Unpacking Discrepancies in American and Irish Royalty Reporting

In 2021, a striking discrepancy emerged in Ireland’s royalty payments to the United States. As shown in the first figure, Ireland reported paying approximately $106 billion to the U.S. for intellectual property use, yet the U.S. reported receiving only $24 billion from Ireland for these services. This stark difference, visible in reported trade data from the Organization for Economic Cooperation and Development (OECD),In this post, we used “OECD-WTO: Balanced International Trade in Services–EBOPS 2010,” a database from the OECD that we accessed on July 15, 2024. is both recent and unique to U.S.-Ireland intellectual property transactions.

Discrepancies in Reported Royalty Payments from Ireland to the U.S.

SOURCES: OECD-WTO: Balanced International Trade in Services–EBOPS 2010 and authors’ calculations.

The discrepancy in royalty payments is truly distinct. First, the large discrepancy is specific to intellectual property royalties and does not extend to other service sectors. The second figure illustrates that for services excluding intellectual property royalties (non-IP services), the reporting discrepancy between the U.S. and Ireland was modest. In 2021, Ireland reported paying $63 billion to the U.S. for non-IP services, while the U.S. reported receiving $51 billion—a much smaller gap compared to the IP royalty discrepancy.

Discrepancies in Reported Non-IP Service Payments from Ireland to the U.S.

SOURCES: OECD-WTO: Balanced International Trade in Services–EBOPS 2010 and authors’ calculations.

Second, historical data show that this discrepancy emerged suddenly in 2020, as the U.S.-Ireland trade relationship had previously been stable. Third, the anomaly is also unique to the U.S.-Ireland relationship, as neither country exhibits such a large reporting disparity with any other developed economy.

This unique and substantial discrepancy in royalty reporting between the U.S. and Ireland presents a complex puzzle in international taxation. To unravel this issue, our analysis proceeds in two key stages:

1. We first examine the origins of Ireland’s dramatic surge in royalty payments, tracing its roots to recent changes in global tax laws and the dismantling of sophisticated tax avoidance schemes.
2. We then investigate the potential causes and consequences of the discrepancies in reporting, considering their implications for tax revenue, public policy and the future of international corporate taxation.

The Surge in Irish Royalty Payments and Global Taxation Laws

The sudden increase in Irish royalty payments can be attributed to changes in global and national tax laws, particularly the elimination of the “Double Irish with a Dutch Sandwich” tax scheme.Using patents to shift profits isn’t unique to Ireland. See Mickenzie Bass, Ana Maria Santacreu and Jesse LaBelle’s 2023 blog post, “Profit Shifting in the 21st Century: Multinationals’ Use of Intrafirm Patent Transfers.” In a recent paper, Seamus Coffey argues that this increase during the period was a consequence of changes in global and national tax laws, specifically the elimination of this pervasive and controversial tax avoidance plan.

“Double Irish with a Dutch Sandwich” Tax Scheme

The Double Irish with a Dutch Sandwich tax scheme, as illustrated in the third figure, involved a complex arrangement between a U.S. parent company (USP) and three foreign subsidiaries. The first Irish subsidiary (I1) was incorporated in Ireland but managed from Bermuda, allowing it to avoid both Irish and U.S. taxes. The second Irish subsidiary (I2) was incorporated and managed in Ireland. The purpose of I2 is to control foreign distribution and collect income. A Dutch subsidiary (N) acted as an intermediary between I2 and I1 to avoid Irish taxes.

The scheme worked by exploiting specific provisions in Irish and U.S. tax laws. A USP would transfer intellectual property ownership to I1. Then, I2 would sublicense the intellectual property from I1 and pay royalties. These royalties would flow from I2 to N, and then from N to I1, taking advantage of European Union tax regulations. This structure allowed profits to be shifted to tax havens like Bermuda, effectively minimizing tax liabilities for the entire corporate structure.

Irish tax reforms, particularly the 2015 budget amendments, practically dismantled the Double Irish with a Dutch Sandwich scheme, with a phase-out period ending in 2020. Meanwhile, the U.S. Tax Cuts and Jobs Act of 2017 introduced additional measures to discourage international tax avoidance, further reducing the attractiveness of such complex tax structures. Consequently, Irish companies began paying royalties directly to American parent companies instead of routing them through tax havens. This change is reflected in the OECD-WTO balanced trade data analyzed here.

