How Ireland is cracking down on ‘double non-taxation’ avoidance schemes

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Ten years after the notorious ‘Double Irish’ multinational tax loophole was shut down, Ireland’s reputation as a soft touch on corporate tax still hasn’t been entirely repaired. 

But its recent designation as a ‘tax haven’ by the EU’s Tax Observatory (along with its regular partner in crime, the Netherlands) notwithstanding, it’s hard to argue that the government is at least making moves towards reform.

A signatory to the OECD’s various treaties aimed at stamping out the wholesale tax avoidance strategies lumped together under the term base erosion and profit shifting (BEPS), Dublin is also falling into line with the European Commission’s insistence that EU member states take a tougher line on ‘aggressive tax planning’ by multinational corporations.

To this end, from January 1st, new rules will take a swipe at so-called ‘double non-taxation’ schemes perpetrated by companies operating in Ireland. In the most simple terms, double non-taxation occurs when money is moved between two tax jurisdictions with the express purpose of paying tax in neither (or at least significantly reducing the amount of tax paid).

Treaty abuse

Fleshing that out a little, most double non-taxation schemes take advantage of treaties designed to avoid double taxation or the charging of tax twice on the same revenues in different jurisdictions. This can occur if, say, a company pays dividends on earnings from operations in one country to shareholders in another. The dividend may be reduced by being calculated after tax on the original revenue in the first country and then taxed again in the second as a new source of revenue or income there.

Anti-double taxation treaties often take the form of providing preferential treatment to foreign capital coming into the country on the assumption that it has been ‘taxed at source’. But this is where such measures are open to abuse. Global corporations have latched onto the fact that they can use countries with favourable corporate tax rules (like Ireland) as ‘conduit countries’. This involves using registered headquarters in a conduit country to funnel capital from operations elsewhere, and then taking advantage of anti-double taxation treaties to move it to beneficiaries in other jurisdictions, all with minimal tax liability.

Extension of Withholding Tax

Introduced as part of the Finance (No. 2) Bill 2023, the new measures in Ireland to clamp down on double non-taxation schemes extend the scope of the Withholding Tax regime. Outward payments in the form of interest, royalties, dividends and distributions made by companies operating in Ireland will from the new year be liable for withholding tax if:

  • Payments are made between legally associated entities
  • The recipient is listed by the EU as a non-cooperative or “zero-tax” jurisdiction for tax purposes
  • The payment does not qualify for a permitted tax exemption.

The relevant withholding tax rates – 25% for dividends, 20% for interest and royalties – are higher than the new 15% corporate tax floor rate that Ireland has committed to as part of the OECD’s ‘Pillar 2’ tax reform proposals. So not only do the new measures strongly disincentivise money being moved out of Ireland to some of the world’s lowest tax jurisdictions, but they create an incentive for organisations to account for more of their taxes in Ireland, at a lower rate.

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