Thursday, October 30, 2014

Retail sales hit reverse

Yesterday’s release by the CSO of the September Retail Sales Index shows that the increases recorded over the past year or so have stalled, and in value terms have almost fully being reversed.  As per usual we focus on the RSI excluding the motor trades.  In the past two months the value of retail sales has fallen 1.4 per cent with volumes falling 0.6 per cent.

RSI Sep 14

These are reflected in the annual changes which are still positive but the value index is now showing annual growth of just one per cent.

RSI Sep 14 Annual

The monthly changes highlight the volatility in the series so reading anything from changes over a two-month period is not very reliable.  It is also possible that the September figures will be revised in later RSI releases.

RSI Sep 14 Monthly

For the moment at any rate we can say that the figures are not reflective of “recovery”.  What will the final quarter of the year bring?

Wednesday, October 29, 2014

Contribution of foreign-owned firms to the Irish economy

Using Eurostat here we can summarise the contribution of enterprises to the Irish economy.

Contribution of enterprises - all

In 2011, Gross Value Added at factor cost was around €156.5 billion so we can see that enterprises contributed €87.8 billion (around 5/8ths) of that.  The remainder would come from the household sector (the self-employed) and the government sector. The contribution of foreign-owned enterprises to the above is.

The GVA from enterprises was divided between personnel costs (€37.6 billion) and gross operating surplus (€50.2 billion).  GOS is a measure of profits akin to earnings before interest, tax, depreciation and amortisation (EBITDA). 

Looking at how much of this was contributed by the foreign-owned sector gives the following.

Contribution of enterprises - foreign

The importance of the foreign-owned sector in Ireland is clearly visible.  Here is a table that shows the percentage of each item for enterprises coming from the foreign-owned sector.  In 2011, foreign-owned enterprises made up just over 2 per cent of all enterprises in Ireland but provided 22.7 per cent of the persons employed by enterprises. Foreign-owned companies accounted for 55 per cent of enterprise turnover, 34 per cent of enterprise personnel costs and 72.8 per cent of enterprise gross operating surplus (somewhat equivalent to earnings before interest, taxes, depreciation and amortisation).

In 2011, Irish-owned companies generated a gross operating surplus of €13.6 billion compared to €36.5 billion from foreign-owned companies. 

After making adjustments for interest and depreciation there is likely to be a taxable income from the foreign-owned sector of around €30 billion with 12.5 per cent of that being €2.5 billion. 

[It should be noted that all the tables in this post exclude the financial and insurance activities sector - NACE K – as it is excluded in the Eurostat data. It should also be noted that columns are only approximately additive.]

Corporation Tax and financial and insurance companies and passive income not included in the above “operating” table would bring the corporation tax take from the sector to over €3 billion.  The Income Tax (+USC) and PRSI collected from the €12.8 billion of personnel costs incurred by the foreign-owned sector is also likely to approach €2.5 billion.  There will be further Exchequer revenues from VAT, Excise Duty and other taxes.

The following four tables give a breakdown of the above for companies controlled from the US, the UK, the Euro-area and Other (i.e. non-US/UK/Euro).  The figures for US-owned companies are the largest: 100,000 jobs; €6 billion of labour costs likely leading to €1 billion of Income Tax and €0.5 billion of PRSI; €2 billion of Corporation Tax; €3 billion of gross investment in tangible goods; VAT; Excise Duty, local purchases of goods and services; etc. etc.

Contribution of enterprises - US Contribution of enterprises - UK Contribution of enterprises - Euro area Contribution of enterprises - Other

And finally here are the figures for Irish-controlled enterprises. 

Contribution of enterprises - Irish

For Irish companies 65 per cent of added value is devoted to personnel costs, compared to just 26 per cent in the foreign-owned sector (and 17 per cent for US-owned companies).

Sunday Business Post 26/10/2014

Here is the submitted text for an article in last weekend’s SBP on the European Commission State-Aid investigation to Apple’s tax arrangements in Ireland.

Commission probe unlikely to bear fruit

The European Commission’s investigation into Apple’s tax affairs started out as a narrow probe of a transfer pricing arrangement in place in Ireland back in 1991 but could expand into a much broader trawl through Apple’s global tax affairs. 

