Tuesday, September 19, 2017

How much tax do GAFA pay?

Google, Apple, Facebook, Amazon.  The debate on corporate income tax in the EU is fixated on.  Earlier this week Dutch MEP Paul Tang, and member of the European Parliament’s TAXE committee, was co-author of a short report which looked at potential tax revenue losses from Google and Facebook.

The conclusions require a complete re-working of existing tax law.  The tax losses are based on estimated customer revenue shares in EU countries and the global profitability of the companies.  That is, if a customers in a country generate 10 per cent of a company’s net sales that country should be able to tax 10 per cent of the company’s total profit.  Of course, that is not how the system works but it is indicative of the approach some would like introduced.

What this report has in common with many other reports is that it is difficult to determine how much tax the companies are currently paying.  If the argument is that something is “too low” surely we should be told what it is and what it should be.  This is rarely shown.

The table here gives the consolidated income statements for Google, Apple, Facebook and Amazon aggregated over the five financial years that ended between 2012 and 2016.

GAFA Aggregate Income Statements 2012-2016

There are a couple of different ways of measuring how much tax a company pays but that one that matters is surely cash tax payments – how much are companies actually paying over to fiscal authorities in corporate income tax payments net of any rebates or refunds received.  This is given in the second last line of the above table.  From 2012 to 2016 Google, Apple, Facebook and Amazon paid $63.4 billion of corporate income tax.

The companies made provisions to pay around $105 billion of corporate income tax over the period but due to a number of issues (mainly the deferral provisions in the US tax code but also the use of previous losses and tax credits carried forward) the actual amount paid was about one-third less.  Still $68 billion is quite a chunk of change.

Of this, the bulk was paid by Apple which is unsurprising as it generates the largest profits.  For financial years ending between 2012 and 2016 Apple made $52.9 billion of net corporate income tax payments.  Cash tax paid was equivalent to 18 per cent of income before income taxes.

On this measure Facebook comes lowest with cash tax payments equivalent to just 7.2 per cent of income before income taxes.  The reasons for this are that Facebook built up substantial losses prior to 2012 and was able to offset these against the positive income it began to generate from 2012.  This have been exhausted and of the $1.9 billion of cash tax paid over the five years over $1.2 billion was paid in 2016 alone.  In the accounts Facebook indicate that tax payments will rise in further years as offsetting losses are no longer available to be utilised.

The lowest tax payments over the period were made by Amazon but the reason for this is pretty straightforward – Amazon had the lowest profits.  Amazon is a prodigious spender on research and development.  Of the five year period Amazon used 34 per cent of its gross margin for research and development.  This compares to a spend of 15 per cent of gross margin across the other three companies.

Do these companies pay enough tax?  That is not what we are trying to answer here.  What we can say is that between 2012 and 2016 these companies paid $68.4 billion of corporate income tax which was equivalent to 16.4 per cent of their income before income taxes.  What tends to be true of most studies of these companies is that the authors want the companies to pay more tax in certain countries which will almost certainly result in less tax being paid in others. 

Who got most of the $68 billion that the companies paid? The US, of course, because that is where most of the profits were generated.  And if the US didn’t allow deferral or have rules that allowed US-source income to be treated as “offshore” it would collect even more.  And no matter what formulas are used the EU will not simply be able to go and take that taxing right.

The annual income statements for the individual companies are reproduced below.

Google Income Statements 2012-2016

Apple Income Statements 2012-2016

Facebook Income Statements 2012-2016

Amazon Income Statements 2012-2016

Monday, September 18, 2017

US companies in the business economies of the EU–and the taxation of their profits

Data from Eurostat clearly shows the oversized presence of US companies in Ireland.  The table below gives the contribution of US companies to the business economies of the EU15 in 2014 for profits, pay, employees and investment.  The business economy is NACE B to N excluding K so it reflects the economy excluding the financial sector, sectors dominated by the public sector such as health and education, and the arts. 

Contribution of US companies to EU15 2014 2

For all the categories shown the largest contribution of US companies is in Ireland.  US companies employ 8.3 per cent of all people employed in the business economy (it is c.5 per cent of total employment) and because they pay rates are higher US companies contribute more the 13 per cent of employee remuneration.  Around one-tenth of investment in tangible goods (excluding aircraft) in Ireland is undertaken by US-owned companies.  In all of these measures the UK is next while the figures for Ireland are between three and four times greater than the mean across the EU15.

The stand-out figure is clearly for Gross Operating Surplus with US companies responsible for more than half of the Gross Operating Surplus generated in Ireland.  The next largest is Luxembourg though the relative contribution is three and a half times smaller while the mean across the EU15 is 14 times smaller than that recorded in Ireland.

