Tech industry loses a tax leprechaun, but loophole will stay open for years

The “Double Irish” tax treat favored by Google, Apple and other large tech companies will be phased out by the Irish government, which is under pressure from the European Union and others to eliminate an arrangement that let companies avoid billions in taxes by washing intellectual property profits through off-shore subsidiaries.

The government confirmed the news on Tuesday but, for now, corporate accountants can rest easy since the tax changes provide a grandfather clause that lets companies take advantage of the controversial loophole until 2020.

Ireland’s announcement comes after years of complaints over the country’s tax law gimmicks, which let companies treat billions of revenues from across Europe as if they originated in Ireland, and pay almost no tax. The Wall Street Journal provided two examples of how US tech companies use the tax rules:

VMware for instance, has an Ireland-registered subsidiary named VMware Bermuda Ltd. that last year pulled in €1.43 billion ($1.8 billion) in licensing fees from the Irish unit that markets and sells VMware software and services, according to a corporate filing. VMware Bermuda paid no corporate income tax last year, the filing says.

A Facebook subsidiary in Ireland reported €1.79 billion in revenue in 2012. But the unit posted a pretax loss of €626,000, after subtracting €1.75 billion in administrative fees, which included royalties for use of the Facebook platform to Facebook Ireland Holdings, which is controlled via the Cayman Islands, according to corporate filings.

Such accounting practices are entirely legal, though they have attracted criticism from politicians and others, perhaps in part due to the tax treatments’ colorful names. The “Double Irish” is typically served with a “Dutch Sandwich,” which relies on Netherlands-based rules to avoid other taxes, and has been the subject of numerous headlines.

Ireland’s move may also fuel calls for the Obama Administration to work on passing laws to overhaul America’s byzantine corporate tax code and high tax rates. Critics say the current system punishes U.S. companies that want to repatriate their profits, resulting in companies like [company]Apple[/company] leaving large piles of cash overseas rather than investing it at home.

Ireland, which is trying to brand itself as a tech hub, appears to be cooking up replacements for the “Double Irish.” As the New York Times reported, the government is planning a “Knowledge Development Box,” modeled on the “patent boxes” of other countries, which let companies avoid intellectual property-related taxes.