Thursday, November 23, 2017

Computation and Concentration of UK Corporation Tax

Ireland’s Corporation Tax statistics get a fair bit of attention.  Similar statistics are produced for the UK by HRMC.  First up the aggregate Corporation Tax computation.

UK CT Comp

The common origins of the two systems mean that many of the descriptions are similar and it follows a form similar to the Irish version (the most recent update of which can be seen here).

For the UK we can see that the starting point of Gross Trading Profits and after subtracting capital allowances and other deductions and adding Other Income & Gains we get to Total Chargeable Profits.  The applicable rates are set against this to give the Total Tax Charge and after allowing for reliefs and set-offs we get to the bottom line: Corporation Tax Payable.

The sequence of numbers shown above don’t necessary add to the outcomes shown as in some cases (such as capital allowances) the amounts are those available in the year rather than those actually offset against profits in the year as losses brought forward are not included in Net Trading Profits.

The majority of Chargeable Profits are taxed at the Main Rate.  This has been reduced over the past decade (it was 30 per cent in 2008) and for the period shown in the table above there were reductions every year as it fell from 26 per cent to 20 per cent.  This has the effect of reducing the “tax payable as a % of chargeable profits” figure in the final row. 

This figure is fairly close to the Main Rate for all years and it can be seen that the largest item reducing the Total Tax Charge is Double Tax Relief which relates to non-UK tax already paid on non-UK profits included in the Chargeable Profits of companies.  This is also a key reason why this measure of below the 12.5 per cent headline rate for Ireland though it has been joined by the R&D tax in recent years as explored here

A second issue of relevance to Ireland is the concentration of payments.  Statisticians from the Revenue Commissioners have done excellent work on this recently and we now know that 10 companies account for around 40 per cent of Irish Corporation Tax payments.  For the UK the key points on concentration made in the HMRC report are:

Key points:

1. The distribution of companies’ tax liabilities is highly skewed. In 2015- 16 about 7,000 companies (under 1 per cent) had liabilities of £500,000 or more, between them contributing around 54 per cent of total Corporation Tax payable.

2. Companies with liabilities of less than £10,000 comprised about 65 per cent of the total number of companies liable for corporation tax in 2015- 16, but owed only around 7 per cent of the total Corporation Tax payable.

3. In 2015-16, around 50 companies had more than £50 million each in Corporation Tax liabilities (totalling £5.4 billion or 12 per cent of the total Corporation Tax payable). The figures for 2014-15 were around 60 companies paying £6.9 billion or 16 per cent of the total Corporation Tax payable.

4. There was an increase of around 140 thousand in the number of companies with any liability between 2014-15 and 2015-16. This increase was largely concentrated in companies with a Corporation Tax liability of under £50,000.

So the receipts are concentrated but not anything near to the same extent as they are in Ireland.

Finally, the HMRC report has lots of detail on the use of capital allowances – but there is no mention or breakdown provided for capital allowances for capital expenditure on intangible assets. Pity.

Tuesday, November 21, 2017

Ireland’s capital stock continues to expand

The CSO have provided the 2016 update of Ireland’s fixed capital stock.  This has been affected in recent years by aircraft for leasing and intangible assets.  This continued in recent year.

Here is Ireland’s gross capital stock in 2015 prices.

Gross Capital Stock Constant Prices

This measure gives an estimate of the amount of fixed capital held at the end of each year.  Gross depreciation is not taken into account and the amounts reflect the value of the fixed assets (in 2015 prices) as if they were new.  Changes are the result of additions to the capital stock and obsolescence of existing fixed assets.

There have been a number of data suppressions in recent years which means that we only have a combined category for aircraft and R&D intangible assets.  There were increases in all categories of fixed assets though the largest contribution to the overall increase came from aircraft and IP.

Unsurprisingly it is estimated that there was a very small increase in the stock of dwellings, rising by just one per cent in 2016.  Other buildings and structures rose at an appreciably faster pace at 4.5 per cent.

Next is a net measure of the capital stock which accounts for depreciation.  This better reflects the value in use of fixed assets rather than their replacement cost.  Again we will consider this in constant prices to look at changes in the quantity of assets from year to year.

Net Capital Stock Constant Prices

We know there were large depreciation charges for aircraft and IP over the past few years (it is was it messing up the GNP and GNI figures) but we can see that even accounting for depreciation the stock of these assets increased by almost five per cent in 2016.  They are still arriving faster than the existing stock is depreciating.  Again on dwellings it is not surprising to not that our stock of dwellings barely changed in 2016, with a rise of just 0.5 per cent.

