Wednesday, February 3, 2021

Further evidence of the end of the “double-irish”

A previous post looked at the changing nature of outbound royalties from Ireland.  The key point was a huge increase in 2020 in the flow of royalties from Ireland to the United States.

Royalty Imports to United States 2008-2020

Under a “double irish” structure these royalties would have gone to a Caribbean island such as Bermuda with maybe a stop-off in The Netherlands (the “dutch sandwich”).  As set out in the post there has been a huge decline in royalties following that path with an increase in royalties paid to the US as shown above.

We have more evidence of this change in Google’s annual 10K report which was filed with the SEC.  Technically it’s the 10K report of Alphabet, the owner of Google, but they are pretty much the same in practical terms.

Anyway, here is the table that shows the impact of Google’s revised structure:

Google 10K 2020 Domestic Foreign Income

This shows the split of Google income before taxes into “domestic” and “foreign”.  And we can see that, somewhat oddly, up to 2019, Google had more of its income deemed as foreign than domestic.  This is odd because most of the risks, functions and assets that generate Google’s profits are based in the US. 

Included in those foreign profits would have been the profit from the royalty flows out of Ireland.  Google’s operations in Ireland pay a royalty for the right to sell advertising on Google’s platforms to customers outside the Americas. 

This is a payment for technology developed in the US but US tax law allowed the rights to this technology to leak out of the US very cheaply.  Companies were then able to locate these licenses in no-tax jurisdictions such as Bermuda.

As Google set out in their 2020 annual report:

As of December 31, 2019, we have simplified our corporate legal entity structure and now license intellectual property from the U.S. that was previously licensed from Bermuda resulting in an increase in the portion of our income earned in the U.S. 

So now instead of making a payment that ends up in Bermuda, Google’s Irish operation makes a payment that goes directly to the US.  This structure is much more in line with the economic reality and substance of Google’s activities.

For 2020, we can see that of Google’s $48 billion of profit before tax, $37.5 billion is now classed as “domestic” and $10.5 billion as foreign.  The “double-irish” is no more.  Google is now reporting most its profit where it is earned – in the US.

Tax Impact

Does this change have an impact on Google’s taxes? Not hugely.  We can assess the impact from the table reconciling Google’s effective tax rate with the statutory 21 per cent federal corporate income tax rate in the US (some notations added):

Google 10K 2020 Tax Recon

The two key provisions we are looking for the impact of are:

  1. GILTI – Global Intangible Low-Taxed Income
  2. FDII – Foreign-Derived Intangible Income

Both of these were introduced with the Tax Cuts and Jobs Act (TCJA) in 2017.  Under the “double irish”, a significant share of Google’s profits ended up in no-tax Bermuda (no income taxes anyway).  But that didn’t mean the profit was not subject to tax.

The US operates a worldwide corporate income tax regime so US companies owe US tax on their profits wherever earned.  Google might have been able to shift the highly-valuable license for its technology from the US to a no-tax jurisdiction but US tax was still due on those profits. 

Of course, pre-TCJA, companies could defer the payment of this tax until the profit was formally repatriated back to the US, if ever.  The TCJA introduced a “deemed repatriation tax” for these historical profits but at a rate much lower than the 35 per cent that would have applied without the deferral. 

Google, and other US MNCs, have been paying this US tax on these historical profits for the past few years though the bulk of the payment is not due until the mid-2020s.  In the annual report Google says:

As of December 31, 2020, we had long-term taxes payable of $6.5 billion related to a one-time transition tax payable incurred as a result of the U.S. Tax Cuts and Jobs Act ("Tax Act"). As permitted by the Tax Act, we will pay the transition tax in annual interest-free installments through 2025.


The quote refers to the US tax due on the profits shifted to Bermuda.  The TCJA abolished the deferral provisions that meant the tax was not paid at the time (and at a higher rate) and introduced the GILTI tax for these profits (with a tip of the hat to whoever came up with the acronym!). 

We don’t need to go into the details but at its essence GILTI imposes a 10.5 per cent US tax on foreign income that is untaxed with no additional US tax due if the foreign tax on these profits exceeds 13.125 per cent.

We know that in 2018 and 2019 a large share of Google’s foreign income ended up in Bermuda.  The profit that ended up in Bermuda would be taxed at 10.5 per cent by the US regardless of whether it is repatriated or not.  Of course, 10.5 per cent is significantly lower than the statutory 21 per cent rate so having a large share of its profit taxed at 10.5% would reduce Google’s effective rate.

We can see this in the table for the item “Foreign income taxed at different rates”.  The table is annotated to show that this includes the impact of GILTI.  In 2018, having this income taxed at 10.5 per cent instead of 21 per cent knocked up to 4.4 percentage points off Google’s effective tax rate while in 2019 the impact of income taxed at lower rates was 4.9 percentage points.  Under the new structure this fell to just 0.3 percentage points in 2020.


