Friday, September 22, 2023

The past is a foreign country

We all like looking to the past for evidence and pointers to help understand the present.  A deterioration in the current of the balance of payments has been such a pointer for instances of economic mismanagement in Ireland. 

Following Honohan and Walsh (2002) we can see that in the last fifty years the Irish economy has gone through two loops of:

  1. Imbalances building up via that deterioration of the current account,
  2. Weaknesses being exposed and resulting in a shooting up of the unemployment rate,
  3. A period of painful readjustment before,
  4. Recoveries took hold.

These loops from 1975 to 1998 and from 2003 to 2018 are shown below using the unemployment rate (vertical axis) and the current account (horizontal axis).

Internal and External Imbalances 1975-2022

The thing is though, these are not really useful for assessment the current position of the Irish economy.  2022 saw Ireland with an average unemployment rate of around 4.5 per cent while the surplus on the modified current account of the balance of payments (CA*) was equivalent to around 7.5 per cent of modified gross national income (GNI*). 

The economy had reached a near identical position in 2019 but then COVID19 reared its head.  Relative to the economic history of the State since its foundation, it is an unprecedented position: near full employment and large balance of payments surpluses. From a policy perspective, the unemployment rate could be a bigger constraint to achieving priorities. Sure, we should not forget the mistakes of the past, but they do things differently there.

Addendum: It is somewhat nonsensical but a further way of looking at it is to consider the sum of the unemployment rate and the current account deficit (thus a deficit is represented by a positive number).  This shows:

Internal and External Imbalances Sum of 1975-2022

Again, we can see the imbalances building up after 1975 and 2003.  But the main thing is to highlight just how far 2022 is from even those starting points.  We know things can change quickly but we should also recognise where we are now is pretty much unprecedented.

Tuesday, July 4, 2023

Still Waiting for US GDP to be Revised Up

We have been tracking the impact in Ireland’s national accounts of the structures of US MNCs for some time.  In recent years, many of those structures have changed leading to changes in several key metrics in Ireland such as the stock of intangible assets and the destination of outbound royalty payments. 

As a result of the changes in the destination of royalty payments we have been expecting revisions to US GDP.  See previous post here with an even earlier one here

The previous post goes through the impact of the changes introduced by Google and Facebook in 2020 when they ended their use of “double-irish” type structures.  We won’t repeat that detail here but will highlighted the updated position of the mismatch between the Balance of Payments figures for Ireland and the U.S.

One point we will reiterate is the changed nature of outbound royalty payments from Ireland.

Royalty Imports US v ROW 2014-2023

Obviously the first thing to notice is the scale. These outbound payments are enormous. In the 12 months to the end of March they came to almost €140 billion.  What the chart also shows is the change in the destination of these royalties.

Up to 2020, most of the royalty payments from Ireland ended up in offshore financial centres such as Bermuda and the Cayman Islands, now the bulk of them are going to the US.  The non-US portion is still quite significant (€34 billion in the year to March) but due to suppressed data we don’t have direct insight into the destination of these. It looks like most of these payments are going to The Netherlands, Switzerland and Singapore (which would also be among the potential locations for US MNCs to locate their IP). 

Anyway our interest here is in the royalty payments from Ireland to the U.S. and these now exceed €100 billion in annual terms.

To see the mismatch (and avoid any classification issues) here are the balance of payments figures for services trade between Ireland and the US. What is shows are Eurostat figures for services imports by Ireland from the US and BEA figures for service exports from the US to Ireland. In principle these should correspond. Is that what we see? Hmmmm, no.

Services Trade Ireland and US BEA and Eurostat

There is a few chart crimes going on there, most notable that the series are in different currencies, but the conversion from dollars to euro has nothing to do with the gap that has emerged since 2020 (and would actually only increase it).

We can see that Balance of Payments data on this side of the Atlantic is showing that, in 2022,  Ireland had almost $200 billion of services exports from the US.  Over on the other side of the pond, their Balance of Payments data shows that the US $85 billion of service exports to Ireland.  And as noted above, in principle these should be the same.

The chart is for all services so it cannot be a classification issue – unless the payments are accounted for by the BEA as goods exports or primary income, both of which are unlikely.

We cannot immediately assume that there is a GDP effect.  The trade could be in IP assets which, initially at least, would be GDP neutral.  There would be disinvestment (-) and exports (+) on the US side with investment (+) and imports (-) on the Irish side. 

