Double Irish Dutch Sandwich: The End of Tax Avoidance Strategy

I wrote about the Double Irish Dutch Sandwich a decade ago, a strategy that was so widespread and large-scale that it caught the attention of the International Monetary Fund (IMF) for avoiding corporate taxes. But with the various changes in national and international tax agreements, the strategy seems to have largely disappeared. Ana Maria Santacreu and Samuel Moore of the Federal Reserve Bank of St. Louis said:Unraveling the Differences Between U.S. and Irish Royalty Reporting” (August 8, 2024).

For those unfamiliar with the specifics of international tax avoidance schemes, Santacreu and Moore explain how the Double Irish Dutch Sandwich works:

As illustrated in Figure 3, Double Irish with its Dutch sandwich tax system involved a complex arrangement between a US parent (USP) and three foreign subsidiaries. The first Irish subsidiary (I1) was incorporated in Ireland but managed in Bermuda, thereby avoiding both Irish and US taxes. The second Irish subsidiary (I2) was incorporated and managed in Ireland. The purpose of I2 was to control foreign distributions and collect income. The Dutch subsidiary (N) acted as an intermediary between I2 and I1 to avoid Irish taxes.

The scheme was implemented by taking advantage of certain provisions of Irish and US tax law. USP would transfer ownership of the intellectual property to I1. I2 would then sublicense the intellectual property from I1 and pay royalties. These royalties would flow from I2 to N, and then from N to I1, taking advantage of EU tax rules. This structure effectively minimized the tax liabilities of the entire corporate structure by shifting profits to a tax haven such as Bermuda.

But the combination of Ireland’s 2015 tax reform and changes to the U.S. Tax Cuts and Jobs Act of 2017 rendered that strategy ineffective. “As a result, Irish companies began paying royalties directly to their U.S. parent companies, bypassing tax havens.”

Changes in royalty payments tell the story. This graph shows royalties paid by Irish companies to the United States, which doubled from 2019 to 2021.

Conversely, taxes paid in Bermuda, Ireland and the Netherlands, which are known for having near-zero corporate income tax rates, have fallen significantly, indicating a decline in corporate profits flowing through Bermuda.

I am sure that international tax lawyers around the world are coming up with new tax avoidance strategies as I write this. But it is worth remembering that there are two big costs here. The obvious one is the loss of government revenue, but the more subtle and very real one is the diversion of powerful talent from what could have been gained in efficiency and productivity to focus instead on corporate restructuring and the tax avoidance game.