If Oscar Wilde were to comment on the evolving taxation of multinationals in Ireland in recent years, he would probably say that failing to close one loophole may be regarded as a misfortune; failing to close two looks like carelessness.

Yet my reporting over the past week has shown that this is exactly what happened. As detailed on Tuesday, then Minister for Finance Michael Noonan passed a reform in 2014 forcing Irish-registered companies to be tax-resident in Ireland, apparently ending the double Irish tax scheme whereby Irish intermediary holding companies of countless multinationals were resident nowhere or in zero-tax offshore jurisdictions. 

There was, however, a loophole in the closure of the loophole. The reform did not apply in countries where a tax treaty with Ireland allowed such cross-border residency, such as Malta. Before the 2014 legislative change took full effect in 2020, multiple corporations were already shifting their Irish-registered intermediary holding companies to the Mediterranean island. The same could be expected of other treaty jurisdictions, such as the United Arab Emirates.

The charity Christian Aid identified the loophole and called it the single malt. In its most extreme form, the tax treaty between Ireland and Malta allowed the income of a company straddling the two countries to pay tax nowhere.

In November 2018, Revenue and its counterpart tax authority in Malta agreed an add-on to the treaty, again to ensure that companies formed in Ireland would be regarded as tax-resident in Ireland. Noonan’s successor Paschal Donohoe made the change public on December 3, 2018.

But what happened just eight days later? An Irish subsidiary of the Arizona-headquartered semiconductor maker Microchip, involved in a series of multi-billion-dollar intellectual property transactions, changed its tax residency to Malta. As reported on Wednesday, it has been extracting the corresponding intercompany debt repayments from Microchip’s Irish trading centre ever since.

Of course, neither Microchip nor any of the other reputable, listed multinationals I covered this week broke any laws. The 2018 treaty update with Malta had simply left another gap wide open: The Irish residency obligation applied only in the most egregious single malt cases that would have resulted in profits being taxed nowhere at all.

It has remained completely legal to operate a good old double Irish structure with international sales booked in Ireland, while an intermediary holding company extracts payments for the use or financing of the associated intellectual property and declares the corresponding profit in Malta, where it is taxable at 5 per cent. This is what I’ve called the double malt.

If you’re having trouble getting your head around this, consider this series of articles: I have written them largely on the basis of documents obtained from companies, government agencies and tax analysts in Europe and in the US. Why don’t I establish a company here in Ireland and pay someone in Malta a small fee to organise its board meetings via video call from a computer in the Verdala Business Centre, where Abbott Laboratories, Microchip and Tencent already surface hundreds of millions of euros in profits from Irish sales?

The Verdala Business Centre in Birkirkara, Malta, home of the double malt.

The same computer could be used to store all my digital source documents while I read them remotely from here. Then when my salary comes in from The Currency, I could tell Revenue not to bother deducting income tax from it, because I’m actually remitting most of my pay to my own company resident in Malta, where the documents underpinning the value of my work are stored. I could then extract the same income from that company, liable to Malta’s 5 per cent corporation tax rate.

If this sounds ludicrous, that’s because it is. Yet this is essentially what the multinationals listed above do – in full compliance with current regulations.

So, were two successive government attempts to avoid this scenario plagued by misfortune? Carelessness? I don’t think so. When I queried Revenue this month, a spokesperson gave a swift and comprehensive response detailing how the double Irish tax structure remained legal via Malta. A further freedom of information request showed that the tax authority had conducted activities amounting to “investigations and inquiries” in 2020 into compliance with the amended tax treaty with Malta. Their details remain secret.

On the contrary, my impression is that skilled officials have known all along exactly what multinationals may or may not do before and after a given rule change, and the government’s decision on both occasions was to apply the narrowest possible patches to stamp out the most controversial behaviour while maintaining other attractive avenues for corporations to reduce their tax bills if they came to Ireland.

In the statement announcing that Revenue had closed down the single malt (without detailing that this was restricted to full-on double non-taxation cases only), Donohoe said at the time: “While I am confident that US tax reform has already significantly reduced the concerns around the single malt structure, I had asked officials to examine any further bilateral action that may be needed. I am pleased that this agreement has been reached which should eliminate any remaining concerns about such structures. This is another sign of Ireland’s commitment to tackling aggressive tax planning, as set out in Ireland’s Corporation Tax Roadmap.”

A question to the Department of Finance this month about any potential plans to outlaw the continuing use of double malt structures remains unanswered. So much for the minister’s “commitment to tackling aggressive tax planning”.

The US GILTI as charged

The US tax reform the minister referred to was the late 2017 introduction of the Global Intangible Low-Tax Income (GILTI) regime by the Trump administration. The new rule, still in place today, says that when American multinationals use structures such as the Irish-Maltese intellectual property holding companies detailed in The Currency this week, the US tax authority may apply a top-up to ensure that the resulting profits are eventually subject to a tax rate equivalent to 13 per cent. 

