Ireland's Ministry of Finance announced that Ireland will phase out its controversial (but legal) tax scheme known as the "Double Irish," which lets companies, especially tech companies, drastically reduce their overseas tax burden.

"I am abolishing the ability of companies to use the ‘Double Irish’ by changing our residency rules to require all companies registered in Ireland to also be tax resident," Irish Finance Minister Michael Noonan said in a statement accompanying the government’s new 2015 budget on Tuesday. "This legal change will take effect from the 1st of January 2015 for new companies. For existing companies, there will be provision for a transition period until the end of 2020."

The move will affect many tech firms that take advantage of this arrangement such as Apple, Amazon, Adobe, Microsoft, and Google. Last year, for example, Google alone cut billions off of its tax bill.

Google declared $60 billion worth of revenue in the United States in 2013. Google’s effective tax rate in the United States has fallen dramatically from 21 percent to 15.7 percent in recent years as the company has broadened its use of overseas tax benefits.

As Google stated in its 2013 annual report, "Our provision for income taxes and our effective tax rate decreased from 2012 to 2013, primarily as a result of proportionately more earnings realized in countries that have lower statutory tax rates as well as the federal research and development credit related to the American Taxpayer Relief Act of 2012."

In July 2014, Ars reported that Google Ireland Limited paid an effective tax rate of just 0.16 percent on €17 billion ($22.8 billion) revenue in 2013. That bill came to a mere €27.7 million ($37.2 million). Google paid €11.7 billion in "administrative expenses," which The Irish Times reports "largely refers to royalties paid to other Google entities, some of which are ultimately controlled from tax havens such as Bermuda."

Google and many other tech firms have recently come under increased scrutiny for using a quirky Irish tax law arrangement that allows organizations to incorporate in Ireland but legally route money through other jurisdictions such as the Netherlands. It's all done in the name of drastically reducing tax burdens. The general term is called "transfer pricing," although specific tactics involve colorful names like the "Double Irish" and the "Dutch Sandwich."

Samuel Brunson, a professor of tax law at Loyola University Chicago, said that such a move was a long time coming.

"It does seem like a good thing, albeit a delayed good thing," he told Ars. "With the low corporate tax rate, though, I assume Ireland will still actively try to attract foreign direct investment, and even aggressive tax planning, since its corporate rate is staying at 12.5 percent and it still has its web of tax treaties. Still, although there’s bound to be some way to arbitrage the change, it seems like a move toward a cleaner global set of international taxes."

Bermuda Triangle of Taxation

Ars has previously detailed how the Double Irish works. Bloomberg reporter Jesse Drucker first described the process in 2010: a company sells or licenses its foreign rights for intellectual property developed in the United States to a subsidiary in a country with lower tax rates. The result? Foreign profits that come from that tech—like the rights to Google’s search and advertising technology, effectively the keys to the kingdom—are now attributed to that offshore subsidiary rather than the Mountain View, California headquarters. The subsidiaries have to pay "arm’s length" prices for those rights, just like an outside company would.

Bloomberg concluded, "Because the payments contribute to taxable income, the parent company has an incentive to set them as low as possible. Cutting the foreign subsidiary’s expenses effectively shifts profits overseas."

So who does Google license its tech to? A fun little company called Google Ireland Holdings, headquartered in Bermuda. Bermuda, of course, has zero corporate income tax. So as a Bermuda company, Google Ireland Holdings pays none. (Under the new Irish rules, Google will no longer be able to license its tech to the Bermuda-based holding company.)

Google Ireland Holdings, in turn, owns Google Ireland Limited, which employs 2,000 people in downtown Dublin. Google Ireland Limited reported a pretax income of less than one percent of sales in 2008 and paid $5.4 billion in royalties to Google Ireland Holdings. (French investigative news site OWNI.fr published Google Ireland Limited’s 2011 annual report and its Irish Registration Office documents in 2012.)

This holding company based in Bermuda is owned by yet another Bermuda-based subsidiary, Google Bermuda Unlimited. It is managed by Conyers, Dill, and Pearman, a law firm specializing in such offshore transactions. That "unlimited" corporation means it is not required to disclose income statements, balance sheets, and other financial information.

But getting money, tax-free, from Ireland to Bermuda requires a stopover in the Netherlands (the "Dutch Sandwich" part) at Google Netherlands Holdings B.V. This entity, according to Bloomberg, "pays out about 99.8 percent of what it collects to the Bermuda entity, company filings show. The Amsterdam-based subsidiary lists no employees."

Over the last year, various European countries, including the United Kingdom, the Netherlands, and France, have been reviewing their laws that enable this type of corporate behavior.