And finally, here are the change in the depreciation on these assets (again in constant prices)

Consumption of Fixed Capital

Although the increase in depreciation in 2016 was much lower than the huge-level shift that occurred in 2016 we can see that around three-quarters of the 2016 increase is due to aircraft and intellectual property.  This, of course, matches the first table where we saw that an equivalent amount of the increase in the gross capital stock was related to these assets which have few direct links to activities in Ireland.  The aircraft are flying all over the world and many of the products that are derived from the IP are made in other countries with the R&D behind it all also having being undertaken elsewhere.

The figures for “total ex. aircraft and IP” at the bottom of each of the tables give a better indication of the underlying changes in Ireland’s capital stock.

Monday, November 20, 2017

Non-Profit Institutions Serving Households

As well as giving a split of the non-financial corporate sector the 2016 institutional sector accounts also give a split for the household sector.  Up to now households (S.14) and non-profit institutions serving households (S.15) were combined.  We now have separate current and capital accounts for each.  Non-profit institutions serving households (NPISHs) are relatively small in the overall scheme of things (they are around two per cent of the combined sector) but we do get to see how they are funded and what, in rough terms, they spend the money on.

It should be noted that this doesn’t cover all charitable or voluntary organisations many of which are counted in the government sector given the nature of their links to the public sector.  As the CSO note:

Many charities, such as hospitals and social care providers, which receive most of their funding from government and which provide services under contract with government, are treated as part of the government sector (S.13) in national accounts, and not S.15.

Anyway here is the aggregate current account of those entities included in this sector.

NPISHs Sector Current Account 2012-2016

On the income side we can see that these institutions had around €3.3 billion of income in 2016.  Most of this came in the form of transfers with around €780 million raised from their own activities.  The CSO note:

The institutions in the NPISH sector get most of their income as transfers from households (for example donations, church collections, union dues or members' subscriptions) and also receive transfers from government.  They also earn profits on their market activities, such as charity shops and match tickets.  Relatively little of their income is from investments.

On the current expenditure side almost all goes on compensation of employees and final consumption expenditure which between them were €3.2 billion in 2016:

Their income is spent on final consumption expenditure and compensation of employees in a roughly 3:1 ratio. There are over 55,000 people in direct paid employment in the NPISH sector.

Expenditure on staff was €1.14 billion in 2016 which gives an average of €20,700 per person in direct employment.  We also get a capital account for the sector but there isn’t a whole lot going on there.

NPISHs Sector Capital Account 2012-2016

For the past few years the gross capital formation of the sector has been less than the gross saving from the current account and investment grants received shown here.  This has resulted in the sector being a net lender averaging around €45 million for the past three years.  The figures for net capital formation are positive which means that gross capital formation was lower than the consumption of fixed capital (depreciation).

Friday, November 17, 2017

New breakdown of Non-Financial Corporates in the Sector Accounts

An earlier post went into the gory details of the household sector.  Here we do something similar for the non-financial corporate sector and assess what can be learned from a new breakdown of this sector provided by the CSO.

There is lots going on in the current account of the non-financial corporate (NFC) sector but it is hard to tell what the underlying patterns are.  Here is the NFC current account since for the past five years from the 2016 institutional sector accounts.

NFC Sector Current Account 2012-2016

The big changes happened in 2015 when gross value added jumped by more than 50 per cent to reach €180 billion with an increase of a near similar scale showing for gross operating surplus.  We know this was the result of activities of foreign-owned MNCs and it probably wouldn’t be much of any issue if the pollution was limited to the estimates of GDP but we can see that after profit and interest distributions that gross national income in 2015 still jumped by almost €30 billion. 

So more than half of the increase in gross profits of the NFC sector in 2015 was attributed to Irish residents.  There was a bit of fumbling around when the figures first came out but now we have a fairly good handle on what happened.

Now the CSO are giving a further useful breakdown that allows us to see what happened by trying to isolate some of the distortions.  Figures have been provided for two sub-components of the NFC sector:

  • large foreign-owned NFCs
  • other NFCs

As the CSO say in the background notes:

Non-financial corporations are sub-divided into Large foreign-owned MNEs (S.11a) and the Other (S.11b) in these accounts. Large foreign-owned MNEs are those companies surveyed by the CSO's Large Cases Unit. This division is not prescribed in ESA2010 but is an additional level of detail provided because of the nature of the Irish economy. This sub-division is a step towards a full separation of domestic and foreign-owned corporations, and allows a more informed perspective on the purely domestic economy.

