The “Double Irish”

by Henry on May 24, 2010

Apropos of my piece on Ireland’s bubble economy for the Washington Monthly, it does no good thing for a country’s reputation when they start naming tax dodges perfectly legitimate tax avoidance strategies after you.

On advice from Ernst & Young, Forest Laboratories Ireland reorganized that year, dropping the country from its name. The newly dubbed Forest Laboratories Holdings Ltd. established a registered office in Hamilton, Bermuda, declaring the island its tax residence. This unit took control of licensing the patents. A second subsidiary in Ireland inherited the old name. It handled the manufacturing, sublicensing the rights to the patents, according to a corporate disclosure and an internal Forest flow chart tracing the arrangement that was reviewed by Bloomberg. The change helped the Irish subsidiary cut its effective tax rate to 2.4 percent from 10.3 percent the year before the reorganization, according to its annual reports. It did so by deducting from its taxable income the fees that went to Bermuda, which has no corporate income tax. Charlie Perkins, a spokesman for Ernst & Young, one of the so-called Big Four accounting firms, declined to comment on its work for Forest. International tax planners have a nickname for the type of structure the drugmaker adopted: the Double Irish. …
Even though Forest described its Bermuda office as the Irish subsidiary’s “principal place of business” in a 2008 court filing, it has no employees on the island. The closest it comes to an actual presence is its registered office at Milner House, at 18 Parliament Street in Hamilton, a beige building nestled among the pastel structures of the island’s main commercial area. There, Coson Corporate Services Limited, part of law firm Cox Hallett Wilkinson, provides “corporate administrative services” for Forest Laboratories Holdings, according to Jeannette Monk, who identified herself as the company’s corporate administrator. Asked whether Forest had any employees there, she said, “This is a law firm.”

But perhaps “Double Dutch” would be better …

To avoid another Irish tax, Forest’s profits don’t fly direct to Bermuda. They have a layover in Amsterdam. Fees paid to the Bermuda unit pass through yet another subsidiary, Forest Finance BV in the Netherlands, according to the internal Forest document, Dutch corporate records and a person familiar with the transaction. That route bypasses a 20 percent Irish withholding tax on certain royalties for patents, according to Richard Murphy, a U.K. accountant who worked on similar transactions and is director of Tax Research LLP. The structure takes advantage of an exemption from the levy if payments go to a company in another EU member state, Murphy said.

A really good article from Bloomberg – go and read it.

{ 17 comments }

1

christian h. 05.24.10 at 9:55 pm

Oh look over there, benefits cheats!

2

EWI 05.24.10 at 11:33 pm

I think that Ernst&Young’s fame deserves to be wider among the general taxpaying public who are footing the bill. It is no surprise to find E&Y tied up with Anglo Irish Bank’s implosion, and yet still giving the finger to the country:

By September last year Ernst & Young’s Irish partners found themselves at the epicentre of an unmerciful storm – perhaps the biggest corporate scandal ever to hit these shores. As auditors to Anglo Irish Bank the company faced huge criticism when it was revealed that Anglo directors had a “bed and breakfast” arrangement for their loans. Ernst & Young maintained a stony silence in the press and refused to appear in front of an Oireachtas committee hearing into the matter.

“One of the big challenges that we had was that we weren’t in a position to go to the press,” says Mike McKerr, who was promoted in July from his role as managing partner in the Belfast practice to become overall managing partner for Ernst & Young on the island of Ireland.

“There was a media storm around Anglo at the time and part of the frustration our people felt was that we weren’t out there conveying our message. But we didn’t believe that it was right to be part of a debate around Anglo in the press. We were the auditors of Anglo and we very strongly believed and continue to believe that we discharged our responsibilities as auditors in a very proper and very professional manner. I think the board of Anglo would share that view.”

http://www.businessandfinance.ie/index.jsp?p=494&n=500&a=2193

For a rather different view on E&Y’s responsibilities:

http://www.mcgarrsolicitors.ie/2009/01/30/anglo-irish-bank-corporation-2/

E&Y also turn up in other parts of the collapse, of course: http://www.accountingnet.ie/law_regulation/Injunction_lifted_to_reveal_E_Y_appeal_against_Equitable_ruling.php

