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.

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.

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.

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.

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.

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.

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.

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.

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.

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. 

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What did we do with €166 billion of Gross National Savings?

The last post used the sector accounts to give the steps that led to there being €166 billion of gross national savings in 2021. Here we will look at bit closer at what this €166 billion was used for.

A large chunk of it was already accounted for by one item included in the previous post – €105 billion of gross capital formation.  This left an excess of just over €60 billion of gross savings over investment. 

Accounting for net capital transfers and the proceeds from acquisitions less disposals of non-produced assets meant that the total amount available for net lending was €64.4 billion.  The sectoral split shows that almost all sectors were net lenders in 2021 with the only significant net borrowing being the €7 billion deficit recorded for the government sector.

So, that leads us to ask what did we do with that €64 billion? The answer is in the financial transactions account, though the numbers here are pretty big.  Unfortunately we are not provided with the same sector split in this account (foreign-owned etc.) that is available elsewhere.  Still the main sectors do provide some insight.

Across all sectors, total transactions in financial assets led to an increase in these assets of €644 billion while there were transactions giving a €583 billion increase in financial liabilities.  The gap between them is net financial transactions and this was €60.9 billion in 2021. 

This is not exactly equal to the €64.4 billion of net lending that was available in the capital account but given the scale of the figures it is not a surprise that they do not fully match.  What may be a surprise in 2021 is that the largest contributor to the statistical discrepancy between the two is the household sector.

That aside, the figures for the household sector are the most straightforward.  Households added almost €14 billion to their deposits in 2021.  They also put nearly €4 billion in insurance and pension schemes. 

The figures indicate the household bought nearly €6 billion of equities in 2021. Digging a little deeper into that item shows that around two-thirds of that was made up of purchases of unlisted shares.  Transactions in unlisted shares was something that piqued our interest a few years ago but the scale here is significantly smaller.

The government column shows that there were excess liabilities taken on relative to the deficit that needed to be financed.  With €20 billion borrowed versus a deficit of €7 billion this meant that €13 billion was added to the government’s financial assets, mainly deposits, which are held with the Central Bank.

The Central Bank itself is included as part of the financial corporate sector.  The numbers here are enormous (in large part due to IFSC activities) but the net figures are pretty small.  The figures for the non-financial corporate sector are also large and again it is hard to identify discernible patterns in the components but financial transactions did result in an improvement of around €44 billion in the financial position of the sector.

So what did we do with €166 billion of gross national savings?  Spending on capital formation by all sectors added around €105 billion to the capital stock and left just over €60 billion for net lending. The household sector added €22 billion to its financial position, the corporate sectors sectors €46 billion, the while the government sector had to borrow €7 billion.  The next step will be look at the impact these had on the national balance sheet.

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Ireland in the Country-By-Country Reports of US MNEs

The IRS have published the latest update of their aggregate statistics compiled from the country-by-country reports filed with it by US MNEs.  The latest figures cover 2019.  The data are useful but have some limitations. Here we will look at some of the aggregate outcomes for Ireland and compare some to other countries.

The headline figures for Ireland are:

There are 632 reporting groups in the IRS data.  In total, they reported that they had around 163,000 employees in Ireland (2018: 151,000).

Some of the financial outcomes are immense. The companies report $735 billion of revenue, $55 billion of profit and $10 billion of tax. In 2018, these were $690 billion, $50 billion and $8 billion.

This might seem to imply an effective tax rate in 2019 of 18 per cent but the figures in the above table include entities that were loss making.  This pulls down the overall profit figure while having limited impact on the tax figure. When restricted to entities with positive profits an average tax rate of 13 per cent is found.

There is also a useful breakdown by economic sector with outcomes for 2019 shown below.

Manufacturing has the largest figure for employment (72,000).  There are also significant levels of employment in the sector encompassing Wholesale and retail trade, transportation and warehousing and in the Information sector.

When looking at tax payments, 2019 marks the first year when payments from the Information sector exceeded those from Manufacturing.  Between them, those two sectors they accounted for 90 per cent of the corporate tax paid by Irish entities in the CbC reports of US MNEs.  Payments in 2019 from US firms in the Manufacturing sector came to $4.1 billion and in the Information sector they were $4.6 billion.

The growth in the income tax paid (on cash basis) in the last few years has been extraordinary. 

The IRS CbCR data go back to 2016. In that year the total tax paid (on cash basis) for entities in Ireland was $4.3 billion.  The $10 billion figure for 2019 was more than double that and given what we have seen with Irish Corporation Tax receipts since then the figures in subsequent IRS updates will be even higher.

