The Effect of the Closure of the Double Irish Arrangement on the Location of U.S. Multinational Companies’ Profits (Navodhya Samarakoon, July 2023)

 

 

 Abstract.

In 2015, the Irish government announced the closure of the Double Irish; one of the largest tax loopholes used by U.S. multinational companies, giving existing users until 2020 to comply. Using U.S. administrative corporate tax data, I provide novel estimates on profit shifted back to the United States after closure of the Double Irish. I estimate that firms that used the Double Irish redirected $59 billion in royalty payments to the United States in 2020, the first year of full closure. To disentangle the effect of loophole closure from other major international tax reforms, I propensity score match to a comparable control group. Using this comparable control group, a difference-in-differences analysis suggests the average Double Irish user reports $609 million more in royalty payments after full closure. I use a log specification to demonstrate royalty payments shifted,although large, are driven by outliers. Multinational companies in my treated group funneled an estimated $1.2 to $1.4 trillion in profits to low-tax jurisdictions via the Double Irish from 1998 to 2018. The royalty payments redirected to the United States comprise 31 to 38 percent of profit within the Double Irish arrangement in 2018, meaning many Double Irish users continue to hold large amounts of profit abroad. Lastly, my estimateson the size of the arrangement suggest the current literature may underestimate the U.S. tax base shifted abroad.

Keywords: international taxation, profit shifting, corporate taxation, multinational com-
pany

JEL Classifications: F23, H25, H26, H32

 As one of the first studies to observe the use of tax planning arrangements by U.S. MNCs at the affiliate level, I provide evidence of the historical importance of the Double Irish. In doing so, I demonstrate relatively few U.S. MNCs disproportionately contribute to corporate tax base erosion. These companies maintained existing structures through the 5-year grace period and, in fact, continued to funnel profit into the Double Irish at an increasing rate between 2015 and 2019. Although the Double Irish is closed, the paperemphasizes that past, and current, profit shifting is driven by attributes of U.S. law. CTB regulations no longer benefit my treated group through the Double Irish, but difficulties in enforcing arms-length standards when transfer pricing IP continue to facilitate themovement of profits abroad.

 

 

🔎Placing this in context of loophole size, after full closure 62-69% of 2018 Double Irish profit levels remained abroad. I note several possible reasons for this in my conclusion! 10/13

— Navodhya Samarakoon (@NavSamarakoon) July 5, 2023

🔎 Placing this in context of loophole size, after full closure 62-69% of 2018 Double Irish profit levels remained abroad. I note several possible reasons for this in my conclusion! 10/13

— Navodhya Samarakoon (@NavSamarakoon) July 5, 2023

🔎 Finally, these 134 firms alone used the Double Irish to shift $1.2 to $1.4 trillion in profits to low-tax jurs. between 1998 and 2018. In 2017, shifted profits made up 14-17% of the US corp tax base. 11/13

— Navodhya Samarakoon (@NavSamarakoon) July 5, 2023