The Irish government today announced that it will close the "Double Irish," a tax loophole popular with U.S. tech and pharmaceutical firms such as Apple (AAPL), Facebook (FB) and Pfizer (PFE), which have operations in the country. The strategy has gained notoriety as countries around the world decry aggressive tactics multinationals use to minimize their tax burden.
In a speech unveiling Ireland's 2015 budget in Dublin, Finance Minister Michael Noonan said Tuesday the loophole, where companies lower their tax rates by funneling their profits through two Irish subsidiaries, will be phased out for new companies starting in January 2015 and for existing ones by the end of 2020.
Ireland's neighbors in Europe and U.S. officials have long called for the loophole to be closed, arguing it gave the Emerald Isle an unfair advantage.
"The Irish government is undoubtedly responding to the moves by the EU and U.S. government to tighten up global rules on tax avoidance by multi-national companies and to introduce a more standardized set of global rules," says Nat O'Connor, research director of the Dublin-based think tank TASC - Think-tank for Action on Social Change, in an email to CBS MoneyWatch, noting that "...the scope for any country to do this is tightening, which is appropriate as lost tax revenue means lost public services across Europe and America."
The "Double Irish" is attractive since Ireland's corporate tax rate is 12.5 percent, which is among the lowest in the world. Multinationals lower their burden further by moving profits through a second Irish subsidiary, which is located in an even lower tax jurisdiction, such as Bermuda.
"Ireland isn't a destination," said Lee Sheppard, contributing editor at Tax Notes, a respected website that follows tax policy, in an interview. "It's a weigh station."
Ireland's role as tax spoiler has long unnerved some of its European neighbors such as Germany and France, along with The Organisation for Economic Cooperation and Development (OECD). Officials from the OECD are trying to craft international tax rules to insure that companies pay their fair share of tax around the world, an initiative that Ian Roxan, a professor at the London School of Economics, argues spurred the Irish government to shut down the controversial loophole.
"The OECD is looking pretty serious about it," said Roxan in a telephone interview from London.
How much of a difference it will make to the bottom lines of U.S. corporations is hard to say. Multinationals like Ireland for reasons besides its advantageous tax rates such as its educated, English-speaking workforce and its close proximity to the U.S.
It's also important to remember that the "Double Irish" affects taxes U.S. companies pay on European profits and doesn't have a direct bearing on the taxes they pay to Uncle Sam, though it may encourage them to keep their profits parked overseas. One estimate from Bloomberg News estimates that $1.95 trillion in U.S. corporate earnings are booked offshore.
"The American government doesn't care what they do in Ireland as long as they have a few warm bodies there," says Sheppard of Tax Notes, "This particular gambit isn't so much about screwing the U.S. It's more about screwing Europe. "
Dublin continues to resist pressure to raise its corporate tax rate. Noonan added the "12.5 percent tax rate never has been and never will be up for discussion."
Though other countries may pressure Ireland to lower its tax rates, MoodysEconomy.com Chief Economist Mark Zandi notes that the trend around the world is toward lower corporate rates. He added that ending the "Double Irish" won't have a significant impact on the broader U.S. economy.
"It's an obvious advantage," Zandi said in an interview with CBS MoneyWatch, referring to Ireland's rate. "At the end if the day, I am not sure that Ireland would have seen the growth that it has without that very attractive rate."
According to the U.S. Chamber of Commerce in Dublin, 700 U.S. companies employ about 115,000 people in Ireland. Finance Minister Noonan's plan includes new incentives for these businesses, such as extending corporate tax relief to start-up companies, changing the research and development credit, and a "knowledge development box" that would protect patents and innovations.
"... In the current international tax environment it is imperative that Ireland makes it attractive for multinational companies to hold, develop and exploit their intellectual property from Ireland," said Louise Phelan, the president of the American Chamber of Commerce in Ireland, in a press release, adding that the plan outlined by Noonan, "sends out a very positive and powerful signal."
The announcement, however, has its critics. The Irish union Unite notes in an email to that the so-called "patent box" "may create new opportunities for tax avoidance."