IT SOUNDS like a multinational snack but the double Irish Dutch sandwich is actually a tasty way for multinationals such as Google to organise their tax affairs.
The system takes advantage of low corporate tax rates in the Republic, the Netherlands and various jurisdictions such as Bermuda and the Cayman Islands.
It is legitimate, based on legislation in the relevant countries and supported by tax treaties. In the case of US companies, the arrangement must first get the approval of the US Internal Revenue Service. Google obtained this before establishing a base here.
Google operates the scheme through a series of agreements between subsidiaries based in the Republic, the Netherlands and Bermuda.
The California-based parent licenses its advertising software and technology, the company’s main revenue earner, to a subsidiary, Google Ireland Holdings, an Irish company controlled from Bermuda, and thus based there for tax purposes.
Google Ireland Holdings in turn licenses that technology to a Dutch-based shell company, which then licenses it back to Google Ireland Ltd, the Dublin- based entity that employs 2,000 people.
Google Ireland Ltd collects all advertising revenue generated by the group outside the US.
It then pays part of this back in royalties to the Dutch subsidiary, which passes most of this back to Google Ireland Holdings in Bermuda, where there is no corporation tax.
The Netherlands shell is needed because if the money were transferred directly to Bermuda the company would have to pay withholding tax to the Irish authorities.
However, that withholding tax does not apply if the money is transferred to another EU member state. The Netherlands allows businesses to establish corporate bases there for tax purposes.
The Netherlands entity is the meat in the sandwich between Google Ireland Holdings and Google Ireland Ltd, hence the term double Irish Dutch sandwich.
Google pays tax in both jurisdictions, in the Republic’s case at a rate of 12.5 per cent on its profits. Both states use their tax laws to attract investment. The Republic’s return is that it employs large numbers of people here.
The exchequer gets corporate tax on profits, plus social insurance and PAYE levied on employees. Google Ireland Ltd’s figures show that its social insurance bill was €16 million in 2011.
Google Ireland Ltd generated €12.5 billion in revenue last year – the company’s accounts state that this was advertising revenue. Out of this, it incurred €9 billion in administrative expenses, part of which was the royalty payments.
After deducting further expenses, its pretax profit was €24 million. The tax on that was €8 million. It paid €12 million in foreign withholding tax.
The Netherlands gets tax on the difference between the royalties paid to the Dutch subsidiary and those it pays to Google Ireland Holdings. The actual take is normally negotiated between the Netherlands authorities and the company. The Dutch exchequer is, in effect, taking a commission for allowing the company to channel payments through there.
