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The IMF (International Monetary Fund) says that so many companies exploit complex avoidance
schemes, and so many countries offer devices that
make them possible, that examples are invidious.
Nonetheless, the “Double Irish Dutch Sandwich,” an
avoidance scheme popularly associated with Google,
gives a useful flavour of the practical complexities.
Here’s how it works (Figure 5.1 above): Multinational Firm X, headquartered
in the United
States, has an opportunity to make profit in (say)
the United Kingdom from a product that it can for
the most part deliver remotely. But the tax rate in
the United Kingdom is fairly high. So . . .
It sells the product directly from Ireland through
Firm B, with a United Kingdom firm Y providing
services to customers and being reimbursed on a
cost basis by B. This leaves little taxable profit in
the United Kingdom.
Now the multinational’s problem is to get taxable
profit out of Ireland and into a still-lower-tax
For this, the first step is to transfer the patent from
which the value of the service is derived to Firm H
in (say) Bermuda, where the tax rate is zero. This
transfer of intellectual property is made at an early
stage in development, when its value is very low (so
that no taxable gain arises in the United States).
Two problems must be overcome in getting the
money from B to H. First, the United States might
use its CFC rules to bring H immediately into tax*.
To avoid this, another company, A, is created in
Ireland, managed by H, and headquarters “checks
the box” on A and B for U.S. tax purposes. This
means that, if properly arranged, the United States
will treat A and B as a single Irish company, not subject to CFC (controlled
foreign corporation)rules, while
Ireland will treat A as
resident in Bermuda, so that it will pay no corporation
tax. The next problem is to get the money
from B to H, while avoiding paying cross-border
withholding taxes. This is fixed by setting up a conduit
company S in the Netherlands: payments from
B to S and from S to A benefit from the absence of
withholding on nonportfolio payments between EU
companies, and those from A to H benefit from the
absence of withholding under domestic Dutch law.
This clever arrangement combines several of the
tricks of the trade: direct sales, contract production,
treaty shopping, hybrid mismatch, and transfer pricing
*The United States will charge tax when the money is paid as
dividends to the parent—but that can be delayed by simply not
paying any such dividends. At present, one estimate (cited in
Kleinbard, 2013) is that nearly US$2tn is left overseas by
The IMF says that assessing how much revenue is at stake is
hard. For the United States (where the issue has been most closely studied), an
upper estimate of the loss from tax planning by multinationals is about US$60
billion each year - - about one-quarter of all revenue from the corporate income
tax (Gravelle, 2013). In some cases, the revenue at stake is very substantial:
IMF technical assistance has come across cases in developing countries in which
revenue lost through such devices is about 20% of all tax revenue.