Although this is still lower than the current US federal corporation tax rate of 21 per cent, it sounds good – what’s wrong with a bit of market-distorting export subsidisation through preferable tax treatment, surely everyone else does it? (Incidentally, the White House’s Budget 2023 published this week proposes federal corporation tax rates of 28 per cent domestically and 20 per cent on GILTI profits, which would wipe out Ireland’s tax advantage in the competition for American investments with many other jurisdictions).

How, then, did Abbott Laboratories achieve a worldwide effective tax rate of 10 per cent in 2020, aided in part by the 4 per cent current tax charge visible on the profits of its Irish-Maltese rapid diagnostics structure that year?

You’ve guessed it, the GILTI rule itself contains a loophole. It considers the overseas income of US-based multinationals on a blended basis – all profits and taxes derived from intangible assets around the world in one pot. So the (minimal) profits the group leaves in limited-risk distribution subsidiaries located in higher-tax market countries to fuel local expansion enters into the equation.

For example, the €3 million pre-tax profit returned by Abbott Rapid Diagnostics in France in 2020, taxed at 31 per cent, contributed to averaging out the pharmaceutical giant’s tax bills around the world before the Internal Revenue Service considered the imposition of any GILTI top-up in the US. This may be small, but the Irish-registered companies in Abbott Rapid Diagnostics’s double malt structure had 36 such local subsidiaries around the world that year – it all adds up.

There were certainly other tax breaks sheltered from GILTI rules in the seven jurisdictions, including Ireland and Malta, where the Abbott group reported enjoying “a combination of favorable statutory tax rules, tax rulings, grants, and exemptions”.

In an interview yesterday, Christian Aid Ireland’s head of policy Conor O’Neill rightly called out the failure of a “whack-a-mole” approach to closing individual corporation tax loopholes whenever they cause a fresh controversy. The only credible alternative is a collective approach recognising that profits will always flow downwards to the lowest-tax point and flattening the global catchment.

The most advanced attempt at achieving this so far is Pillar Two of the global tax agreement brokered by the OECD last year, under which 137 countries have agreed that large multinationals should effectively pay a minimum of 15 per cent corporation tax in each jurisdiction where they operate (not on a global blended basis).

Ireland reluctantly and belatedly supported the agreement last October. Yet it is hard to see what benefit this country retains from continuing to allow tax planning structures as aggressive as the double malt. It leaves hardly any corporation tax payable in Ireland – just €3 million at Abbott Rapid DX International in 2020 after adjustments for prior years, and none at any of Microchip, Riot Games or Lufthansa.

They did, between themselves, employ 640 people in Ireland that year. But the government could have created more or less the same number of much-needed public service jobs with the €60 million in Irish tax that it would have raised if the profits of Abbott Rapid Diagnostics’s double malt structure alone had been domiciled here.

By contrast, those multinationals with significant employment in Ireland, from Microsoft to Google, Facebook and Apple, have apparently given up on heavily offshored tax structures like the double malt and onshored their intellectual property and associated taxable profits to Ireland or the US. They enjoy reduced tax bills either way, but nothing as unsustainable as 5 per cent.

The bewildering survival of the double malt, although enabled by governments including those of Ireland and the US, benefits precisely none of them.

This is, in the end, the crux of this issue. OECD talks gathered momentum once average citizens paying through the nose for their taxes in developed countries got tired of seeing their bridges, hospitals and energy infrastructure crumble as their governments struggled to meet their full costs. Meanwhile, corporations and rich individuals in those countries were parking their income offshore instead of paying their fair share of tax. This has fuelled votes for Trump, Brexit and Europe’s far right, and successive waves of bonnets rouges and gilets jaunes protests in France. 

Meanwhile, as O’Neill pointed out, siphoning off profits and taxes from developing countries – where multinationals also sell their products and services – hampers those governments’ ability to improve local living conditions, in turn contributing to the instability and migration crises costing developed nations billions to manage.

The bewildering survival of the double malt, although enabled by governments including those of Ireland and the US, benefits precisely none of them. The sole beneficiaries are multinational companies themselves, their shareholders and the small elite of lawyers and accountants selling them ready-made companies to enable such schemes.

Further reading – the double malt series

Part one: How a pandemic boost to a multinational’s Irish sales left a half-billion profit taxed at 4%

Part two: The double Irish is alive and well, and it officially lives in Malta

Part three: How Microchip, Tencent and Lufthansa cut their tax bills via Ireland and Malta

Part four: “Structures like these siphon revenue from some of the poorest countries in the world”