Corporate Tax Avoidance And It’s Global Implications: “A Case Study Of Double Irish And Dutch Sandwich: Strategy”
ABSTRACT
“Tax Avoidance” has always been a concern in a global scale particularly affecting the global economic landscape. One of the most concerning methods “Double Irish and Dutch Sandwich Strategy” used by various companies in order to mitigate levying of tax. Companies like Apple, Google and Amazon have used this method making huge profits for their company.
This research paper explores the concept of “Corporate Tax Avoidance in relation with Double Irish and Dutch Sandwich Strategy”. The study main examines leading case studies of major Multinational Corporations (MNCs) that exploited the Double Irish and Dutch Sandwich Strategy and its global Implications. Furthermore, the paper also analyzes how Netherland became a global tech hub and center of attraction for tax avoidance. Finally, the paper will also evaluate whether transparency in tax and regulatory frameworks will serve as a long-term solution to corporate tax avoidance.
Keywords: Multinational Corporations (MNCs), Corporate Tax Avoidance, Netherland, “Double Irish and Dutch Sandwich Strategy”.
INTRODUCTION
Tax Avoidance has always been a major concern in the developing countries. Many companies use different strategies to avoid levying of tax (Clear Tax, 2023). MNEs like Microsoft, Apples, Amazon and Google earn humongous amount of profits by using various tax avoidance strategies one of which is “Double Irish and Dutch Sandwich”. “Double Irish and Dutch Sandwich Strategy” is one of the examples of “Corporate Tax Avoidance” (Taylor, 2024).
“Tax avoidance and tax evasion” are often mistaken for the same concept, but they are fundamentally different. While tax evasion is clearly cheating and illegally preventing themselves from levying of the tax, tax avoidance is not illegal but unethical (Bajaj Finserv, 2024). Tax avoidance is the use of legal concepts and strategies in order to mitigate the amount of tax an individual owes to the government.
Despite the complete ban of the Double Irish and Dutch Sandwich Strategy in 2020, it was still in use which is purely unethical impacting globally. This led to the inculcation and introduction of global Anti Base Erosion (Globe) introduced in 2021 by the G20 countries and by OECD. This object and aim of this were to make sure that MNCs to pay a “minimum tax rate of 15%.”
RESEARCH OBJECTIVE
My research objective in this paper include to deeply analyze the concept of “Corporate Tax Avoidance and how it is different from Tax Evasion and Tax Planning. My research objective also includes to identify key loopholes and relate the “Corporate Tax Avoidance” with the concept of “Double Irish and Dutch Sandwich Strategy.”
RESEARCH QUESTION
1. How did the country Netherlands become the center of attraction for tax avoidance and what has been the global impact of the “Double Irish and Dutch Sandwich” Strategy?
CORPORATE TAX AVOIDANCE: IS TAX TRANSPARENCY THE SOLTUION?
Corporate tax avoidance has been in the matter of considerable public attention since the global financial crisis of 2008. Not obeying laws is unethical which is why Tax evasion method is illegal. Whereas on the other hand, tax avoidance is legal and involves using lawful methods to eliminate, mitigate or delay tax liabilities of the big tech companies. According to Payne and Ralborn (2018), tax evasion is not only unlawful but also unethical due to its reliance on deception and secrecy (Christensen & Murphy, 2019).
Tax Transparency is definitely a solution because tax avoidance by using the method of “Double Irish and Dutch Sandwich Strategy” has impacted globally. “The Double Irish with a Dutch Sandwich” is a strategy used by MNCs to shift profits to mitigate levying of tax.
E.g., a U.S.-based parent company, referred to as “Zenex”, establishes an Irish subsidiary, “C”. In exchange, “C” pays minimal royalties to “Zenex”. Since “C” is incorporated in an offshore tax haven, it is not subject to U.S. corporate tax obligations. Under the tax law of Irish, a subsidiary that is incorporated in an offshore jurisdiction is not considered an Irish tax resident. However, if this subsidiary wholly owns another entity that qualifies as an Irish resident, it can still operate within the legal framework.
