Europe Economy

Irish budget: Death knell for ‘Double Irish’?

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Michael Noonan, Ireland's finance minister, is under international pressure over the country's tax rules, which have allowed U.S. technology giants like Apple and Google to pay very little tax on their international earnings.

There has been plenty of speculation that Tuesday's budget may mark some pledges to close the loophole, which allows companies to do a "double Irish" by channelling royalty payments for intellectual property from one Irish subsidiary company, to another that is based in a tax haven. Noonan is expected to announce that the "double Irish" will be closed to new entrants from 2015, but companies using it already can do so til 2020, according to CNBC sources in Dublin.

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The loophole has attracted criticism from the U.S., Europe, and the Organisation for Economic Co-operation and Development (OECD), which last month recommended an end to these kinds of arrangements.

"There has been a lot of chat over the global tax debate, and Ireland has suffered some reputational damage, unfairly, as a result of this," Feargal O'Rourke, head of tax at PricewaterhouseCoopers Ireland, who specializes in advising U.S. technology companies relocating to Ireland, said in a video on the PwC website. He forecast a change in the corporate residency rules, and spoke of the need to keep the tax system "competitive."

Still, the Irish government may hedge its bets until it sees what others are prepared to do to fall in with the OECD.

"I don't think you will see a lot by way of finer detail, but more of broad commitments from the government," Philip O'Sullivan, chief economist for Ireland at Investec, told CNBC.

"It would be wise not to take steps until they can tell if other countries will follow."

New tax incentives focused on intellectual property are likely to be a feature of this year's budget – and that may continue to attract global pharmaceutical and technology companies to Ireland's shores.

"Intellectual property and R&D (research and development) tax credit are the real tax incentives for the 21st century, and I believe the minister will make positive changes in this area," O'Rourke said.

The real economy could get a boost from a much-trailed plan to raise the threshold for the Universal Social Charge, which should boost the pockets of lower earners.

The Irish economic recovery has come back to form, after a blip late last year, with gross domestic recovery (GDP) growth of 5.8 percent in the first half of 2014. However, much of the recovery is concentrated in Dublin, and there are still many who feel "left behind," according to O'Sullivan. Recent protests over planned water charges, where 50,000 people took to the streets of Dublin, emphasized that there is still festering discontent with the political class, despite the apparent economic recovery.

Ireland was forced to seek a bailout from international lenders in 2010, after the near-disastrous pledge to guarantee all bank deposits in the country by the Irish government, which followed the monumental bursting of the Irish property bubble fueled by cheap credit.

New planned curbs on mortgage lending by the Central Bank of Ireland, likely to be imposed next year, are aimed at stopping future property bubbles, and are harsher than their U.K. equivalents.

Ireland's banks are facing the upcoming stress tests from the ECB, although Investec economists predict that the country's two 'pillar banks', AIB and Bank of Ireland, won't need to raise further capital as a result.

One measure being considered which could potentially be even more significant, according to sources in Dublin, would be allowing the two lenders to reclassify their deferred tax assets (DTAs), losses or provisions which can be offset against future tax bills when the bank becomes profitable, as deferred tax credits. Italy and Spain both made similar moves during their debt crises. If the assets were changed to deferred tax credits, they would make the banks' capital ratio look more robust – and make AIB look more attractive as the government prepares to sell it off next year.

- By CNBC's Catherine Boyle