The Double Irish Dutch Sandwich: End of a Tax Avoidance Strategy

I wrote about the Double Irish Dutch Sandwich a decade ago, a corporate tax avoidance strategy that was widespread and large enough to attract the attention of the International Monetary Fund. But changes in domestic and international tax treaties seem to have caused the strategy to fade significantly. Ana Maria Santacreu and Samuel Moore of the St. Louis Fed provides some background in “Unpacking Discrepancies in American and Irish Royalty Reporting” (August 8, 2024).

For those unfamiliar with the details of international tax avoidance practices, Santacreu and Moore describe the workings of the Double Irish Dutch Sandwich as follows:

The Double Irish with a Dutch Sandwich tax arrangement, as illustrated in the third figure, involved a complex arrangement between a US parent company (USP) and three foreign subsidiaries. The first Irish subsidiary (I1) was incorporated in Ireland but controlled from Bermuda, allowing it to avoid both Irish and US taxes. The second Irish subsidiary (I2) was incorporated and controlled in Ireland. The purpose of I2 was to control foreign distribution and collect income. A Dutch subsidiary (N) acted as an intermediary between I2 and I1 to avoid Irish taxes.

The scheme worked by exploiting specific provisions in the Irish and US tax laws. A USP would transfer 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 European Union tax rules. This structure allowed profits to be shifted to tax havens such as Bermuda, effectively minimizing the tax liability across the entire corporate structure.

However, a combination of Irish tax reforms in 2015 and changes to the US Tax Cuts and Jobs Act of 2017 rendered this strategy ineffective: “As a result, Irish companies began paying royalties directly to US parent companies rather than routing them through tax havens.”

The shifts in royalty payments tell the story. This figure shows royalty payments by Irish companies to the US, which doubled from 2019 to 2021.

In contrast, tax payments from Ireland and the Netherlands to Bermuda, known for its near-zero corporate tax rate, fell significantly, showing that only a fraction of corporate profits flow through Bermuda.

I’m sure that international tax lawyers around the world are coming up with new tax avoidance strategies even as I write this. But it’s worth remembering that there are two major costs here. The obvious loss is to government revenues, but the more subtle and still very real loss is the diversion of highly skilled talent from what could have been gains in efficiency and productivity to focus instead on corporate restructuring and tax avoidance games.