It is also worth putting the payments in Ireland in the context of the tax payments made by US MNEs in other countries.  Here are the 2019 figures for the EU27.

In 2019, US MNEs paid more corporate tax in Ireland than in any other EU country.  Indeed, the payments in Ireland were the third-highest in the world, trailing only the US itself (obviously) and the UK.

In total, the US MNEs in the IRS data paid $329 billion of corporate tax in 2019.  Of that, $204 billion was paid to the US. The next largest recipient was the UK with receipts of $10.6 billion.  In third spot is Ireland at $10.0 billion.  There aren’t many things Ireland comes third in the world at, but tax receipts from US MNEs is one of them.

The nominal figures don’t give a sense of the relative importance of the tax receipts from US MNEs to each country.  Here are the receipts of the EU27 but scaled to each counties Gross National Income (GNI).

Using GNI*, the corporate tax payments of US MNEs were equivalent to just over four per cent of Ireland’s national income.  This is double the level of the second-highest and eight times that of the third-highest.

We can also do a quick comparison of profits, assets, employment and effective cash tax rates in the US, Ireland and some selected jurisdictions.  The US continues to tolerate “stateless entities” so these are also included in the below table.

The total share in the bottom panel shows that these jurisdictions cover a large share of the activities in the US MNEs in the IRS CbCR data, though it should be noted that the coverage of the table is “limited to reporting entities with positive profit before income tax”.  This is to get average cash tax rates that better reflect the tax burden on profits.

The largest amounts are understandably in the US itself with more than half of profits, tax, assets and employment recorded there. 

The selected ten jurisdictions, including Ireland, account for one-fifth of profit but only eight per cent of tax, five per cent of assets and just two per cent of employment.  The profit/employment mismatch is most evident for The Cayman Islands, Bermuda and Barbados.  These jurisdictions are also those with the lowest average cash tax rates (all below one per cent).

In aggregate, the companies and entities in this data faced an average cash tax rate of 11.8 per cent in 2018.  In Ireland, the average cash tax rate was 13.0 per cent, which was by far the highest of the selected ten jurisdictions.  Singapore was next highest at 5.6 per cent.

To conclude here is a comparison of the employment figures for the EU27 in the IRS data.  It takes the number of employees for each country and puts it as a share of that country’s population.

For the Eu27 as a whole, the MNEs in the IRS data report that they has 2.65 million employees in 2029.  That is equivalent to 0.6 per cent of the population of the EU27 on January 1st of 2019 (446 million).

The national shares range from 3.3 per cent in Ireland (163,000 in population of 4.9 million) to 0.1 per cent in Latvia (1,800 in population of 1.9 million).

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The Domestic Non-Financial Corporate Sector in 2020

The distortions in Ireland’s national accounts means that the contribution of some sectors can be overlooked as it cannot be disentangled from huge flows in the overall data due to the presence of US MNCs here.  One such sector is the domestic business sector which is lumped in with the MNCs in most national accounts releases.

The annual institutional sector accounts remedy this as they provide a very useful sectoral breakdown with one of these being for a “domestic non-financial corporate sector”.  We have previously examined the contribution of this sector to pre-pandemic growth and, while there have been some revisions to the figures for earlier years, here we will focus on the 2020 changes. First, the current account.

Summary: pretty much everything went down.  In 2020, output was down, wages paid was down, profit was down. Pretty much the only thing that went up was subsidies received, without which the drop in wages paid would have been even greater.

But the above breakdown misses some of the significant differences by economic sector. Here is a breakdown by economic sector the of compensation of employees paid by the domestic corporates (with domestic financial corporates (NACE K) also included).

The stand-out figure is the 60 per cent drop in COE paid by the Accommodation and Food Services sector.  This contrasts with the three best-performing sectors in the above table which saw their COE expenditure increase by more than five per cent last year.

If also worth noting that the domestic NFC sector includes publicly-owned non-financial corporations.  These include semi-states such as the ESB, An Post, Coillte, Bord na Mona, Rehab, Gas Networks Ireland, RTE, the Dublin Airport Authority, Dublin Bus, Bus Eireann and others. Included in others are the seven universities as they are classified in the non-financial corporate sector and are likely a significant contributor to the COE from the Education sector shown in the above table.

The impact of the pandemic on the capital account of the domestic NFC sector seems to have been a bit more muted and as with the current account there have also been revisions to earlier years.