3

P O'Neill 05.25.10 at 2:36 am

I think the focus on the IRS is understandable but at this stage it’s just one of Ireland’s problems on the tax front. Another is Germany and France concluding that if they are ultimately on the hook when the EU’s small economies get in trouble, they won’t be as content to have those countries nibbling around the edges of their tax base in the good times. And then there’s the countries sitting outside the EU and looking to replicate the original Ireland recipe e.g. Balkans, Georgia. And finally places that will be willing to risk winding up on various OECD black/gray lists but nonetheless waiting to see who shows up for their version of light touch — Singapore, Dubai etc.

4

John Quiggin 05.25.10 at 3:08 am

I’ve already seen reports that harmonization of the Irish corporate tax rate will be part of the price for the bailout. Certainly, it would be crazy for the Germans and French to let them continue with this stuff.

It would be interesting to know how much avoidance actually depends on evasion in the sense of global corporate structures too opaque to allow benefits to be traced to their recipients. This kind of thing will be a lot harder to do in future I think.

5

john b 05.25.10 at 5:01 am

“It would be interesting to know how much avoidance actually depends on evasion in the sense of global corporate structures too opaque to allow benefits to be traced to their recipients.”

For listed companies, not much – simply because at some point, the money has to go to the parent company to be paid out as dividends to shareholders, and the levels of disclosure required if you’re listed on NYSE/LSE/Euronext are too high to sensible cover up what you’re doing.

For privately-owned companies, a lot, because if the chairman is also the 100% owner then he can transfer millions of quid to a trust in the Cayman Islands for random “transfer pricing” purposes without anyone objecting.

However, there’s a simple and obvious solution to the Forest problem for public companies.

In the UK, companies are taxed at the standard corporation tax rate on dividends remitted from subsidiaries abroad, unless they can show that tax has already been paid on those profits to foreign tax authorities. Even if tax has been paid abroad at a lower rate than the standard UK rate, the company must pay the difference to UK tax authorities. So there’s no real scope to use these strategies – if you want to pay dividends (which is what companies are for, after all) you pay tax on the profits you’re paying them with.

If the US and the other EU countries were to bring in the same rule, that would solve the problem immediately.

6

Warren Terra 05.25.10 at 8:31 am

All due respect to Ireland, but this isn’t new – Stanley Tools did exactly the same ten years ago. And Coke decides each year whether its intellectual property or its distribution makes the profits.

7

john b 05.25.10 at 9:21 am

It’s different for Coke, though, because CCE (bottling & distribution) and TCCC (brand) are separately-owned, listed companies – hence, they have to agree a price that the shareholders in each business believe is fair, rather than just making up something internally based on minimising tax subject to minimising the risk of jail time.

8

Richard J 05.25.10 at 9:32 am

For privately-owned companies, a lot, because if the chairman is also the 100% owner then he can transfer millions of quid to a trust in the Cayman Islands for random “transfer pricing” purposes without anyone objecting.

The tricks are, of course, a) said price to the relevant tax authorities [1],b) avoid paying lots of withholding taxes on the transfer [2], and c) getting the cash out again.

That said, John, as I think I’ve pointed out on Twitter in the past, the UK is looking at introducing a participation exemption for foreign dividends shortly (i.e. for dividends paid by subsidiary companies in a group, not in shares held as a portfolio investment).

[1] This does not apply in Ireland, where they don’t have much in the way of transfer pricing/thin cap rules.

[2] This step usually makes using tax havens not worth the candle, to be honest.

9

Ginger Yellow 05.25.10 at 10:10 am

“I’ve already seen reports that harmonization of the Irish corporate tax rate will be part of the price for the bailout. Certainly, it would be crazy for the Germans and French to let them continue with this stuff.”

It would also be crazy for Ireland to continue with this stuff. If 10.3% is too high a tax rate for a company like Forest Labs, what’s the point of getting involved in the race to the bottom?