In the release they further say:

These 50 largest foreign MNEs (out of approximately 114,000 enterprises in S.11) are presented as a proxy for all the MNEs in this release. A more comprehensive account of foreign-owned enterprises is currently under development.

So what do we see if we split the current account into these 50 foreign-owned MNCs and the rest? Lots.  Here are their current accounts for the last three years.

NFC Sector Current Account 2012-2016 Divided

A wider table that also includes the overall totals is available here.  Breakdowns aren’t provided for all of the constituent parts of the current account but most of the important ones are included.  The panel on the right hand side is a huge step in giving us a view of the underlying trends in Ireland’s business sector.  Over the past three years we see that gross value added has been increasing (+7.3% in 2016), compensation of employees is growing (+6.3%) and gross operating surplus is rising (+8.3%). 

There may be a little bit of an issue with redomiciled PLCs or some other issue in the distribution of income account as gross national income recorded an increase of 17.9% in 2016 but all in all the new breakdown is very useful.  Corporation Tax payments from these companies rose a further 13.2% in 2016 to reach €3.55 billion (and up €1.3 billion on 2014).  Thus, the right panel presents a story of a business sector growing strongly. 

And that means that most, but not all, of the problems are corralled in the large, foreign-owned NFC subsector.  This is a small group of companies but ones which have a disproportionate, and distortionary, effect on Ireland’s national accounts.

The €50 billion jumps in gross value added and gross operating surplus that occurred in 2015 are obvious.  As stated above the problems really kick in after the distribution of income.

As these are foreign-owned companies we would expect their direct contribution to Irish gross national income to be minimal.  Their contribution would have been paid out to other sectors: buying goods and services in their intermediate consumption from domestic suppliers and wages paid to the household sector.  In fact by the time we get to gross national income all we would expect to be left is whatever is needed to cover their Irish Corporation Tax bill.  We would expect any remaining profits to be either distributed or attributed to the foreign shareholders.

But that is not the case.  The gross national income of the large, foreign-owned NFCs far exceeds their Corporation Tax payments and at the bottom we would expect their gross disposable income to be close to nil.  We can see that it was €3.1 billion in 2014, jumped hugely in 2015 and rose again in 2016 to stand at €31.2 billion.  This is counted as our income. It is not.

As an quick aside here are the Corporation Tax payments attributed to the subcategories of NFC and also to Financial Corporates over the past four years.

Corporation Tax by NFC and FC 2013-2016

Compared to 2014, Corporation Tax payments for 2016 are shown to be €2.9 billion or 57.6 per cent higher.  All the categories shown paid more but the small relative growth was for these large, foreign-owned NFCs which paid 53 per cent more Corporation Tax in 2016 compared to 2014.  For other NFCs the increase was 59.7 per cent and it was 60.4 per cent for financial corporations.  It should be noted though that these tax amounts are inclusive of the R&D tax credit (which as a payable tax credit related to capital spending (as research and development is now treated) is counted as an investment grant received).

Anyway, back to this huge level shift in GNI from foreign-owned NFCs in 2015.  The reason is because nearly €25 billion of profits of foreign-owned companies weren’t counted as a factor outflow.  There are two possible reasons:

  • The first is different treatment of certain items in the national accounts (where gross operating profit is estimated) and in the balance of payments (where factor outflows are derived).  We previously considered some issues around the treatment of spending on R&D service imports.
  • The second, and most significant, is that profit outflows are based on net operating surplus and there is now a huge amount of gross operating surplus that is consumed by depreciation.

We can see some things that point to the second issue in the capital account.

NFC Sector Capital Account 2012-2016 Divided

Unfortunately, both the capital accounts of both sub-groups are bit of a mess.  For the large, foreign-owned group the acquisition and depreciation of intangibles is throwing the numbers awry while for other NFCs it is likely that the acquisition and depreciation of aircraft are muddying the waters (not forgetting that gross savings is inflated by the net income of redomiciled PLCs).

For the group of large foreign-owned NFCs we can see the large changes that occurred in the depreciation charge.  Consumption of fixed capital for these 50 companies was €5.5 billion in 2014 and this surged to €29.4 billion in 2015 with a further increase to €32.8 billion in 2016.

In the National Income and Expenditure Accounts the CSO provided details of a modified measure of national income, GNI* and one of the adjustments made is for the depreciation on certain foreign-owned intellectual property assets.  This depreciation  went from €0.8 billion in 2014, to €25.0 billion in 2015 to €27.8 billion in 2016.  This is what has driven the changes in the consumption of fixed capital for the large, foreign-owned NFCs shown in the table above.

