By Jamie Smyth in Dublin and James Fontanella-Khan in Brussels Financial Times

Dublin amended its tax code following lobbying by US industry, reducing the tax burden on multinationals that funnel royalty payments to offshore tax havens, the FT has learnt.

The changes enabled some multinational companies to make royalty payments from their Irish-based operations directly to subsidiaries based in tax havens such as Bermuda or the Cayman Islands, without having to pay a 20 per cent withholding tax on the royalties.

The changes to Ireland’s tax code in July 2010 to exempt certain companies from the withholding tax were introduced as part of a suite of incentives to boost Ireland’s attractiveness as a location for intellectual property.

Previously, multinational companies with Irish operations had to pay patent royalties through subsidiaries registered in other EU states, typically the Netherlands, to avoid paying Irish withholding tax on patent royalty income paid to subsidiaries in tax havens such as Bermuda. Tax accountants coined the phrase the “Dutch Sandwich” to describe this mechanism.

The change in Ireland’s tax code was introduced following lobbying by the American Chamber of Commerce of Ireland in a pre-budget submission seen by the FT. The chamber argued that Ireland’s attraction as a location for intellectual property could be “significantly improved” by the abolition of withholding tax on patent royalties.

The changes came to light on Tuesday as Dublin strongly rejected allegations contained in a US Senate Committee report that it is a tax haven. Responding to the report, the Irish government claimed loopholes in US, rather than Irish, tax law were responsible for multinationals such as Apple avoiding paying billions of dollars in taxes.

Eamon Gilmore, Ireland’s deputy prime minister, told reporters Ireland did not negotiate any special tax deal with multinationals.

“They are not issues that arise from the Irish taxation system. They are issues that arise from the taxation system in the other jurisdictions, and that is an issue that has to be addressed in those jurisdictions,” he said.

The US Senate permanent subcommittee on investigations has accused Dublin of being at the centre of a complex tax avoidance strategy devised by Apple, which enabled the US technology giant to save US tax on $44bn in “otherwise taxable offshore income”. The report also claimed Apple cut a special deal with Ireland to apply a tax rate of less than 2 per cent on any profits that are taxable in the country, well below the 12.5 per cent Irish corporate tax rate.

Dublin rightly argues that US politicians could prevent multinationals from avoiding tax by making changes to its own tax laws. But tax experts also point to Irish laws that allow Irish-incorporated companies to be deemed non-resident for tax purposes as enablers for tax avoidance.

“An Irish incorporated company may avoid Irish tax if it is centrally managed and controlled outside Ireland, controlled by certain non-Irish residents and related to a company carrying on a real and substantive trade in Ireland,” said John Gulliver, head of tax at Dublin-based law firm Mason Hayes & Curran.

This structure enables multinationals to engage in a tax avoidance strategy known as the “Double Irish”. This mechanism relies on two Irish incorporated companies. The first is tax resident in Ireland and pays royalties to use intellectual property, which generates expenses that reduce the amount of tax it pays in Ireland. The other company, typically incorporated in Ireland but not tax resident in the country, collects the royalties in a tax haven such as Bermuda or the Caymans, thereby avoiding Irish taxes.

European leaders are expected to discuss ways to tackle corporate tax avoidance at an EU summit on Wednesday. The G8 summit will also discuss the issue next month. Officials in Brussels said the focus among EU leaders had turned on multinationals adopting so-called “aggressive tax schemes” that have been eroding countries’ overall tax revenues.

“It is obvious that this is becoming a bigger problem for member states,” said one official. “Before we only talked about countries’ commitments to taxation, now the attention will shift to companies, clearly.”

Brussels says fighting corporate tax avoidance is a priority for Europe. However, there are no concrete plans on the table to stop multinationals moving their profits to countries with low tax regimes. Shifting profits is considered to be a lawful measure to lower a company’s tax exposure.

The political strength of multinationals, which employ 150,000 people in Ireland, is underlined by a succession of tax changes and incentives introduced by Dublin over recent years following lobbying by industry.

Ireland is unusual within Europe for setting up a group chaired by the country’s top civil servant and staffed by international finance executives, regulators, tax lawyers, accountants – known as the Clearing House – to suggest changes to legislation. Before the 2012 budget, this group, which meets in private, recommended a series of 21 taxation and legal incentives sought by the finance industry, according to documents released under a freedom of information by an Irish MEP. Virtually all the changes were introduced in the subsequent budget.

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