The analysis of the impact of these tax reforms relies on OECD-WTO Balanced International Trade in Services data, specifically focusing on charges for the use of intellectual property. It is important to note that unlike the first two figures, which use the unadjusted data reported by the two countries, the fourth, fifth and sixth figures use these balanced data, which are produced by the OECD using estimation techniques to reconcile reporting discrepancies between countries. These balanced data provide a more reliable picture of actual trade dynamics, unaffected by potential reporting anomalies from either country involved in the transaction.

We use this balanced data to evaluate the consequences of dissolving the Double Irish with a Dutch Sandwich tax scheme since the data offer a more accurate representation of realized trade flows. This approach allows us to analyze trends that might otherwise be obscured by the significant reporting discrepancies between the U.S. and Ireland.

The fourth figure shows that Irish royalty payments to the U.S. more than doubled since the disassembly of the Double Irish with a Dutch Sandwich tax scheme. This increase supports the hypothesis that royalties are now moving directly to the U.S. rather than to Bermuda through either Ireland or the Netherlands.

Increases in Royalties Paid by Ireland to the U.S.

SOURCES: OECD-WTO: Balanced International Trade in Services–EBOPS 2010 and authors’ calculations.

Further evidence of the scheme’s dissolution is presented in the fifth figure, which illustrates that both Irish and Dutch royalty payments to Bermuda (represented in our diagram by the arrows from I2 to I1 and from N to I1, respectively) have approached zero since the implementation of Irish and American reforms. This trend suggests that companies like I1 are no longer collecting royalty payments in tax havens.

Decreases in Royalties Paid by Ireland and by the Netherlands to Bermuda

SOURCES: OECD-WTO: Balanced International Trade in Services–EBOPS 2010 and authors’ calculations.

Additionally, the sixth figure confirms that royalty payments from Ireland to the Netherlands (represented in our diagram by the arrow from I2 to N) have severely diminished, indicating the abandonment of Dutch intermediary companies. These data points, along with the confirmation of other implications of the Double Irish with a Dutch Sandwich tax scheme’s elimination, provide strong exploratory evidence supporting Coffey’s argument that the meteoric rise in royalties paid from Ireland to the U.S. is likely a result of changes in international tax planning.

Decreases in Royalties Paid by Ireland to the Netherlands

SOURCES: OECD-WTO: Balanced International Trade in Services–EBOPS 2010 and authors’ calculations.

While the increase in Irish payments is explicable, the discrepancy between Irish and U.S. reporting remains puzzling. Potential explanations include U.S. corporations’ misreporting royalties to reduce tax burdens or the emergence of new, undiscovered tax avoidance strategies.

The Potential Tax Significance of the Discrepancies in Irish Royalties

If Ireland’s reporting is accurate, the implications for U.S. tax revenue could be substantial. A back-of-the-envelope calculation suggests that if the $82 billion discrepancy represents unreported income, it could translate to roughly $17.2 billion in forgone U.S. taxes—equivalent to nearly 5% of U.S. corporate income tax revenue. This amount equals more than twice the annual funding for the National Cancer Institute.

However, these calculations make several assumptions and should be interpreted cautiously. The actual tax implications would depend on various factors, including double-taxation agreements and industry-specific considerations.

The significant discrepancy between U.S. and Irish royalty reporting warrants further investigation. Whether it stems from U.S. underreporting or Irish overreporting, understanding this issue is crucial for policymakers as they approach potential tax code revisions with the expiration of the Tax Cuts and Jobs Act in late 2025. Clarifying the U.S.-Ireland tax landscape should be a priority to ensure fair and effective taxation practices.

Notes

1. In this post, we used “OECD-WTO: Balanced International Trade in Services–EBOPS 2010,” a database from the OECD that we accessed on July 15, 2024.
2. Using patents to shift profits isn’t unique to Ireland. See Mickenzie Bass, Ana Maria Santacreu and Jesse LaBelle’s 2023 blog post, “Profit Shifting in the 21st Century: Multinationals’ Use of Intrafirm Patent Transfers.”