We would probably prefer Net Operating Surplus (which is akin to earnings before tax and interest) but GOS gives a good approximation of the contribution of US companies to the corporate tax base in each country.  If for some reason Ireland ended up with a contribution of US companies to gross operating surplus close to the EU mean it would represent a loss of close to half the corporate tax base.

Relative to other EU countries Ireland benefits disproportionately from US companies under the headings of staff, pay and capital investment but the largest difference is for profits.  Ireland’s corporate tax revenues are generated by US companies to an extent that no other EU country comes anywhere near.

The following table gives the numbers behind the contributions of US companies in Ireland.  The total for the business economy is given as well as a breakdown by the main sectors: manufacturing, wholesale and retail, information and communication and the rest.  Remember that the financial sector is not included in any of the data used here.

Contribution of US companies to business economy in Ireland 2014

The key figures are €6.5 billion of personnel costs for 103,000 staff and €2.5 billion of investment in tangible goods.  From the €39 billion of gross operating surplus Ireland probably collected in the region of €2 billion in Corporation Tax while something around €4 billion of the total purchases of goods and services would have been made from Irish suppliers.  This gives a total of €15 billion or so.

We can see how this is broken down by the main contributing sectors in the subsequent columns.  The largest sector is manufacturing with about half of the staff, pay bill and profit totals.  Capital investment in Ireland by US manufacturing companies seemed surprisingly low in 2014.  For the years 2008 to 2012, US manufacturing companies undertook an average of over €1 billion of capital investment in Ireland.  The 2014 figure was just one-twelfth of that though capital investment by ICT companies meant the total of €2.5 billion was in and around the annual average since 2008.

The final thing we can look at is the distribution of these contributions from US companies across the EU.  In can be seen that in terms of absolute size across the EU, US companies have their largest footprint in the UK, well for the time being anyway.  Around 30 per cent of US companies profits, staff, pay and investment in the EU are in the UK.

Distribution of contribution of US companies in the EU

The stand-out figure for Ireland is again for profit.  Just over one-fifth of the gross operating surplus generated by US companies in the EU in 2014 arose in Ireland.  Current rules for allocating taxing rights means that Ireland has approximately one-fifth of the taxable income of US companies in the EU in its tax base.

Alternative proposals to allocate taxing rights are contained in the Commission’s CCCTB proposal.  This would allocate taxing rights on the basis of number of employees, pay bill, tangible capital goods and sales.  Obviously, the allocation will be done by individual company but we can see that in aggregate Ireland has about three percent of the staff measures to be included and maybe around double that for the tangible investment component (or at least for new investment in tangible capital goods in 2014).

We don’t know where these companies sell the goods and services that make up the turnover column but we can get a rough approximation of the size of national markets using ‘actual individual consumption’ from national accounts statistics.  Ireland is about one per cent of the EU market.

Again, the aggregates here don’t provide the granular detail that would go into the calculation at the level of the individual firm but if taxing rights were to be allocated on the basis of employees, pay bills, capital goods and sales, Ireland’s tax base from US companies could fall from the current level of around 20 per cent of profits generated by US companies in the EU using the arm’s length principle to something roughly one-sixth or one-seventh of that under formulary apportionment.  Again this would represent a loss of around half the existing Corporation Tax base.

Who would favour this approach?  Well, just look at France,  Italy and to a lesser extent Spain, in the above table.  France is nearly 16 per cent of the EU market and has around 10 per cent of the employment and capital investment of US companies in the EU.  How does France fare on taxing rights?  Much lower.  Only 3.4 per cent of the gross operating surplus generated by US companies in the EU in 2014 arose in France.  A similar outcome can be seen for Italy with shares of employees, pay bill, capital goods and market size that exceed its current share of the tax base.  Winners and losers.

Friday, September 8, 2017

Remarkable falls in the Live Register

There are better measures of changes in the labour market (with the QNHS being best) but it can be instructive to look at changes in the Live Register and some of the recent changes have been remarkable.

The pattern of the Live Register itself is probably pretty well understood.  Here is the seasonally adjusted total since 2007: rapid rise, level for a period, period of decline.

Live Register Total

Let’s look at the rate of change.  Here are the average monthly changes over rolling three-month periods since 2010.

Live Register Three Month Average Change

The Live Register has been dropping for five years but the three-month period that has the fastest absolute decline has been the last three months.  The average month fall (seasonally adjusted) across June, July and August has been 5,100.  The next best of the 4,500 recorded for the three months to September last year.

Maybe the seasonal adjustment casts some doubts so lets look at the annual changes in the actual numbers.  Here are annual changes recorded in the unadjusted total on the Live Register each month since the annual declines began around the start of 2012.

Live Register Annual ChangeThe largest annual decline in the Live Register was the month just past, August 2017.  Compared to 12 months ago the Live Register has fallen by 51,762.  Previously, the largest annual decline was the 48,162 drop seen in March of this year.  And again these are the absolute declines which might have been expected to moderate but are doing anything but.

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