Double Irish Dutch Sandwich Mechanism of Tax Avoidance

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Mayur Joshi
Mayur Joshi
Mayur Joshi is a forensic accounting evangelist based out of Pune. He regularly contributes to the Regtechtimes. He is the forensic accounting and financial crimes evangelist in India who is instrumental in designing india's first certification program in Anti Money Laundering. He is the author of 7 books on the financial crimes and compliance subjects.

The term “Double Irish Dutch Sandwich” might sound like a complicated concept, but let’s unravel it in simpler terms to understand how it works and why it has gained attention, especially in the realm of corporate taxation.

What is the Double Irish Dutch Sandwich?

The Double Irish Dutch Sandwich is a tax strategy employed by multinational corporations to minimize their tax liabilities. The name originates from the countries involved in the process: Ireland and the Netherlands. The technique utilizes Ireland’s favorable tax regime, often termed a tax haven. It also uses the Netherlands’ beneficial tax laws regarding intellectual property (IP) holdings.

How Does It Work?

Double Irish Dutch Sandwich is a six-step process.

    1. A multinational corporation sets up a Dutch subsidiary and an Irish Subsidiary.
    2. The Dutch subsidiary lends money to an Irish subsidiary.
    3. The Irish subsidiary invests the money in a high-tax country where the taxes are more than in Ireland.
    4. The Irish subsidiary pays interest on the loan to the Dutch subsidiary.
    5. The Dutch subsidiary deducts the interest payments from its taxable income, reducing its tax liability in the Netherlands.
    6. The Irish subsidiary pays little or no tax on the interest income, due to Ireland’s low corporate tax rate.

The scheme is effective because the Netherlands and Ireland have different tax treaties with other countries. For example, the Netherlands has a tax treaty with the United States that exempts Dutch companies from paying US corporate tax on interest income. Ireland has a similar tax treaty with the United States, which exempts Irish companies from paying US corporate tax on dividends.

Real-World Examples

Some of the largest corporations have utilized the strategy to minimize their tax obligations. Notable examples include Google, Apple, and Facebook. Tax forensic accountants need to study tax avoidance schemes thoroughly.

Google’s use of this strategy was legal, but it was widely criticized as being unfair. In 2017, the European Commission ruled that Google had received illegal tax breaks from the Irish government. The Irish government was ordered to recover €13 billion in back taxes from Google.

Google has stopped using the Dutch sandwich Irish double mechanism. However, the scheme remains a popular tax avoidance strategy for many multinational corporations.

It is important to note that tax avoidance is different from tax evasion. Tax avoidance is the use of legal loopholes to reduce or eliminate one’s tax liability. Tax evasion, on the other hand, is the illegal concealment of income or assets to avoid paying taxes. You can learn more about tax evasion in the Certified Tax Fraud Analyst course.

In Conclusion

The Double Irish Dutch Sandwich represents a complex yet powerful tax-saving tool employed by multinational corporations. However, it is essential to recognize that the landscape of international taxation is evolving, with authorities increasingly scrutinizing tax avoidance practices. While this strategy offers significant tax benefits, it is critical for companies to ensure compliance with evolving tax regulations and remain updated on legal and ethical tax practices.

By understanding the dynamics of tax strategies, we can better appreciate the broader dialogue surrounding fair taxation and its implications for both businesses and governments worldwide.

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