The discussions from 1991 that took place between Apple’s tax advisers and the Revenue Commissioners were reported in a damning fashion by the Commission but were short of what is required for an adverse state aid finding to be made.  It seems the Commission investigation are motivated to make an adverse finding against Ireland and have thrown a wide net over Apple’s management of its intangible assets.  However, like their examination of the 1991 agreement the Commission are unlikely to come up with much to interest them.

The key to Apple’s profitability are its brand and innovations.  Lots of companies can make smartphones and other consumer devices but none command the customer loyalty Apple has engendered or the reputation it is fostered.  The Apple brand is a massively valuable asset and much of Apple’s profit is rightfully attributed to it.

Apple has divided the economic rights to into two divisions.  On one side you have the Americas, with Apple declaring its profits to the Internal Revenue Service in the US and paying tax accordingly.  On the other side there are the global rights to Apple’s intangibles and that is where the story gets interesting.

As was revealed by a US Senate investigation in May 2013 these hugely valuable intangible assets are held in Irish-incorporated subsidiaries of Apple.  However, apart from some Irish Corporation Tax paid on the profits of the activities of their branches in Ireland these subsidiaries paid no other corporate income tax anywhere in the world.

This was achieved by being “stateless” for tax purposes which was the result of not being tax resident anywhere.  Apple engineered this by falling between gaps in the interaction of Irish and US tax law.  Of course, a company that is “stateless” for tax purposes has to be somewhere in reality.

The question the European Commission wants answered is where are these companies.  If they are in the US it is not an issue for Ireland but if these companies are carrying out their operations in Ireland how come they are not paying Corporation Tax to Ireland on the massive profits earned.

There was lots finger-pointing at Ireland following the US Senate hearing but the reality is that these “stateless” Apple subsidiaries carry out their activities in the US and therefore their profits are not subject to Irish tax.

In his opening statement to the Senate hearing when talking about these companies, the committee chairmen Sen. Carl Levin said that “these companies’ decision makers, board meetings, assets, asset managers, and key accounting records are all in the United States.”  In a sense the European Commission have asked the Irish government to prove this.

A problem faced by the government is that they need Apple’s help to do so.  It was easy for the government to provide the information on the 1991 agreement because the Revenue Commissioners had it all but how do they get information about Apple’s activities in the US unless the company provides it?

From an outsider’s perspective we can try to find evidence of these companies in Irish economic statistics, most notably the balance of payments which records international transactions.  The scale of Apple’s financial flows means they should be fairly easy to identify in Irish statistics.

In 2011, the key Apple subsidiary in question made payments of $1.4 billion to the parent company as part of the agreement to use Apple’s intangible assets outside the Americas.  In that year this company had sales revenue of $48 billion and a profit of $22 billion.  If these massive financial transaction were happening in Ireland they should be easy to identify in Ireland’s economic statistics. 

We know that Google does have its international sales running through Ireland and the effect of these on Irish economic statistics can be identified.  In 2013, Google’s non-US revenue was €17 billion which is much lower than Apple’s.  It is also the case that Apple’s revenues are growing rapidly.  The subsidiary the Commission are focussing on had revenues of $48 billion in 2011 which in 2012 had grown to $64 billion and this rapid growth has continued.  Figures in the Irish data do not show these increases.

A useful check to make would be to see if these flows appear in US balance of payments data.  Apple may be one of the biggest companies in the world but the US remains the biggest economy in the world and identifying the impact of a single company in US statistics is impossible. 

We can check flows by country and there is nothing in the US data to suggest that Apple is routing its revenues through Ireland.  A possibility is that the investigations into these “stateless” companies has revealed huge gaps in the international tax law but also a massive black hole in balance of payments data.

The profit from Apple’s sales around the world flow directly to the US just as Sen. Carl Levin said last year.  Unlike Google there is no stop-off in Ireland to indicate that the application of Irish Corporation Tax to these profits is warranted.  The profits are in the US and it is US rules that allows them to go untaxed until they are transferred from the subsidiary to the parent.

It is not clear how the Commission investigation will proceed from here.  Apple may not have been pleased but, as a US company, they were obliged to provide information to the US Senate on their US activities. There is no such obligation for them to tell the European Commission about their activities in the US and the Irish government cannot provide information that they do not have. 