To facilitate this, “C” inculcates a second Irish subsidiary, “D”, which holds the rights to the intellectual property & generates revenue through its commercial exploitation. “D” then pays licensing fees and royalties to “C”, ensuring that profits accumulate within the offshore entity.
CASE STUDIES OF MULTINAIONAL CORPORATIONS USING THE “DOUBLE IRISH AND DUTCH SANDWICH STRATEGY”
“The Double Irish with a Dutch Sandwich tax strategy” was mainly used by technology companies because they could easily shift profits by transferring intellectual property rights to their subsidiaries in other countries. However, it wasn’t just tech firms—other global companies, including Amazon, Apple, Facebook (now Meta), Google, IKEA, and Starbucks, also took advantage of this tax loophole.
Google Inc:
Google was one of the early adopters of this tax-saving method. In 2009, it became a key player in using such strategies. In 2016, Google saved $3.7 billion taxes by, moving € 15.9 billion to the Bermuda shell company (O’Brien, 2018). According to Reuters, this allowed Google to pay just a small percentage of taxes on its non-U.S. profits for over a decade (FINEXITY, 2024). “We pay all of the taxed due and comply with the tax laws in every country we operate in around the world,” as stated by spokesman of Google. Google is a big profit company which earns a huge number of gains from its international business. But what if they bring back that certain money to their own country which is US?
Certainly, they will be levied to pay high-rate tax which is why the company google used this “Double Irish and Dutch Sandwich Strategy” to avoid tax. Basically, once google earns money from various ads promoted globally, money is sent to the Netherlands Holdings (a Dutch company). This procedure is followed to ensure European tax rules are followed. The Netherlands Holdings then send those money to Google Ireland Holdings which is an Irish company but is actually based in Bermuda. Bermuda is a country where no corporate tax is levied. Since, Bermuda does not levy corporate tax income, Google pays almost no tax on this money!
This huge number of money that the company Google had moved in “2016 was 7% higher than the previous year as per company filings.” This had impacted a huge loss in the tax revenue in the country United States as that same money could have been used for various funds and subsidiaries or investment in education. In 2014, Ireland closed these loopholes because of the pressure from European Union (EU) and US (Bergen, 2019). The Trump administration also made sure that profits to be returned back to the US by lowering “the corporate tax rate from 35% to 21%.” The inculcation and introduction of Tax Cuts and Jobs Act of 2018 permitted the companies to return money that is made overseas to the US without facing more US taxes.
Apple Inc:
Apple is another example that used this strategy. The iGroup avoided an estimation of 8.5 billion dollars taxes in 2016 by using “Double Irish and Dutch Sandwich Strategy” As per the article of New York Times titled “How Apple Sidesteps Billions in Taxes”, it is stated that apple has prevented million dollars taxes in “California and 20 other states.” The headquarter of apple is a Cupertino, Calif. By establishing “an office in Reno, just 200 miles” way to invest and collect the profits of the company. Establishing the office at Reno, Nevada made them an easy path as it has no corporate income tax (Duhigg & Kocieniewski, 2012). Apple owed 13 billion taxes for using Irish subsidiaries to avoid the levying of taxes as claimed by The European Commision in 2016.
NETHERLANDS AS THE CENTRE OF ATRACTION FOR TAX AVOIDANCE AND GLOBAL IMPLICATIONS OF “DOUBLE IRISH AND DUTCH SANDWICH STRATEGY”
Every company has the following conditions that are very important for it to fulfill:
1. Legal protection
2. Tax Minimization
3. Regulatory Advantages
Legal protection for every company is an upmost priority. It is essential when investing in countries with corrupt or has weak legal system. In order to avoid this, company establish subsidiaries in various nations where the laws of that particular country are reliable. Some of the wealthy individuals (Schulkes, 2020). Earlier, the wealthy individuals used legal tricks for instance English Libel Laws, to stop journalists from exposing their financial activities. This was used to avoid paying of taxes. The country Netherlands has a primary role in tax avoidance because the big tech companies moved huge amounts of money in a way that keeps it out of reach of tax authorities by shifting the money through low-tax countries like Bermuda & Ireland where the corporate income tax rate is very low.
