Wednesday, April 4, 2018

Revisions (introduced and expected) to the NFC sector in the national accounts

When the 2016 Institutional Sector Accounts were published in November the CSO provided a breakdown of the non-financial corporate sector in the “top 50 foreign-owned NFCs” and “other NFCs”.  We went through the accounts for each here.  A few weeks ago the CSO made some minor revisions to the figures and it is worth giving them a little look. Click to enlarge.

NFC Sector Current Account 2013-2016 Split

The CSO have revised down the property income paid by the large, foreign-owned NFCs which has the effect of increasing the aggregates as the revisions work down the table.  The revisions summed to around €8 billion across the four years for which the split of the NFC sector is currently available.  A derived measure such as “Net Savings” which here is Gross Savings less consumption of fixed capital (i.e. depreciation) is now essentially zero.  As companies so not undertake final consumption we could equivalently say that the Net Disposable Income of the large foreign-owned companies is zero.

We would not expect foreign companies to be contributing anything to the net savings of the economy.  By the time you get down to Gross Disposable Income the only thing left to cover is depreciation.  There should be no excess as any residual should be counted as a property income outflow (such as retained earnings accruing to non-residents). 

[The numbers in the panel of the table above for the Net Savings of the large, foreign-owned NFCs are close to but not exactly zero though these values do seem to be related to the net of other transfers paid and received further up the table.  In the greater scale of things the numbers are close enough to zero to make no difference.]

Of course, the aggregate measures that get most of the attention, GDP, GNP, GNI etc., are in gross terms so the impact of depreciation is important.  Measures of national income and growth in net terms are very useful and should be more widely used but differences, inconsistencies and robustness concerns in how depreciation is estimated across countries means that the primary focus remains on the gross measures.

The changes don’t hugely affect what was said in the previous post and a fuller discussion of what the breakdown does and does not provide is available there.  Here we will just look at a couple of additional points.

Firstly, on the tax paid by foreign-owned companies.  We usually focus on Corporation Tax and the table above shows that the 50 companies in this category paid around €2.5 billion of Corporation Tax in 2015 and 2016.  A bit further up the table though we have “other taxes on production paid”.  For 2015 and 2016 these came to around €900 million for this group which is a significant contribution [it can also be seen that “subsidies on production received” were zero).

There are a number of taxes that make up this categories and for the foreign-owned companies involved it is likely that the relevant ones are:

  • Commercial Rates
  • Motor Tax
  • National Training Fund Levy

Second, when looking at the contribution of foreign-owned companies to national income we would like to know what they spent on:

  • goods and services from Irish suppliers (i.e. non-imported intermediate consumption)
  • compensation of employees to the direct staff
  • taxes, both taxes on income and taxes on production
  • capital investment, particular on tangible goods

The table above gives us the middle two of these for the top 50 foreign-owned NFCs, €4.3 billion for compensation of employees and €3.4 billion for taxes.  We don’t know how much of their intermediate consumption comes from Irish suppliers and the investment figures recently have been skewed by volatile investment in intangibles but it would not be a surprise is these two figures were around €4 billion as well. 

With a bit of juggling this could be seen to be in line with finding from the Survey of Business Impact now carried out by the Department of Business, Enterprise and Innovation though the non-imported component of intermediate consumption of one MNE could simply be the imported by an Irish supplier (or another MNE for that matter) and it will certainly be the case that a share of the investment in tangible goods will be on imported equipment.

Turning to the second panel in the table doesn’t offer much as it remains a bit of an impenetrable gloop. It obviously contains all domestic firms but also contains those foreign-owned NFCs not included in the “top 50”.  The CSO are working on a more complete foreign/domestic split which will help.