All told, the bottom line of the non-financial accounts is that the domestic NFC sector has been a consistent net lender in recent years.  The pandemic seems to have had only a modest impact on this.

The next step would be to move to the financial accounts to see what the sector is doing with this net lending.  We don’t have a financial transactions account so we move beyond that to the financial balance sheet.  We will show all years for which data is available. Click to enlarge.

As noted before the financial balance sheet for Irish-owned NFCs has been exploding in recent years.  Total financial assets went from €167 billion at the end of 2012 to €529 billion at the end of 2020.  That far outstrips anything that could be explained by the net lending shown in the capital account or any revaluation effects.

At the same the total liabilities of the sector rose from €275 billion to €705 billion with the most significant changes on both sides of the balance sheet being for equity items. And, as can be seen with the bottom line, the financial net worth of the domestic NFC sector has significantly deteriorated in recent years. Financial net worth excludes real assets so this is not an indication that the sector is insolvent.

At the end of 2012, financial net worth was minus €108 billion.  By the end of 2020, this had deteriorated to minus €175 billion.  Again, this is in contrast to the net lending position shown in the non-financial accounts.  It be could that there activities of a small number of large Irish NFCs are distorting the financial balance sheet of the domestic NFC sector – not dissimilar to the type of thing we see with US MNCs on other parts of the national accounts.

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The Contribution of the Domestic Non-Financial Corporate Sector to Recent Growth and Some Taxing Questions

In an earlier post we went through some of the remarkable improvements for the household sector in recent years.  Of course, an outstanding question is: where did the growth come from?  We can get some insight into this from the same sector accounts. 

Current Account

Here we will look at the Irish-owned non-financial corporate sector which as we will see has been a major contributor to recent growth.  First, the current account. Click to enlarge.

Some of the changes here are very significant.  Between 2013 and 2019, output of domestic NFCs increased by 55 per cent, wage paid by 66 per cent and gross operating surplus by 83 per cent.  Compared to where they were in 2013, last year NFCs produced €53 billion more output, paid employees €18 billion more and generated €12.5 billion more profit. 

These have been a significant factor underlying the economy’s recent growth.  A useful sectoral breakdown is also provided.  Here are the domestic sources of compensation of employees (with domestic financial corporates (NACE K) also included))

The largest relative increase was the 130 per cent rise in employee compensation from domestic ICT companies (NACE J). The largest absolute increase was the €2.6 billion increase in employee compensation from professional, scientific and technical activities companies (NACE M), with mining and manufacturing (B,C), wholesale and retail (G), and administrative and support services (N) as well as ICT also recording increased greater than €2 billion.

Some of the other notable changes in the current account of the domestic NFC sector are the near 1,000 per cent increase the retained earnings of foreign subsidiaries and related entities of Irish-owned NFCs, the 500 per cent increases in dividends received and the 13 per cent increase in Corporation Tax paid. 

Two per cent tax rates?

It is surprising to see such a small increase in Corporation Tax paid by domestic NFCs over a period when all performance indictors improved significant.  The figures are this item are a significant revision on what the CSO reported this time last year. For example, it was previously reported that domestic NFCs paid €1.6 billion of Corporation Tax in 2018.  This is now estimated to be just €0.5 billion. 

It is not clear why there has been such a significant downward revision.  Nor is it clear that the figure is correct.  If we take the figures for depreciation from the capital account we can get the Net Operating Surplus of the sector.  This is probably the closest proxy of the tax base for Corporation Tax in the sector accounts and is akin to EBIT (the FISIM adjustment excepted).  Anyway, using Net Operating Surplus we can get some effective tax rates.

Those certainly are some eye-catching numbers down at the bottom.  Perhaps there is some support for this in the Revenue Commissioners research paper on recent Corporation Tax receipts which shows that non-multinationals (i.e., domestic companies) have the lowest effective tax rates in their data.

However, that conclusion was based on an effective tax rate in 2018 or 7.4 per cent which is almost three times larger than what the national accounts are showing.  Differences in definitions and coverage aside that is a large gap to be explained. No explanation is offered here.

Capital Account

We dipped into the capital account with the depreciation figures used above and here it is in full.

Again, we are looking at some large increases over the period.  In line with the rise in profits (and seeming absence of a rise in taxes) the annual increase in net worth rose significantly over the period.

Of this, ever more was used for gross capital formation, with the investment spending of domestic NFCs rising from €7 billion in 2013 to €19 billion in 2019.  There was no year where this fully exhausted the gross saving available and for each of the past seven years the domestic NFC sector has been a net lender. 