But as might be expected given the contents of the post it is mainly a story of royalties.  Here are the royalties components from Eurostat and the BEA of the above overall services trade figures.

Royalty Imports to the US Eurostat v BEA

Mind the gap! Ireland reporting €102 billion of royalty imports from the US in Eurostat’s data becomes the US reporting just $16 billion of royalty exports to Ireland in the BEA’s data.  And as we started by looking at total services this cannot be explained by classification issues.  We have a difference of something approaching €90 billion.

For what it is worth, it can be noting that the revision to Ireland’s national accounts for 2015 (the 26% growth rate and all that) was of the order of €40 billion.  Some US commentators should perhaps be wary of skeletons in their own closets.

However, as the previous post goes through the likely GDP impact would not be the full difference shown above as a share of the royalty payments that previously went from Ireland to the like of Bermuda did subsequently flow on to the US as payments for R&D services exports.

Statements from Google and Facebook have confirmed that they are now licensing their technology directly from the US rather than offshore locations.  This should have led to a reduction in US R&D service exports and an increase in US royalty exports. 

The rise in royalty exports would be larger (reflecting the fall in profit reported in Bermuda etc.). It is possible there could be a GDP impact of $40-50 billion for 2022 – equivalent to around 0.2% of US GDP.  Not exactly headline grabbing.

Why the gap?

In part, the answer to this apparent puzzle comes down to scale. In a small economy like Ireland, the activities of companies such as Google and Facebook are relatively enormous. The Large Cases Unit (LCU) in the CSO will be in regular contact with these companies for filing updates and notice of any significant changes.  For an economy of the scale of the US, such companies are simply are not as important in and of themselves when it comes to the BEA’s production of their National and International Accounts.

In the BEA’s case they undertake “benchmark surveys” every few years of a wide number of market participants to get a deep understanding of what is going on.  Between these comprehensive “benchmark surveys” the BEA do quarterly surveys of a much smaller sample and extrapolate the data they publish from those.

The most recent benchmark survey for Transactions in Selected Services and Intellectual Property with Foreign Persons was carried out for 2017.  The data was collected in 2018 with the results published in 2019.  As it so happens, the BEA are in the process of collecting data for the latest such survey.  In this instance the benchmark year is 2022 with the data collected in 2023 and results not due until sometime in 2024.

So it looks like the significant changes implemented by US MNCs operating in Ireland fell in the middle of the gap between the BEA’s benchmark surveys that would have picked them up.  They were too early for the survey for 2017 and while they should be picked up by the ongoing survey for 2022 the results won’t be pulled together and incorporated in the BEA’s International Accounts until 2024.  It seems our wait for US GDP to be revised up will be going on for a while yet.

Friday, June 23, 2023

Does Ireland have the lowest per capita consumption of housing in the EU?

A couple of years ago we asked “does Ireland have the lowest per capita consumption of housing in the EU15?”  As the title to this post suggests, that question can now be put in terms of the entire EU and now just the old EU15.

Here is the full data on the consumption of housing services (including water, electricity, gas and other fuels) in Eurostat’s data on Actual Individual Consumption (AIC).  Obviously there is too much here to be useful but it gives all the elements used to give the ranking in the final column.

Consumption of Housing Services in AIC 2022

The start point is the consumption of housing services in national currency from each country’s national accounts.  Using the exchange rate, population and a relative price index this is transformed into real expenditure per capita on which the volume index is based.

Here is Ireland’s consumption of housing services relative to the overall figure for the EU27.

Consumption Per Capita of Housing Relative to EU27 2003-2022

Back in 2008 Ireland was pretty much at the level of the EU27 and ranked 12th of the 27 countries.  Since then Ireland’s relative consumption has fallen and the first estimates for 2022 put Ireland’s consumption of housing services at 70 per cent of the level of the EU27 and now ranked last (joint with Estonia) across the EU.

In terms of the data, the answer to the question at the top is, yes, Ireland has the lowest per capita consumption of housing services in the EU.  Why is this?

Here is the aggregate consumption of housing services in constant prices.

Consumption of Housing Services Constant Price 2003-2022

In line with the significant construction of new housing this rises up to 2009 and has been essentially unchanged since then.  Ireland and Luxembourg are the only EU countries that have not had growth in the per capita consumption of housing since 2008.

