complexity and administrative costs
Evolution of the Double Irish Dutch Sandwich
The DID structure gained popularity in the early 2000s but has since faced increased scrutiny from tax authorities. In 2015, the Irish government introduced anti-avoidance legislation to target the DID, and the Netherlands followed suit in 2019.
Impact of the DID on Tax Policy
The DID has highlighted the need for international cooperation to prevent tax avoidance. The Organization for Economic Cooperation and Development (OECD) has developed the Base Erosion and Profit Shifting (BEPS) project, which aims to address tax avoidance practices.
Current Status of the Double Irish Dutch Sandwich
As of 2023, the DID structure is largely obsolete due to changes in tax laws in Ireland and the Netherlands. However, similar tax avoidance schemes continue to emerge, prompting ongoing efforts to strengthen international tax cooperation.
Alternatives to the Double Irish Dutch Sandwich
Multinational corporations now explore other tax avoidance strategies, such as:
- Intellectual Property Holding Companies: Establishing IP holding companies in low-tax jurisdictions to minimize royalty payments.
- Double Dutch Irish Sandwich: A similar structure to the DID, but with an additional Dutch subsidiary to further reduce withholding tax on royalties.
- Luxembourg-Swiss Sandwich: A structure involving subsidiaries in Luxembourg and Switzerland to take advantage of their tax treaties.
Conclusion: The Future of Tax Avoidance
The Double Irish Dutch Sandwich has played a significant role in shaping international tax policy. While it has been largely phased out, it serves as a reminder of the ongoing challenges in combating tax avoidance. As multinational corporations continue to seek ways to minimize their tax liability, it is essential for governments and tax authorities to cooperate to ensure a fair and equitable global tax system.
Top Questions Asked
Q: Is the Double Irish Dutch Sandwich still legal?
A: The original DID structure is largely obsolete due to changes in tax laws. However, similar tax avoidance schemes continue to emerge.
Q: What is the purpose of the Dutch subsidiaries in the DID structure?
A: The Dutch subsidiaries are used to receive royalties from the Irish subsidiary and to pay royalties to the Irish IP holding company, taking advantage of tax treaty benefits.
Q: How does the DID structure reduce tax liability?
A: By shifting profits to low-tax jurisdictions and exploiting tax treaty loopholes, the DID structure allows multinational corporations to reduce their overall tax liability.
Q: What is the OECD’s role in combating tax avoidance?
A: The OECD has developed the BEPS project, which aims to address tax avoidance practices and promote international cooperation on tax matters.
Q: What are some alternatives to the Double Irish Dutch Sandwich?
A: Alternative tax avoidance strategies include Intellectual Property Holding Companies, Double Dutch Irish Sandwich, and Luxembourg-Swiss Sandwich.