That is, after working through the current and capital accounts there was a residual surplus that was transferred to the financial balance sheet.  And it could be that some this is going on the financial balance of foreign subsidiaries or related companies given the increase in the retained earnings on FDI shown in the current account.

Financial Balance Sheet 

We don’t have a financial transactions account so move straight to the financial balance sheet.  As we said last year this has been exploding.

The financial assets of the Irish-owned NFC sector have gone from €167 billion in 2012 to €513 billion last year.  On the other side of the balance sheet, financial liabilities have gone from €175 billion to €633 billion.   Even with the huge increase in the gross figures, the net financial worth of the sector has been largely unchanged, going from –€108 billion in 2012 to –€120 billion last year.

Such is the scale of the increases across the available categories it’s actually pretty hard to determine what is going on.  But for both financial assets and liabilities there has been extraordinary growth in the equity category.  Are there some form of circular transactions taking place?

While the balance-sheet amounts are massive we didn’t really see significant distortions in the current account.  Yes, there has been a surge in the retained earnings of foreign related entities.  This was €3 billion in 2019 and it is possible that some of this should be included in operating surplus.

It would be nice to see the interest figures before the FISIM adjustment but they are only published by Eurostat who do not use the bespoke sectoral breakdown employed by the CSO.

Conclusion

All-in-all it looks like there are two things going on in the domestic NFC sector.  The first is a large, and very real, contribution to the growth of the Irish economy in recent years with significant increases in output, wages and profits.  This has driven a lot of the improvements that occurred pre-COVID.

The second is some kind of financial engineering on the balance sheets of (some) domestic NFCs.  It is possible this involves some sort of circular international transactions with huge increases on both sides of the balance sheet but limited impact on net worth.  To the extent, that there are flows which might, for example, reduce the tax base in Ireland, is unclear.  And, indeed, the tax paid on the tax base of this sector that remains seems unusually low with an estimated effective rate of not much more than two per cent.

So a mix of the good and the unexplained.

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The exploding balance sheet of the Irish-owned non-financial corporate sector

The previous post looked at the current and capital accounts of the domestic non-financial corporate (NFC) sector and painted a positive picture of rising output, employee compensation, profits, corporation tax, investment and savings. 

Here we look at the financial balance sheet of the Irish-owned NFCs (excluding redomiciled PLCs) from table 2.9 of the release.  Before getting to the detail here is a summary chart.

The data go back to 2012, and though there has been some volatility in between, the bottom line, financial net worth, is pretty much the same in 2018 as it was in 2012.  The financial net worth of the sector was –€108 billion in 2012 and was –€104 billion in 2018.  To get overall net worth we would need the value of non-financial assets such as fixed capital and land which is not provided but there is value in looking just at the financial balance sheet.

Although, the bottom line is essentially unchanged the size of the balance sheet of the Irish-0wned NFC sector has exploded in the last six years – and particularly in 2015 and 2016.  For example, total financial assets increased from €167 billion in 2012 to €428 billion in 2018.  This is equivalent to increase from 132 per cent of GNI* in 2012 to 217 per cent of GNI* in 2018.

So, lets see what the detail shows (click to enlarge):

Unfortunately, there are some categories where suppressed values means we can’t complete the above table.  All values are included in the balance sheet for the overall NFC sector so we can see roughly where the residual amounts would show.

For financial assets, we can see actually where most of the increase arose: loans and equity.  Loan assets rose from €54 billion to €121 billion and equity assets rose from €56 billion to €177 billion.  There was also an increase in ‘other accounts receivable’ from €39 billion to €99 billion.  These increases account for almost all of the €260 billion increase and again it should be noted that they took place in just six years, with €170 billion of the increase accounted for by 2015 and 2016 alone.

On the liability side the increase is from €275 billion in 2012 to €532 billion last year.  The available figures show some increase in loan liabilities but most of the increase is accounted or by equity liabilities.  There was also about a €60 billion increase in financial liabilities accounted for by the suppressed categories with most of this due to ‘other accounts payable’. 

For this, note that for overall NFC sector (Irish-owned, foreign-owned and redomiciled PLCs), the amount of debt securities rose from €10 billion to €18 billion while there are relatively minor overall amounts in the other suppressed category above: financial derivatives and employee stock options.

It’s well and good going through the increases by category but the overall increase is immense.  Usually, we can point to the activities of US MNCs when trying to pick through the distortions in Ireland’s national accounts but the above shows that Irish-owned firms might be throwing a distortion or two of their own into the mix.