Consumption Per Capita of Housing Relative 2008 and 2022

In 2008, Ireland’s per capita consumption of housing was almost twice that of Bulgaria. In the years since, Bulgaria has seen per capita growth of almost 130 per cent and is now around 25 per cent higher than Ireland.

That there hasn’t been growth over the last 15 years in the per capita consumption of housing services is a surprise. We haven’t built many new dwellings and the population has grown faster than the stock of housing. Census figures show that between 2011 and 2022 the housing stock grew by around six percent. Over the same period the population grew by 12 percent.

Ireland is below the level of the EU27 for many of the categories in Actual Individual Consumption.  This is in contrast to 2006 when Ireland was above the level of EU27 for almost all categories.  Some convergence might have been expected but the fall in Ireland’s relative position goes beyond that.

AIC Ireland by Item 2006-2022

Ireland is significantly below the level of the EU27 for food, alcohol and tobacco but then is also one of the highest for consumption in restaurants and hotels (including pubs).  There are a number of categories where Ireland is close to but below the level of the EU27 including health, transport and communication. Ireland is higher for education as might be expected from our relatively younger population and higher participation in third-level.

For the public/private split of AIC, it can be seen that Ireland is at the level of the EU27 for government spending on individual consumption expenditure (and has been rising slightly relative to that over the past decade).

However, for the household component of real AIC per capita, Ireland is well below the level of the EU27.  Back in 2006, Ireland was 127 per cent of the level of the EU27; now this is just 84 per cent (though with a far, far higher household savings rate!)

Yes, there have been falls in a number of categories but by far the most significant is the one highlighted at the start of the post: consumption of housing services.

Communication has gone from 146 per cent of the level of the EU27 in 2006 to just 88 per cent now, but communication makes up only two per cent of AIC.  Housing on the other hand makes up 16 per cent of AIC. It is the largest of the above categories. 

15 years ago, Ireland was middle of the road for the consumption of housing services in the EU.  The convergence referred to earlier can be seen here. But rather than holding station in the middle Ireland can now be seen poking out at the bottom.

EU27 Housing Consumption in AIC 2003-2022

Ireland certainly has issues with housing. And the data says we have the lowest per capita consumption of housing in the EU. But is that really how we see it?

Monday, June 19, 2023

An update on what was Ireland’s largest taxpayer

We previously identified Microsoft Ireland Research as a likely candidate for Ireland’s largest taxpayer.  Microsoft Ireland remains a very large taxpayer but may have been usurped for top billing. Here will be provide a short update on Microsoft Ireland Research’s latest accounts.

Microsoft Ireland Research Income Statement 2017-2022

The company has seen enormous revenue growth in recent years.  Since 2017 (the first year the information is available for) turnover has pretty much quadrupled from $11.6 billion to $48.2 billion. Operating profit has grown commensurately going from $5.1 billion to $21.4 billion.

There is more details on the taxation of the company in the previous post. Here we note that the tax charged in the accounts continues to be around 12 per cent of operating profit plus interest received.

Microsoft Ireland Research ETR 2017-2022

The amount of tax has also quadrupled going from nearly $630 million in 2017 to $2.6 billion in 2022.  This would make Microsoft Ireland Research alone responsible for around 10 per cent of current Corporation Tax receipts and around 2 per cent of general government revenue.

Microsoft Ireland Research’s staff count has grown at a slower pace. In 2017, the average number of persons employed during the year was 443. This rose to 524 in 2020 and reached 831 in 2022.  The total wages and salaries bill was €112.6 million (giving an average of €135,000 per person employed).  Additional social insurance, pension and share-based remuneration were also incurred.

Wednesday, June 14, 2023

Ireland in the 2020 Country-by-Country Data for US MNCs

As a result of BEPS 1.0, large MNCs have been filing country-by-country reports with their home tax authority since 2016.  Using these tax authorities can publish aggregate statistics and the OECD itself has a partial database of these although it currently only goes up to 2018. For US MNCs, the IRS have now published data up to 2020.

These figures are not national accounts data and there is a number of issues with them but they are still useful. We will look at the 2020 figures published by the IRS and, in particular, the figures for Ireland. This is relevant given the very significant presence of US MNCs in Ireland.

