A man walks into a Starbucks and orders a Double Irish with a Dutch Sandwich and proceeds to open his Apple MacBook Pro and Googles “a man walks into a bar jokes…”

A rabbi, a priest, and a Lutheran minister walk into a bar. The bartender looks up and says, “Is this some kind of joke?”

Not really…it is more an elaborate multinational tax strategy that allowed Google to avoid $2 billion in tax in 2011 by moving income to a subsidiary in Bermuda; Apple to avoid paying tax on $44 billion in income; and GE to hold $108 billion in offshore profits, among others. And all because the U.S. Treasury Department wished to simplify the tax code back in 1996 with something called “check the box.” Simplicity, however, can be overwhelmed with complexity.

“Check the box” seems an innocent enough phrase. The idea is that U.S. firms can decide how to classify a subsidiary for tax purposes. Like a magic trick, a company checks a box on a form and makes a subsidiary disappear – as if it never existed. In tax parlance, the subsidiary becomes a “disregarded entity.”

After setting up the “check the box” rule, the Treasury realized it had a problem, because there was an increase in cross-border financing. The Commerce Department estimates that U.S. companies keep some $1.8 trillion in earnings abroad.

Here is where simplicity gets complex…

A Double Irish requires two Irish corporations. The first company, which we’ll call “Pat,” is tax resident in Ireland – that is, Pat pays Irish income tax. Pat pays a second Irish company, which we’ll call “Mike,” a royalty for the use of intellectual property. This allows Pat to reduce its Irish tax bill for the expense of the royalty payment to Mike. This is why so many software companies love the Double Irish. Software is considered intellectual property.

The second Irish company, Mike, owns Pat and is not tax resident in Ireland (under Irish tax law, a company is tax resident where its central management and control is located, not where it is incorporated). Mike actually collects the royalties in someplace like Bermuda, which has no corporate income tax. Plus, Mike usually charges Pat above-market rates.

A guy walks into a bar. The guy behind him ducks.

This is where “check the box” reenters the picture. If Mike makes an entity classification election for Pat to be “disregarded” by checking the box, the payments between Pat and Mike are ignored for U.S. tax purposes – as if they never existed. Of course, if money is repatriated back to the U.S. it will be taxed. Before being hauled before the U.S. Senate to explain themselves, Apple was lobbying Congress to allow tax free repatriation of overseas funds.

The final item on the lunch buffet is the Dutch Sandwich. Because as you know, without bread, the sandwich falls apart. To avoid Irish withholding tax, a Dutch subsidiary is used because Ireland does not levy withholding on royalty receipts from European Union members. So, the money starts off on the books in the Netherlands, flows through Ireland and then on to Bermuda. A rather nice, virtually tax-free holiday.

There are approximately 1,000 multinationals with operations in Ireland.

A man walks into a bar and orders a drink, then discovers he has to go to the bathroom. To stop anyone stealing his drink he puts a note on it saying, ‘I spat in this beer.’ When he returns he finds another note saying, ‘So did I!’


A duck walks into a bar…