The Commission are shaking the Apple tree but nothing is going to fall out of it.  Rather than being objective it seems they will be disappointed by that.

Irish-registered companies

Last night in a television discussion about Ireland’s corporate tax regime some issues around Irish-registered companies were raised (and are really only of interest to insomniacs and anoraks).  Anyway, three points were raised:

  1. Irish-registered companies have to be audited in Ireland.
  2. Irish-registered companies must maintain their financial accounts in Ireland.
  3. The European Court of Justice has ruled that a company’s main centre of interest is in the country of registration.

None of these are correct.  On whether Irish-registered companies must be audited in Ireland, the Company Registration Office (CRO) have said that:

The Auditor can reside anywhere in the world but must have a ARN (auditors registered number), these are obtained from the accounting governing bodies of UK and Republic of Ireland.

On whether financial accounts must be maintained in Ireland the CRO have said that:

Accounts can be prepared and signed anywhere, it is the submission to CRO and storage that is relevant.

The final point relates to the Eurofood Ltd case that was heard before the ECJ.  The judgement is here and the ruling at the end states that:

the presumption … whereby the centre of main interests of that subsidiary is situated in the Member State where its registered office is situated, can be rebutted only if factors which are both objective and ascertainable by third parties enable it to be established that an actual situation exists which is different from that which location at that registered office is deemed to reflect. That could be so in particular in the case of a company not carrying out any business in the territory of the Member State in which its registered office is situated.

This clearly states that the centre of main interests and country of registration do not have to be the same but if they are to be different then clear and objective facts are required in order to show that they are different.

Unsurprisingly, the debate focussed a lot on Apple (it is after all one of the few companies we have detailed knowledge about as a result of the US Senate Report and the recent EC State-Aid letter to Ireland).  Apple has Irish-registered companies at the centre of its global tax structure. 

Do these companies have their centre of main interests in Ireland?  The Chair of the US Senate sub-Committee that investigated Apple, Sen. Carl Levin, doesn’t think so doesn’t think so.  When discussing Apple Sales International he said:

Prior to 2012, ASI, like AOI, had no employees and carried out its operations through the action of a U.S.-based board of directors, most of whom were Apple Inc. employees in California. Of ASI’s 33 board meetings from May 2006 to March 2012, all 33 took place in Cupertino.

In short, these companies’ decision makers, board meetings, assets, asset managers, and key accounting records are all in the United States. Their activities are entirely controlled by Apple Inc. in the United States.

On Apple Operations International (another Irish-registered company) the US Senate Report says the following:

AOI’s board meetings have almost always taken place in the United States where the two California board members reside. According to minutes from those board meetings, from May of 2006 through the end of 2012, AOI held 33 board of directors meetings, 32 of which took place in Cupertino, California.  AOI’s lone Irish-resident director, Ms. Kearney, participated in just 7 of those meetings, 6 by telephone. For a six-year period lasting from September 2006 to August 2012, Ms. Kearney did not participate in any of the 18 AOI board meetings. AOI board meeting notes are taken by Mr. Levoff, who works in California, and sent to the law offices of AOI’s outside counsel in Ireland, which prepares the formal minutes.

Apple told the Subcommittee that AOI’s assets are managed by employees at an Apple Inc. subsidiary, Braeburn Capital, which is located in Nevada.  Apple indicated that the assets themselves are held in bank accounts in New York. Apple also indicated that AOI’s general ledger – its primary accounting record – is maintained at Apple’s U.S. shared service center in Austin, Texas. Apple indicated that no AOI bank accounts or management personnel are located in Ireland.

Did Apple reveal that it is breaking Irish company law by saying that its primary accounting record is maintained in Austin, Texas?  No, it is the suggestion that Irish-registered companies must maintain their financial accounts in Ireland that is wrong.

Apple is a massively profitable company but the suggestion that the company’s 4,000 employees in Cork are responsible for generating those profits is nonsense.  Apple is profitable because it designs a phone that people want to buy and has developed a brand that people are extremely  loyal to.  Neither of these are the result of the activities of Apple’s Cork employees.