We would expect the profits of foreign-owned companies to be stripped out via property income paid so the Gross National Income and Gross Disposable Income shown in this panel should give us a good idea of the earnings of Irish companies.  That does not appear to be the case as the growth rates are much too rapid.  The nominal growth rates of GNI for other NFCs for 2014 to 2016 were 19 per cent, 11 per cent and 23 per cent.  The growth rates of the Gross Disposable Income of this group were similar.

There might be something going on with depreciation.  From 2013 to 2016 the depreciation associated with aircraft for leasing increased from €2.6 billion to €5.1 billion. However, even the derived “Net Savings” measure shown at the bottom of the table has average annual growth rates of 20 per cent over the three years.  This measure excludes all depreciation and should exclude  the profits of foreign-owned companies.  That does not appear to be the case.

It is likely that the odd outcomes here are, at least in part, linked to the treatment of imported R&D services expenditure (which was raised in this recent post on the Balance of Payments).  It is likely that a large share of the imported R&D services relates to “cost-sharing payments” made by the Irish subsidiaries of US MNCs are part of the licensing arrangement for the use of intellectual property outside the US. The Irish subsidiary contributes a share of the company’s overall R&D expense relative to the size of the market it covers.

One outcome of a more consistent treatment of this R&D services imports as capital formation could be an upward revision to property income paid by foreign-owned companies in this group.  It also seems likely that the full impact of any changes will be seen in the “other NFCs” group given the consistency that now appears in the revised figures for the “top 50” group (i.e. the near zero figures for “Net Savings").

The stability in the figures from 2013 to 2016 for property income paid for the other NFC group would suggest that the profitability of foreign-owned firms in this group was also relatively stable as dividends paid and retained earnings accruing to non-residents will make a large part of this figure. 

This does not seem likely.  The Corporation Tax paid by this group rose 75 per cent between 2013 and 2016 and if the bulk of that came from Irish firms it would imply a remarkable rise in profits.  For example, if Irish firms paid half the Corporation Tax of this group in 2013 then the resultant rise in Corporation Tax would imply the profits of the Irish firms rose 150 per cent (as the amount of tax would need to rise from €1 billion to €2.5 billion).

[And it is also worth noting that the figures for property income received in the right-panel will contain the retained earnings of redomiciled PLCs which is another wrinkle to be ironed out.]

There is a recovery but a 150 per cent rise in the profits of Irish firms is highly implausible.  This suggests the figures in the right-hand panel above are, like the Balance of Payments, subject to revision.  The revision will likely see the property income paid (outbound profits) revised up.  This in turn will see Gross National Income, Gross Disposable Income and “Net Savings” revised down.  The scale of such revisions are difficult to assess but imports of R&D services are significant and have been growing as the table here shows.

Imports of Rand D Services

At present in the accounts investment spending on R&D services carried out elsewhere, i.e. imported, is counted as coming from “Irish” income.  This is because the Balance of Payments are not yet fully aligned with BPM6 and such spending is still treated as intermediate consumption for Balance of Payments purposes rather than capital formation.  When the updated approach is applied by EU countries then the money spent on R&D services by foreign-owned firms will be first counted as a profit outflow in the current account and then re-introduced as an investment inflow in the capital account.  As discussed previously this increase in the outflows of profits should reduced the Balance of Payments current account and will also likely reduce Gross National Income.

There will be a few moving parts.  It will depend on how much of the imports of R&D services shown above was undertaken by foreign-owned firms (likely a lot) and the depreciation of any assets that arise from the investment will have an impact as it is profit after depreciation that is counted as an outflow.  Still, given the numbers above, we are probably looking a some significant changes.

These changes will probably work their way through to economy-wide measures such as the new GNI*.  When this was first published the recent growth rates were queried by some as being “too hot”.  If the changes mooted here work through as expected those growth rates could be revised down – with a downward revisions of the levels also possible which would impact ratios which use GNI* as a denominator.  Given the nature of Ireland’s national accounts there could be revisions across a number of areas (the consumption conundrum?) so it’s best to wait to see what the outcome is first but it does give something to look out for.

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