The Irish economy has been performing well in recent years but nothing that would seem to justify a quarter of a trillion expansion in the financial balance sheet of the Irish-owned non-financial corporate sector.  The concurrent rise in financial assets and liabilities could point to circular transactions of some kind. 

However, at this stage, it is hard to tell what impact this expansion of the financial balance sheet has had on output, income and other flows in the national accounts.  That is likely where the real story lies.

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The Domestic Non-Financial Corporate Sector in the Institutional Sector Accounts

The release by the Central Statistics Office of the 2018 Institutional Sector Accounts saw their work in helping users overcome the impact of globalisation in Ireland’s national accounts.  In this year’s release, the non-financial corporate sector was subdivided into “foreign-owned” and “domestic” sub-sectors with figures provided back to 2013.

In general terms, sub-dividing the NFC sector is something that is set out in the European System of Accounts (ESA2010), and the CSO say:

Non-financial corporations are sub-divided into foreign-owned (S.11a), domestic (S.11b) and redomiciled (S.11c) in these accounts. [.]  The sub-sector S.11a corresponds to the ESA 2010 definition of sub-sector S.11003, foreign controlled non-financial corporations.

The ESA2010 manual gives the definition of foreign NFCs as:

Foreign controlled non-financial corporations (S.11003)

2.54 Definition: the foreign controlled non-financial corporations subsector consists of all non-financial corporations and quasi-corporations that are controlled by non-resident institutional units.

This subsector includes:

(a) all subsidiaries of non-resident corporations;

(b) all corporations controlled by a non-resident institutional unit that is not itself a corporation; for example, a corporation which is controlled by a foreign government. It includes corporations controlled by a group of non-resident units acting in concert;

(c) all branches or other unincorporated agencies of non-resident corporations or unincorporated producers which are notional resident units.

However, deviations from ESA2010 arise with the domestic sector due to the treatment of government-owned NFCs and the presence of the ‘headquarters’ of re-domiciled PLCs in Ireland:

Redomiciled PLCs and domestic NFCs are a part of sub-sector S.11002, national private non-financial corporations, however, following the treatment in the definition of modified GNI, Redomiciled PLCs are separated out in these accounts as S.11c. Government controlled non-financial corporations (S.11001) are included as part of S.11b.

Here we will focus on new domestic NFC sector.  First, the current account (click to enlarge):

The current account takes us through production, generation of income, allocation and distribution of income and the use of disposable income (which for companies is just saving as they don’t engage in final consumption – they have intermediate consumption). So what do we see?

In the past five years, the output produced by the domestic NFC sector has increased by €26 billion (27 per cent).  Intermediate consumption (goods and services used in the production process excluding labour) has not increased in line with output so that the Gross Domestic Product (Gross Value Added) of the sector increased by €23.5 billion (54 per cent).

What we have seen though, is an increase in the pay bill of companies in the domestic NFC sector.  This has risen in line with output.  In 2013, these companies spent €28.0 billion compensating their employees; by 2018 this had risen to €40.4 billion, a rise of 44 per cent, with 2018 showing an increase of 6.4 per cent.

Labour costs did not consume all the additional value added and the Gross Operating Surplus for the sector rose €11 billion (76 per cent) in the past five years.  Over the five years, the labour share of value added for domestic NFCs fell from 64.8 per cent in 2013 to 60.5 per cent in 2018.

After Gross Operating Surplus, we get different allocations due to property income such as interest, dividends and retained earnings.  In line with the increased profits the dividends distributed by these firms has increased.  They distributed €1.5 billion in 2013 with this increasing to €2.7 billion by 2018.  These distributions are relatively small compared to the overall Gross Operating Surplus generated meaning most profits are not distributed to other sectors.  The use of the non-distributed profits will be shown in the capital account.

However, in the allocation of income account the most significant change is the increase, on the resource side, in the retained earnings of direct foreign investment.  This is the profit earned by foreign-subsidiaries of companies in Ireland’s domestic NFC sector that are retained in the country in which they are earned rather than being transferred as a dividend to the parent in Ireland.  Such retained earnings have increased from €0.9 billion in 2013 to €3.4 billion in 2018, a near 300 per cent increase.  Whoever these companies are their foreign subsidiaries seem to be doing pretty well. [There are likely to be genuine reasons underpinning some part of this success but one might wonder whether there is a tax story related to it as well.]

Adding and subtracting the above property income from Gross Operating Surplus gets us to Gross National Income. This has increased from €11.6 billion to €25.4 billion in the past five years, with the increase (€13.7 billion) slightly outstripping the increase in Gross Operating Surplus.

