What loopholes reveal

When we talked about Tiebout and his theory on local expenditures as a means of preference revelation, we were mainly referring to individuals and to small communities within one state or country. However, by broadening the scope of his argument, analyzing Ireland as part of the world community and firms as individuals, I will proceed to discuss Irish tax regulations.

Firms and companies establish their location according to the laws of each city or community. They seek for the set of laws that best satisfy their business model in terms of regulations, free market, and most importantly, taxes. This is the case of companies in Ireland. For many years, Ireland has had the biggest tax loophole called the “Double Irish”, in which firms can transfer royalty payments for intellectual property to a country with no corporate-income tax. Because of the flexible tax system, many foreign firms such as Google, Apple and Facebook had had set Irish subsidiaries to help them shelter Irish profits from foreign subsidiaries, which revealed their preference for a tax-avoidance. But the rules of the game have recently changed:

In an effort to eliminate the Double Irish, the government established that all Irish companies are required to have tax domicile somewhere. For companies already registered in Ireland, this will be done with a transitional period of six years, giving them a chance to accommodate their business model to new tax regulations. This policy can have two consequences: either it enhances the pressure on neighboring tax-friendly countries to enforce more strict tax policies, as the article suggests; or it will cause foreign firms to find another country where the loophole can still be made. Because the government is interested in maintaining Ireland as an attractive location for investment, they have also developed a new tax break for intellectual property capital, hoping companies like Apple will choose to remain interested in the country. If companies decide to move out of Ireland, it will strengthen Tiebout’s argument claiming that local expenditures will better reveal the preferences of an individual. The elimination of the Double Irish will reveal if companies that were originally established in Ireland did so because of tax laws, or because they were attracted to Ireland’s market. Google has chosen to stay in Ireland; the eyes are now on Apple and other tech companies as to which decision they will make.