“Double Irish with a Dutch Sandwich.” Sounds like two Guinnesses and something made out of chicken, doesn’t it? It’s making us hungry.

It’s not food and drink, however. It’s a complicated corporate tax loophole, exploited by tech companies and others with intellectual property, pioneered by Apple, and used by many to save billions of dollars in taxes.

It all begins with the licensing of patents and IP to an Irish subsidiary. When products are sold in the U.S., taxes are reduced by paying royalties to that subsidiary. Under Irish law, if the subsidiary is managed by foreigners, profits skip along, Irish tax-free, usually to a Caribbean tax haven.

Confused yet? Here’s a pretty diagram, courtesy of the New York Times.

(Apple’s innovations go far beyond the iPhone, don’t they?)

Then again, not all of them are succeeding. The problem comes down to the value of that intellectual property, or “transfer pricing.” How much is a patent worth? When a company is licensing patents to itself, it’s going to be tempted to set the value to the amount that will best benefit itself tax-wise. (Higher valuation means larger business expense deduction.)

Instead, companies are supposed to determine prices at “arm’s length”, meaning whatever price would be appropriate if they weren’t licensing to themselves.

With all of that said, should you advise your company to take the same route? The savings don’t lie: One study estimates that Apple saved between $2.4 and $4.8 billion in taxes. Just be sure that your transfer pricing is reasonable. (And if you aren’t a tax lawyer, it’s time to consult outside counsel.)

Related Resources:

  • States v. Startups: When Laws and Innovation Clash, Who’s to Blame? (FindLaw’s In House Blog)
  • Is it Ethical for an In-House Counsel to Whistleblow? (FindLaw’s In House Blog)
  • Former Ohio In House Counsel Gets Prison for Tax Fraud (FindLaw’s In House Blog)

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