The increased profits has led to an increase in the Corporation Tax paid by these companies from €0.7 billion in 2013 to €1.7 billion in 2018 which shows that some of the recent surge in Corporation Tax has come from companies in the domestic NFC sector.

We can get a measure of the effective tax rate on these companies by looking at Net Operating Surplus.  This is Gross Operating Surplus less the consumption of fixed capital (i.e. depreciation, which is shown in the capital account below).  The national accounts measure of Net Operating Surplus is akin to the accounting concept of EBITDA (earnings before interest tax depreciation and amortisation).

Over the five years, the effective rate on NOS averaged 8.2 per cent and exhibited a slight upward trend over the period going from 7.2 per cent in 2013 to 8.7 per cent in 2018. This could be linked to the exhaustion of losses generated during the crash for use against future profits.

After current transfers (mainly linked to insurance premiums and claims) we get to Gross Disposable Income and as firms don’t have final consumption this is equivalent to Gross Savings.  As shown, this increased from €10.2 billion in 2013 to €23.5 billion last year. 

We now turn to the capital account to see how those gross savings were used. Again click to enlarge.

The main use of the Gross Savings (arising from the increased Gross Operating Surplus) shown in the current account is capital formation.  The Gross Fixed Capital Formation of companies in the domestic NFC sector has increased from €7.8 billion in 2013 to €15.4 billion in 2018.  In five years, the sector has essentially doubled its level of fixed capital investment. 

The companies have also been increasing their inventories.  In 2013, inventories in the sector reduced by €350 million while in the four years since inventories were increased by an average of €1.4 billion per annum.

The investment rate (capital formation as a share of gross operating surplus) averaged 60 per cent across the five years and has shown a generally rising trend from 50 per cent in 2013 to 63 per cent in 2018.

After consumption of existing fixed capital (i.e. depreciation) is accounted for from this investment, Net Capital Formation increased from €3.9 billion in 2013 to €8.5 billion in 2018.  In aggregate terms, the domestic NFC sector is reinvesting a large share of the additional profits being made and this is replacing existing capital, adding new capital and increasing inventories.  Of course, we cannot know that the individual companies undertaking the investment are the ones generating the profits but this is what we see in am aggregate sense.

However, it should also be noted that the additional investment is less than the surpluses being generated and the bottom line shows that the domestic NFC sector is a net lender, and this is increasing.  Per the OECD:

Net lending/borrowing reflects the amount of financial assets that are available for lending or needed for borrowing to finance all expenditures – consumption expenditure, gross capital formation and capital transfers – in excess of disposable income.  If it is positive it is described as net lending and if negative, as net borrowing.

So, the disposable income of the domestic NFC sector exceeds all expenditures.  In 2013, this was €3.6 billion and this had risen to €7.9 billion by 2018.  In part, this could be linked to the ongoing deleveraging of the Irish economy – with companies possibly using surpluses to pay down debts.  In due course, we might look at the financial accounts of the sector to see what insights that might through up.

For our purposes here the bottom line of the capital account, net lending, is far enough. And this links to the discussion in the previous post about the large surplus on the modified current account of the balance of payments recorded in 2018. In that post we said:

One reason to pause before we get excited with highfalutin plans to spend the surplus is that, in the latest figures at any rate, almost half of it arises from the non-financial corporate sector and we really don’t know what is going on there.  Given the scale of the gross amounts in this sector revisions to the figure could be significant.

Before the sector accounts it wasn’t clear where the NFC surplus was arising – with some concerns that maybe it was a residual from the adjustments necessary to go from the headline to the modified current account.  Now we know that this is not the case – a large source of the increase in the modified current account in recent years has been the domestic NFC sector, from which companies involved in the so-called “star” adjustments (GNI*, CA* etc.) are excluded.

And we also know one reason why the domestic NFC sector might be running an increasing net lending balance – the increase in the retained earnings of their foreign subsidiaries.  It may that the companies are investing these earnings abroad so they would not be available for investment or other spending in Ireland.  Or they could simply be held as a financial asset by the foreign subsidiaries and would be available for use if they were transferred as a dividend back to the parent companies here.

This retained earnings strand might be something for another day.  All-in-all these new figures on the domestic NFC sector paint a very positive story: all of output, value added, employee compensation, operating surplus, corporation tax, and investment have risen strongly in the last five years.  The domestic NFC sector has been a major contributor to Ireland’s recent growth.

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