Apple and other tech giants now have to pay their fair share

Ireland puts an end to a tax loophole that saved Google, Apple, Microsoft, and Facebook billions in taxes

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"Double Irish" might sound like a drink that corporate tax lawyers reach for at the prospect of paying higher tax bills, but it's actually the name of a controversial -- albeit legal -- scheme that has enabled companies like Google, Apple, Microsoft, and Facebook to save billions in taxes each year.

No longer: Ireland this week bowed to pressure from U.S. and European regulators and abolished a rule that allowed companies to be registered in Ireland, but not resident there for tax purposes.

Accountants can take comfort in the fact that when one tax scheme closes, another is sure to open. Even as Ireland unveiled the change in law, it announced it is developing a "knowledge development box" that would provide tax breaks for revenue derived from intellectual property. Britain, the Netherlands, and others have introduced similar "patent boxes," which allow companies to apply for a lower tax rate on profits that result from patents, but Ireland's finance minister indicated the Irish version would be "the best in class."

Wait, there's more cause for relief among tech firms. Although the change abolishing the double Irish maneuver will take effect Jan. 1 for new companies, companies currently registered in Ireland will have a transition period until the end of 2020. The companies' tax lawyers should be reaching for the champagne, to celebrate another five years of tax savings.

Granted, no one – except perhaps Oliver Wendell Holmes, Jr. -- ever enjoys paying taxes. Perhaps Google, Apple, and the gang are of the same mind as TV broadcaster Arthur Godfrey, who said, "I'm proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money." However, these companies have actually been paying much, much less.

Last year alone, Google cut its tax bill by billions. Google Ireland paid an effective tax rate of 0.16 percent on $22.8 billion in revenue in 2013. According to the New York Times, Google's Dublin-based subsidiary, which employs more than 2,500 people, pays royalties to a separate Google unit that is registered in Ireland but for tax purposes is resident in Bermuda, where there is no corporate tax. Establishing residency for a titular second subsidiary under the "double Irish" loophole typically involves setting up a letter box in a jurisdiction such as Bermuda and holding a board meeting there as "proof" the subsidiary is managed from the tax haven.

Apple's tax gimmicks are of the same order. The company paid as little as 2 percent on profits attributed to its subsidiaries in Ireland, where the official corporate tax rate is 12.5 percent. The E.U. is still investigating whether that tax deal broke rules on state aid, in which case Ireland would have to recover billions of dollars in taxes from Apple.

According to Reuters, corporate filings show that under the current rules, technology companies have channeled tens of billions of dollars in profits through Ireland that attract little or no taxation elsewhere. Various European countries, including the United Kingdom, the Netherlands, and France, have over the past year been reviewing tax laws that enable this type of behavior. And the European Commission is still conducting an investigation into relationships between multinationals and tax havens like Ireland, the Netherlands, and Luxembourg -- including Luxembourg's relationship with Amazon and Starbucks' tax arrangements in the Netherlands.

The reviews have been a long time coming. As Samuel Brunson, a professor of tax law at Loyola University in Chicago, said to Ars Technica about Ireland's change of law, "It does seem like a good thing, albeit a delayed good thing. … it seems like a move toward a cleaner global set of international taxes."

Because of the mounting pressure in the United States and the European Union to tackle corporate tax avoidance, analysts and tax advisers predict that companies will find it difficult to set up equally effective schemes elsewhere … until they do.

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