First we will start with the payments of corporate income taxes.  Per the CbCR reports filed with the IRS the US MNCs covered paid $310 billion of corporate income taxes in 2020.  This is on a “cash basis”, i.e. net payments of tax to governments around the world. Unsurprisingly, the biggest share of these payments went to the U.S. itself.  The reporting companies made $192 billion of cash payments to corporate income taxes in the U.S.

Here are the top 25 recipients of corporate income taxes from US MNCs in the IRS CbCR data for 2020.

IRS Cash Tax Paid CbCR Chart 2020

Across the EU, the US MNCs in the CbCR data made $35 billion of cash tax payments in 2020.  Ireland is by far the largest recipient of corporate taxes from US MNCs in the EU.  In 2020, Ireland received more corporate tax from US MNCs than the combined total for every country from Italy down in the following chart.

IRS CbCR for the EU27 Tax Payments 2020

The nominal figures, of course, don’t tell the full story. In relative terms, $1 billion of tax payments in Ireland is very different to $1 billion of tax payments in, say, France.  Here are the corporate tax payments of US MNCs relative to the Net National Income (NNI) of each Member State.

IRS CbCR for the EU27 Tax Payments to NNI 2020

Using NNI means we don’t have to do any adjustments for the distortions that can appear in GDP data.  All the above chart does is put the cash tax payments figures from the IRS as a percent of the net national income figures from Eurostat.  The tax payments are converted from dollars to euro using the average exchange rate for the year (1.142).

For the EU as a whole the corporate tax payments of EU MNCs are equivalent to 0.3 per cent of NNI. For Ireland the share is 5.5 per cent.  It exceeds 1.0 per cent in only one other country and the result for Luxembourg is only one-third of that for Ireland.

Putting them in per capita terms may be an easier concept to grasp.  For a population of 5 million the near €10 billion of tax payments from US MNCs is equivalent to near €2,000 per capita.  The equivalent figure for Germany is €67 while for France it is €46 with Italy at just €27.

IRS CbCR for the EU27 Tax Payments Per Capita 2020

The effective tax rates of US MNCs across the EU are shown next. In this instance, the analysis is limited to entities reporting positive profits to ensure that the effective rates are not artificially higher due to the inclusion of losses.

The effective tax rates faced by US MNCs vary from 29.5 per cent in France to 1.3 per cent in Luxembourg.  The effective rate in Ireland, 12.6 per cent, is at the lower end with eight EU countries have a lower rate in 2020.

IRS CbCR Effective Tax Rates in EU27 2020

As well as tax details, the country-by-country data also gives some insight into the substance US MNCs have around the world including employees and tangible assets.

The 1,750 or so US MNCs in the CbCR statistics had around 2.7 million employees in the EU in 2020.  Of this, the largest amounts were in Germany and France where they had 570,000 and 370,000 employees respectively.  The 172,000 employees in Ireland is the eighth-highest amount in the EU.  Of the 1,750 MNCs who filed country-by-country reports with the IRS, 660 included Ireland as a jurisdiction in which they operated.

IRS CbCR Employees Number in EU27 2020

The get an insight into the relative importance of employment in US MNCs in each Member State we can combine the IRS data above with total employment figures from Eurostat.  This shows that employment in US MNCs is just over one per cent of total employment in Germany and France.  For Ireland, the equivalent share is 7.5 per cent, the highest in the EU.  Next highest is Luxembourg where the 15,000 employees they have there is just over five per cent of total employment.

IRS CbCR Employees Share of Total Employment in EU27 2020

The second indicator of substance in the IRS data is the value of tangible assets, other than cash and cash equivalents, that US MNCs have in each country.  This assets would include factories, buildings, plant, equipment etc.

IRS CbCR Tangible Assets in EU27 2020

In 2020, US MNCs valued the tangible assets of their Irish entities at $110 billion.  This was the highest in the EU and is more than France, Italy and Spain combined.

Indeed, the tangible assets that US MNCs report for Ireland is one of the highest in the world.  The reporting groups indicated that they had a total of $8.6 trillion in tangible assets of which $6.2 trillion, 72 per cent, were located in the U.S. itself.  The following charts shows the highest jurisdictions excluding the U.S.

IRS CbCR Tangible Assets 2020

The amount of tangible assets reported for Ireland is the fourth-highest in the world, lower only than the U.S., the U.K. and Canada.  Indeed, the standalone figure for Ireland is more than twice the combined figure for the continent of Africa as a whole.