Apple is profitable because it has hugely valuable intangible assets.  The location of the intellectual property that arises from those intangibles is key.  If that was in Ireland then most of Apple’s profits generated outside the US could be attributed to Ireland (the IRS should be examining the nature of the agreement that allows the use of Apple’s intangibles to be split into “The Americas” and “Rest of the World” but allows it.) 

The US Senate Report shows that Apple’s assets are held in America.  The European Commission have asked Ireland to prove this.  An Taoiseach, Enda Kenny, is confident that this is the case and in a recent Dáil debate stated that:

The intellectual property is vested in California.

There is nothing to suggest that this is not the case.

Wednesday, October 8, 2014

Butchering poverty statistics

In The Irish Times today there is an article that compares some measures of poverty in Ireland to the EU average.  It makes a meal of it.  There is a large amount of poverty in Ireland but it would help if it was described accurately.  This piece features this confusing chart.

The panel on the left says the 2012 at-risk-of-poverty rate in Ireland is around 30 per cent; the panel on the right puts the very same measure at around 16 per cent.  The piece suggests that the difference is because:

Ireland’s Central Statistical Office measures poverty and deprivation in a slightly different way to Eurostat

They do not.  They measure them precisely the same.  In fact, the figures reported by the CSO come from a standard survey that is carried out under its remit from Eurostat across the EU (and in a small number of non-EU countries.) It is the European Union Survey on Income and Living Conditions or EU-SILC.  When describing the survey the CSO say (emphasis added):

This survey will be conducted throughout the European Union as the European Council and the Commission has given high priority to fight against poverty and social exclusion. The European Union requires comparable and timely statistics to monitor this process.

The difference between the left and right panels is not differences in definitions; it is because the data used represent different things.  They are different because they are different.

The panel on the left has data on “at-risk-of-poverty or social exclusion” while the panel on the right just relates to “at-risk-of-poverty”.  It is the inclusion of measures of social exclusion in the data used the left panel that results in the difference not any inconsistency in how poverty is measured. 

We have looked at this measure of “at-risk-of-poverty or social exclusion” before (see here) and discussed some of the reasons why Ireland fares very badly under this metric.  Some of the points made there are important in the context of the article published by The Irish Times today but rather than make them again here are a few additional ones.

This is a table a piece comparing at-risk-of-poverty rates in Ireland and the EU should use.  It shows proportion of the population who have an equivalised disposable income of less than 60 per cent of the median.  This is the standard definition of “at-risk-of-poverty”.

AROP Ireland and EU

Ireland’s at-risk-of-poverty rate is below the EU average and has not deteriorated significantly during the crisis.  Yes, it is a relative measure but that is how it is done.  Further, here is a related table from Eurostat that tells an important story.

532px-At-risk-of-poverty_rate_before_and_after_social_transfers_and_at-risk-of-poverty_threshold_(for_a_single_person),_2011_and_2012

The 2012 figures for Ireland were not available when Eurostat created the table but the outcomes were:

  • 2012 At-risk-of-poverty rate before social transfer: 39.3%
  • 2012 At risk-of-poverty rate after social transfers: 15.7%

Ireland’s at-risk-of-poverty rate in 2012 was below both the EU28 and EA17 average which were both at 17.0 per cent.

What is notable is that Ireland has the HIGHEST at-risk-of-poverty rate in the EU before social transfers are included.  This is disposable income before receipt of all social transfers except pensions (public and private). This is mainly primary or market income.  Ireland has the most unequal distribution of market income in the EU.

Ireland is not just above the EU average we are above the next highest country by some distance.  Ireland is 39.3 per cent; the second highest country is the UK at 30.5 per cent; the EU28 average is 26.3 per cent. Ireland would be considered an extreme outlier.

Introducing a wealth tax and increasing transfer payments will not fix this.  Ireland has the most successful tax and transfer system at reducing poverty in the EA.  It brings us from worst in class to below the EU average.

When looking at at-risk-of-poverty rates in Ireland the stand-out feature is not the headline rate.  That is below the EU average and is lower than it was from 2003 to 2007.  The standout feature from the EU-SILC about Ireland is this.

VLWI Eurostat

As we have said before, Ireland is almost “off the scales” and is more than 2.5 times the EU average.  Maybe we should try and fix this.  Not a word about that today’s article though.