(Bloomberg) Ireland’s government will phase out a tax shelter used by U.S. companies from Google Inc. to LinkedIn Corp., amid mounting pressure from international authorities.
The “Double Irish,” which allows companies to avoid paying tax on much of their income, will be closed to new entrants from January, Finance Minister Michael Noonan said in parliament in Dublin today, as he laid out the 2015 budget. Companies already enjoying the tax break can continue to do so until 2020.
“Aggressive tax planning by multinational companies has been criticized by governments across the globe,” Noonan, 71, said. It has “damaged the reputation of many countries.”
As he delivered his fourth budget, Noonan said the state will stick by its 12.5 percent corporate tax rate, which has helped draw companies such as LinkedIn Inc. and Airbnb Inc. to Dublin and keep the economy afloat after the worst real-estate collapse in Western Europe. Today, facing a general election within 18 months, Noonan is laying out the first non-austerity budget in eight years.
“The macroeconomic and fiscal framework underpinning this year’s budget is far more favorable than in previous years,” Noonan said. “The recovery is gaining momentum.”
The “Double Irish” mechanism permits companies to collect profits through their Irish subsidiaries—often with real operations and employees in the country. Those units then route those profits through royalties and other payments to a second Irish subsidiary, headquartered in a tax haven like Bermuda, Grand Cayman or the Isle of Man.
Google, for example, cut its income tax bill by about $2.5 billion last year, largely thanks to its use of this technique. The company paid more than $11 billion in royalties to an Irish unit that lists its headquarters at a Bermuda law firm during 2012, the most recent year for which records are available.
“It’s for governments to decide the law and for companies to comply,” John Herlihy, head of Google in Ireland, said in an e-mailed response to questions. “We’re deeply committed to Ireland and will work to implement these changes as they become law.”
Noonan also announced plans for a “knowledge development box,” which would tax profits generated as a result of patented innovations, like technological and medical developments. Such a tax break would be similar to so-called patent box tax benefits offered by the Netherlands and the U.K., which introduced its benefit last year.
The minister said the mechanism will be a “key element in attractive future foreign direct investment to Ireland.”
The phasing out of the “Double Irish” comes as Ireland, along with jurisdictions like Luxembourg and the Netherlands, comes under scrutiny from global regulators. Two weeks ago, the European Commission said Irish tax authorities failed to conform to international guidelines in a tax deal with Apple Inc.
The commission, which is in the midst of similar inquiries in other countries, has also asked Ireland for information about its tax residency rules.
Last month, the Organization for Economic Co-operation and Development set out proposals to hinder avoidance as part of a project to shut down tax cutting strategies around the world.
The international focus “isn’t going to go away, so multinationals have to face into it,” said Aidan Byrne, tax partner at Baker Tilly Ryan Glennon in Dublin. “The ability to operate such structures as used heretofore is probably going to be more difficult.”
As Noonan tightens up the corporate tax regime, he moved to ease the burden on workers, including cutting the top income-tax rate by 1 percentage point to 40 percent and raising the ceiling at which this rate is triggered.
The government raised its 2015 economic forecast to 3.9 percent from 3.6 percent and sees its budget deficit falling to 2.7 percent of output next year, ahead of its required target of 2.9 percent under agreement with the European Union.
—With assistance from Donal Griffin in Dublin.
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