10

john b 05.25.10 at 10:15 am

GY: 10% of $200m is a hell of a lot better than 30% of nothing. If you’re a small country without a large corporate base of your own, like Ireland (but unlike the US or UK), then having very low rates of corporation tax will maximise revenue, because every foreign would-be-tax-avoider will pay 10% to you rather than 30% to their home taxman.

This is also why it makes sense for even smaller, poor countries like the Caymans, Mauritius etc to charge 0% corporation tax, because the economic activity (hence VAT, income tax, whatever other taxes you do have) created by the resulting influx of tax avoiders is higher than the revenue lost by not charging locals tax.

But in both cases, it only works for as long as the big countries where tax is being dodged are willing to accept it in the name of global economic freedom. Which, I get the impression, is starting not to be the case.

11

Richard J 05.25.10 at 1:09 pm

Actually, having read the article now, I’m not that impressed with it. Transfer pricing is a hard and fuzzy area because it involves hard and effectively insoluble problems. Take the example of the group used in the article. You have a group that manufactures its goods in Ireland, holds the patents in a tax haven, and sells them in the US. On one plausible view, the US operations are merely a low-margin activity , being essentially a local sales and marketing office, and most of the economic surplus is being generated outside of the US, and hence shouldn”t fall to be taxed there…

The facts, etc. are going to be different in any case (and really, is it any surprise that a tax payer constructs a narrative that’s helpful to them?) and usually comes down, practically, to horsetrading between the taxpayer and the relevant authorities to which a compromise position, which, looking through the accounts, seems to be where the negotiations are at.

The solutions in the article are a bit silly, really. A hard problem like setting arm’s length pricing mechanisms can’t be solved by blindly applying mechanistic diktats. As more profits taxed in one jurisdiction necessarily leads to less available in another, it’s not a straight two-way fight between taxpayer and government; there’s necessarily at least three interested parties.

(I’d observe that the big issue in countries like Ireland is not so much the headline corporate tax rate, but a combination of this rate and a good network of tax treaties that allow most of the negative consequences of using a tax haven such as the BVI or the Channel Islands to be avoided. This, as John notes, was accepted as a compromise by bigger countries until recently, but, well, the mood has changed…)

12

Chris88 05.25.10 at 3:42 pm

Can anyone tell me why corporation tax is based on income? Is it just because it developed from personal income tax? Surely, if companies were charged a (small) percentage of their total value, or at least the value of their operations in the country levying the tax, then the type of avoidance strategy described would be more difficult.

13

Bill Gardner 05.25.10 at 3:57 pm

Ah, Forest Laboratories, maker of Celexa and Lexapro.

NYT 2009-02-25: “The Justice Department charged the drug maker Forest Laboratories on Wednesday with defrauding the government of millions of dollars by illegally marketing the popular antidepressants Celexa and Lexapro for unapproved uses in children and teenagers.”

14

Map Maker 05.27.10 at 3:48 am

“Surely, if companies were charged a (small) percentage of their total value, or at least the value of their operations in the country levying the tax, then the type of avoidance strategy described would be more difficult.”

What is the value of an asset or company? Just the present value of all future cash flows from that business. If you can’t determine “income” with any precision, good luck determining the “value” of an operation. Unless you are just looking at property, plant and equipment, which will tax manufacturers heavily, while asset-lite investment banks will hardly have any PPE.

15

john b 05.27.10 at 8:10 am

With quoted companies, it’d be pretty easy, no?

16

Map Maker 05.27.10 at 10:43 am

Forest Laboratories is public – its total value is known – how much of the value of the company is due to operations in the US, Ireland, or Luxembourg is open to interpretation by accountants, management and taxing authorities.

17

Barry 05.27.10 at 5:54 pm

john b 05.25.10 at 9:21 am

“It’s different for Coke, though, because CCE (bottling & distribution) and TCCC (brand) are separately-owned, listed companies – hence, they have to agree a price that the shareholders in each business believe is fair, rather than just making up something internally based on minimising tax subject to minimising the risk of jail time.”

That assumes that they are actually separately owned, rather than having one hold a bunch of shares in the other.

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