In its most recent Budget, the Irish Government announced it would change its tax residence rules for companies – rules that have been used by thousands of multinationals to avoid tax.
The residency rule currently are that a company is a tax resident where it has its central management and control, irrespective of where the entity was incorporated (unlike Australia where it is a resident if it it either incorporated in Australia or has its central management and control here).
The standard structure used by these multinational entities is to transfer the intellectual property used outside the US to a company incorporated in Ireland but with its central management and control in a tax haven. This could be a problem for the US company due to its controlled foreign company rules if the US company owned the tax haven company directly. So between these two companies sits another Irish company that has its management and control in Ireland and so is a tax resident of Ireland.
So my US pharma or internet business wants to set up business in Australia. The Irish tax haven resident entity licences the intellectual property to the Irish entity (often through the Netherlands… That is another story), and the Irish entity licences the intellectual property to the Australian entity.
The Australian entities profits are almost zero as the royalties paid by the Australian entity are very large ($0 Aussie company tax) but justifiably large as the intellectual property is totally fundamental to the business. These large royalty payments go to an Irish company but it has its own large, but not as large, royalty payments to the Irish tax haven resident entity (so limited tax is paid at the Irish corporate rate of 12.5%). And finally, the Irish tax haven resident entity gets a large royalty payment and it puts it in its bank account Ireland as it is not taxed as the company is a resident of a tax haven.
From January all new companies incorporated in Ireland will also be tax-residents there, making this idea no longer possible.
To avoid a series of multinationals leaving, the Irish Government has propose what it calls a “knowledge development box”. This will allow entities to pay a lower tax rate on profits from intellectual property booked in Ireland. But this wont be zero.
Companies already registered in Ireland are being given six years to alter their accounting structures.
Now that leaves countries with a networks of tax treaties that have almost no royalty withholding taxes, like the Netherlands… If this could be “fixed” then international corporate tax planning gets a bit easier… 30% in Australia or 12.5% in Ireland??? Not a hard question.
Back to work and stop dreaming about being an international tax structuring boffin having a whisky in Dublin, a cycle in Amsterdam and a swim in a tax haven…