Although these companies have large amounts of gross savings their expenditure on gross capital formation is volatile and can exceed the level of gross savings.  The financial transactions account for the subcategories might throw some additional light in the thing but although great strides forward have been made we haven’t got that far – yet. For the large, foreign-owned NFCs we can surmise that some of these are running large surpluses to repay loans they assumed in the process of acquiring large amounts of intangible assets. 

At the same time other companies are borrowing to acquire intangibles so it is hard to tell what is happening.  So, in 2015 there was net lending available to repay debt (net lending of €10.7 billion) while in 2016 additional borrowing for intangibles swamped the repayments that some companies were making (resulting in net borrowing of €16.5 billion).

While we don’t have the financial transactions account we do, though, have the financial balance sheets of the two sub-groups.

NFC Sector Financial Balance Sheet Divided

Plenty of big numbers there.  Unfortunately the loans liability category is suppressed.  However, we do have total financial liabilities.  We can see that for the group of 50 large, foreign-owned NFCs this jumped from €198 billion at the end of 2014 to €516 billion at the end of 2015.  A year later and it was €519 billion.  This is vaguely supportive of the idea of some large loans being repaid while other, relatively smaller, loans are being taken out as part of the onshoring of intangibles.

The balance sheet of the Other NFCs category tells us nothing about the domestic business sector.  The numbers are huge.  By the end of 2016 these companies has €1.2 trillion of financial assets and €1.5 trillion of financial liabilities.  There’s still a bit of stripping out to do here.

None of this is straightforward but this latest release is another step along the way.  GNI* is a promising measure that will likely improve in subsequent rounds.  The current account of the balance of payments is still a bit of a mystery but maybe we know where we’d like to end up.  For the sector accounts we’d definitely like a foreign/domestic split for the NFCs.  The split provided here gives some reasonable growth measures for output in the current account but there’s still room for improvement on the income, capital and balance sheet side of things.

Some snapshots of the aggregate improvements in the household sector accounts

The last post went a bit heavy on the detail in the household sector accounts.  Here we try and pull out a few snapshots from the accounts that give visual pointers to the aggregate improvements over the past few years.  All the data here is nominal and is for the household sector combined with non-profit institutions serving household but the impact of these on the aggregates is relatively minor and they have almost no impact on the trends.

We’ll start with income and consumption and we have series for these that are showing steady growth for the past few years (with the series also having been extended back to 1995).

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Which combined give the following gross savings rate:

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Since 1995 this has averaged 8 per cent so the 2016 level is about a percentage point below that.

The increase in income has largely been driven by a rise in the compensation of employees received by the household sector which, in nominal aggregate terms, is back to the pre-crisis peak.

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Though tax and social contributions are now higher than they were pre-crisis:

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And, of course, rents are increasing.  The aggregate amount of actual rentals paid for housing exceeded €4 billion for the first time in 2016.

Household Sector Actual Rentals for Housing

It is from a very low base (compared to pre-crisis levels at any rate) but household sector capital formation is beginning to pick up:

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After a number of years where household spending (consumption plus capital formation) was less than total household income, the household sector has returned to being a net borrower in the past few years though no where near the levels that were seen pre-crisis.

Household Sector Net Lending

This pattern is reflected in household financial transactions with household transactions increasing both assets and liabilities up to 2008 and reducing them since.

Household Sector Financial Transactions

By and large net financial transactions from the financial transactions account and net (borrowing)/lending from the capital account track each other:

Household Sector Net Lending Net Financial Transactions

Here is the impact of these transactions on household deposits and loan liabilities:

Household Sector Deposits and Loans

After peaking at €203 billion in 2008, household loan liabilities have been steadily declining since then and had reduced to €143 billion by the end of 2016.  Household deposits have been relatively stable for the past decade but what is noticeable is that the level of household deposits almost matches the level of household loans for the fist time since 2002 – though these aggregate data tell is nothing about the distribution of these assets and liabilities.

Add in the impact of other financial assets and liabilities and we get the overall balance sheet position:

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The divergence of financial assets (rising) and financial liabilities (falling) since 2008 is clear. This has meant that the household net financial asset position has been increasing and stood at €210 billion at the end of 2016.  This compares to €130 billion at the end of 2006.

Finally, here is a measure of debt to income:

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This ratio of total financial liabilities to total disposable income has fallen from 220 per cent in 2011 to 160 per cent in 2016 and is now back near levels last seen in 2004.  The progress is understandably slow but we’re getting there.

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