Ireland's Gutsy Tax Gambit

By closing the "double Irish" loophole, the country is betting that tech companies need it more than it needs them.

With its English-speaking population, flexible labor laws, and attractive tax rates, Ireland has served as a destination for high-profile technology companies like Apple and Google since the 1990s. But just like the “Celtic Tiger,” the attractive tax rates are on their way out. The Irish government announced Tuesday that it will phase out a loophole that allowed some of the world’s most profitable companies to dodge taxes.

The loophole—called the “double Irish”—works like this. Companies in Ireland only have to pay taxes where they're controlled and managed, even if they're "managed" from tax havens like the Caymen Islands or Bermuda. This is different than the United States, where companies must pay tax where they are registered. Google’s Irish subsidiary, for example, earned $22.8 billion in 2013 but paid a meager $37.2 million (0.16 percent) in “administrative expenses” to the Irish government.

For a country eager to attract foreign investment and a company wishing to spend as little on taxes as possible, the “double Irish” law worked very well. But the loophole angered foreign governments, and under pressure from the European Commission, Ireland decided to get rid of it. Any new companies registering in 2015 won't enjoy the loophole and current companies have until 2020 to make a change.

This decision is not without some risk for Ireland: Multinational companies like Google employ more than 160,000 people in Ireland, more than 10 percent of the country’s workforce. Will the repeal of the “double Irish” law drive them away?

Not necessarily. It seems unlikely that other countries will be able to lure companies with a similar loophole, given new international tax regulations subject to begin next year. Ireland also has no plans to revise its rock-bottom corporate tax rate of 12.5 percent, which is among the lowest in the developed world. (The corporate tax rate in the U.S. by comparison is 35 percent.)

Google reacted to the news without alarm. “As we’ve always said, it’s for governments to comply with the law and for companies to enforce it,” it said in a statement. “We’re deeply committed to Ireland and will work to implement these changes as they become law."