So does this mean that the profit is now subject to tax in the US at 21 per cent.  Not quite.  We now turn to another TCJA provision, FDII –Foreign Derived Intangible Income. This is even more complex than GILTI but essentially is the tax that is applied when companies in the US sell property for a non-US person to use.

Google in the US is licensing the right to use its technology in markets around the world to Google in Ireland.  The fee that Google Ireland pays (the royalty) is taxed under the FDII provisions. This imposes a 13.1 per cent US tax on these profits (though the calculation of the taxable income is far from straightforward).

Anyway, we have moved from a situation where the profit Google earned selling to customers via Ireland was taxed at 10.5 per cent under the GILTI to this profit being taxed at 13.1 under FDII.  The impact of this can again be seen in the above table and is easy to identify with the item labelled “Foreign-derived intangible income deduction”.

The table shows that this increased in 2020 – with the increased payments from Ireland to the US – and that having this profit taxed under the FDII provisions rather than at the statutory headline rate of 21 per cent reduced Google’s effective tax rate by 3.0 percentage points.

This is lower than what was achieved under the GILTI and is part of the reason for the rise in Google’s effective tax in 2020, but we are still talking about something around one percentage point so it is not huge.

Why? And were there alternatives?

There are many reasons why Google has done this including changes in tax law in Ireland and the US.  An overarching reason is the OECD’s BEPS project.  One of the aims of this project is to try to ensure that company profits are better aligned with substance.  Google has no substance in Bermuda so declaring a large share of its profit there did not align with its substance.

Transfer pricing rules have rightfully changed to reduce firms’ ability to do this.  Of course, getting the license out of the US and into the no-tax jurisdiction in the first place is the ultimate reason such profits ended up there but the OECD has no jurisdiction over the US transfer pricing rules which allowed it.

There is a reason why profits from US firms dominate in places like Bermuda as shown in the OECD’s publication of data from country-by-country reports.

OECD CbCR data for Bermuda 2016 Chart

This is from a limited sample of parent jurisdictions but the overall picture is unlikely to change as the OECD publishes later updates of this data for subsequent years.

Google didn’t have to relocate the license from Bermuda to the US. In theory they could have moved it to any country in the world.  In practice, they were limited to locations they have substance.  One country where Google has substance is Ireland and they could have transferred the license to Ireland.

We know that some MNCs have done this with a subsidiary in Ireland buying the license.  The outlay under this transaction becomes eligible as a tax deduction under Section 291A of the Consolidated Tax Acts.  And there has been a huge increase in the amount of capital allowances claimed under S291A in recent years, most notably in 2015.

Google could have done this.  With the 80 per cent cap on the amount of capital allowances that can be claimed in any single year it would have faced an effective tax on these profits of 2.5 per cent in Ireland with additional tax due to the US under the GILTI provisions bringing it up to around 11 per cent.

Google chose not to do this. Google chose to relocate the license to the US and have the profit taxed under the FDII provisions of the TCJA. As noted above this results in a slightly higher effective tax on these profits.

Why not use S291A in Ireland and GILTI in the US to cut its tax bill?  It’s possible that Google determined it did not have sufficient substance in Ireland to warrant locating the profit linked to its licenses in Ireland. 

Google could have moved the license to Ireland but may have faced difficulties, including from tax authorities in market countries, if it could not show that it has sufficient substance in Ireland to justify the profits being reported there.  By moving the license to the US, Google is very unlikely to face such difficulties.

If we look at the onshoring of IP to Ireland it does appear to be more prevalent among manufacturing companies.  Pharmaceutical companies have multi-billion euro plants in Ireland.  It is much easier for them to show they have substance in Ireland given the role manufacturing plays for pharmaceutical and other industrial companies. 

Can Google really say that its profit is generated in Ireland? Pointing to a couple of empty office buildings in Dublin is unlikely to pass muster.

The end of the “double-irish”

Anyway there we have it. The end of the double irish.  And we can see the same if we look at other companies.  Here is the domestic/foreign split from Facebook’s 10K report published last week.

Facebook 10K 2020 Domestic Foreign Income

Again we see the significant switch from foreign to domestic. This is because Facebook transferred the license to sell advertising on its platforms from the Cayman Islands back to the US.  This was incorrectly reported as Facebook transferring assets out of Ireland as we discussed here

We could go through the same GILTI/FDII rigmarole for Facebook as we did for Google, but we won’t.  The conclusion is simple: the “double-irish” is dead.  Its demise has not seen tax bills soar.  But I doubt we’ll see many headlines about that.

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