The Corporate Income Tax: A Persistent Policy Challenge

Abstract

This article was presented as the inaugural Ellen Bellet Gelberg Tax Policy Lecture at the University of Florida Levin College of Law on November 12, 2010. The views in this study do not reflect the views of the Congressional Research Service.

A newspaper article published in late October 2010 describes a scheme referred to as the “double Irish” with a “Dutch sandwich” that used a variety of rules to reduce taxes on the income of the search company Google to 2.4 percent. The method involved transferring the intangible asset developed by Google in the United States to an Irish holding company, with another, active, Irish subsidiary of that firm selling advertisements in Europe. The sales subsidiary paid royalties, eliminating its own Irish tax. The royalties were diverted through a subsidiary in the Netherlands to avoid the 20 percent Irish withholding tax on royalties. The Netherlands subsidiary then made payments to the Irish holding company whose tax residence was in Bermuda, with no tax. As a result, the income avoided both the 35 percent U.S. corporate tax and the 12.5 percent Irish corporate tax. Although not a company that is a household name, Forest Laboratories, a drug company, used a similar scheme but, in its case, exported pills made in Ireland back to the United States. Both articles described how many companies are using, or considering, such a plan.