Closing Irish Tax Loophole May Spook Corporations but Not Economy

The way the Double Irish works is that companies put their intellectual property into an Irish-registered company that is actually controlled from a tax haven, perhaps Bermuda or the Caymans. Since Ireland taxes companies based on where they are run from, instead of where they are registered (the U.S. does the opposite), that means Ireland taxes royalty payments on those intellectual properties either minimally or not at all.

While that will take something of a toll on Ireland’s economy, it’s probably not really much of a gamble, considering the OECD’s announcement. Since such a broad action is being taken globally, other tax-haven countries are watching to see what befalls Ireland—but are likely to take their own measures in the not-so-distant future to come into line with government crackdowns.

According to Angel Gurria, OECD’s secretary general, its own recommendations to fight tax avoidance by multinationals will be presented to the G20 in 2015 under the joint Base Erosion and Profit Shifting project. The plan is aimed at creating one set of international tax rules that will both allow the protection of their tax bases by governments and also avoid restrictions on legitimate cross-border activity. To that end, countries will be sharing information from financial institutions to make sure there is international coherence on corporate income tax.

Ireland’s in a good position to pursue action on taxes, since its improving economy has included progress at its banks. Only one Irish bank failed its recent ECB stress test, Permanent TSB; the others passed with flying colors—a far cry from bailout days in 2010.

Even the news about Permanent was neither unexpected nor terrible; the shortfall, at 854.8 million euros, is not considered so large that the bank cannot raise it without having to resort to another bailout. Noonan said in a report earlier in October about it, “If they require capital, they’re strong enough to get the small amounts of capital they require in the markets. So we don’t see any risk to taxpayers.”

Indeed, in mid-August, Fitch Ratings upgraded Ireland’s long-term IDRs from BBB+ to A- with a stable outlook, and its short-term IDR from F2 to F1. Fitch analysts Gergely Kiss and Michele Napolitano said in research that “[T]he upgrade primarily reflects Ireland’s successful fiscal consolidation program and improved market financing conditions, as well as the employment-led recovery, large current account (CA) surplus and declining vulnerabilities in the banking sector.”

In addition to a “strengthening recovery, with revenue growth in particular exceeding expectations,” Kiss and Napolitano said, “[m]arket financing conditions have steadily improved over the last two years, since Ireland returned to the markets. The yield curve has declined significantly over this period, and Irish yields are now close to historical lows…. The improving labor market conditions are having positive spillover effects on household consumption and public finances. They are also easing concerns over the credit quality of the heavily indebted household sector.”

Both Bank of Ireland and Allied Irish Bank saw Fitch raise their viability ratings in July, said the analysts, “as the banks have managed to improve capital flexibility and return to profitability in 2014.” And although “the recovery is still fragile and downside risk exists,” they added, “Fitch forecasts growth of 2.2% in 2014, followed by 2% in 2015–2016. Domestic demand could turn positive in 2014, driven by private consumption and a smoother investment profile. Fitch maintains its view that medium-term growth potential is around 2%, significantly below the pre-crisis level, but still above euro zone growth potential.”