Netherland’s role in tax avoidance had been started back to the 1980s. A. notable example is how companies in Canada used the “Antilles Route” to minimize levying of taxes. Instead of directly investing, they funneled funds via Dutch subsidiaries and then to Carribean locations before reaching the U.S. Through this method, this method of tax avoidance made Netherlands a Global Hub. This method is beneficial to big tech companies as it permits them to concentrate their earnings in low-tax nations. Netherlands lost €1.2 billion (corporate tax revenue) as a result of this method in 2016 (Olly, 2014).
The main cause for Netherlands to remain as the main center of attraction is its law of no levying corporate income tax whereby leadings for the big tech companies to save millions of profits and earnings without paying taxes. One of the major tactics used by the big tech companies is the “Double Irish and Dutch Sandwich” strategy which allowed businesses to shift income from high tax countries to tax havens such as Bermuda while avoiding withholding taxes. However, in the year 2015 this strategy and method became unlawful as it had huge global implications. Netherlands has actively opposed EU measures to stop tax competition referring the economic benefits of low tax policies.
IMPLEMENTATION OF 15% CORPORATE TAX AND END TO DOUBLE IRISH AND DUTCH SANDWICH STRATEGY
The 2020 G20 summit in Rome agreed upon a minimum 15% levy in corporate tax rate globally. This initiative made new regime. There are two pillars under this regime.
1. “Companies which earn a profit more than 10%, shall pay a 25% rate of corporate tax.”
2. “Secondly, the companies incorporated in tax havens or overseas and offshore jurisdictions shall also pay a minimum of 15% of the corporate tax rate. (Press Trust of India, 2023). In order to tackle the issue of tax avoidance or to bridge the gap in loopholes provided by the double Irish and Dutch sandwich Strategy.”
Significant impact was there on the Indian’s economy after the OECD introduced 15 action plans under the “Base Erosion and Profit Shifting (BEPs).” India inculcated an Equalization Levy on companies that conduct business in India for fostering and strengthening its tax system (Ernst & Young, 2024). Additionally, India signed “Tax Information Exchange Agreements (TIEAs) with tax havens” like Bahamas, Liberia, Bermuda and Belize in order to access financial details and stop the illegal practice which tax evasion. These measures fostered India to reduce the amount of black money stored in tax havens by Multinational Corporations (MNCs) between 2013 to 2017 (Press Trust of India, 2023). In 2020, Ireland banned Double Irish and Dutch Sandwich Strategy was whereby leading to the immense rise in the corporate tax revenue of Ireland especially from the big tech companies.
CONCLUSION AND RECOMMENDATION
Even today, “corporate tax avoidance remains” a concerning issue, with the “Double Irish and Dutch Sandwich” Strategy. While this strategy is not illegal, but unethical and causes huge global implications. Despite of the fact that this strategy was banned in 2020, corporate or big tech companies still find alternative tax-saving mechanisms, showing the persistent challenge of stopping corporate tax avoidance.
The Netherlands was the main technical hub. The inculcation and introduction of the OECD- led 15% global minimum corporate tax is a significant step for better global implications. However, it is suggested that further steps are expedient in order to ensure tax transparency by necessary reporting of tax payments and corporate earnings. Fostering methods such as “Base Erosion and Profit Shifting (BEPS)” regulatory framework will help to prevent loopholes. Furthermore, stricter legal implications had to be fostered and implemented for prevention of tax loopholes. Ultimately achieving these regulatory frameworks among nations will help to stabilize the economy of a country.
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