Retail sales up (on the year)

In adjusted terms, core retail sales fell in February but remain much higher than they were at the same time last year.

This chart excludes the Motor Trades and a strong upward trend can be seen, for the volume series in particular, from around spring 2013.  Volume in the Motor Trades category is up 15 per cent in the year but fell six per cent in the month.

In annual terms the increase in retail sales volume is close to the level seen during the spike in sales caused by the ‘digital switchover’ in late 2012 and higher than at any other point since the start of 2010.  It can seen that the annual growth in the value series is much more muted.

All in all, good but only weakly so.

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The BoP Current Account: IFSC v non-IFSC

Last week’s slew of economic data from the CSO did little to provide a clear picture of the current direction of the economy.  In the national accounts data, 2013 GDP was down, albeit only slightly, while GNP was up a hefty 3.3 per cent.

GDP is a measure of the output that takes place in a region; GNP is a measure of the income that accrues to residents of a region.  A rise in GNP should be unambiguously good.  However, across the economy there is little to indicate what is driving the increase in income for Irish residents.  Employment is up but little else is.

Also released were the Balance of Payments data and this seems to paint a very positive picture.

The turnaround from a 6 per cent of GDP current account deficit in 2008 to a near 7 per cent of GDP current surplus in 2013 is impressive.  This is important for a country with a large foreign debt as one way to repay the debt is to have a net gain from transactions with the rest of the world. [The debt can also be paid down by selling domestic assets to foreigners.]

In part the improvement was driven by the fall in imports after the end of the credit-fuelled consumption and construction boom in 2008.

On issue with this is that the fall was abrupt and was completed by 2009 as construction, car sales and other elements of the economy ground to a halt.  So what has driven the continued improvement in the current account since 2010?

Last year, Prof. John Fitzgerald in a useful note outlined the impact that the retained earnings of companies re-domiciling to Ireland had on the figures.  In essence, when a company moves its headquarters to Ireland any retained earnings it has are counted as Irish “income” at the time the company moves to Ireland.  These are added to GNP as the companies have become Irish resident but they have no impact on the domestic economy.  If the companies subsequently remit them as dividends to their foreign shareholders they will subtract from GNP at that time.

The rise in the inflow of these earnings in 2010 is fairly clear.

And the net flow due to re-domiciled companies was estimated by John Fitzgerald to be:

Again, one issue with this is the stepped nature of the increase.  This undoubtedly led to an improvement in the current account but in relative terms the current account continued in 2012 and 2013 when the impact of retained earnings seemed to have levelled out (though 2013 figures are not available).

Within the Balance of Payments the CSO provide a breakdown between the “IFSC economy” and the “non-IFSC economy”.  The performance of the current account for each are shown below.

In 2012 and 2013 the current account associated with “IFSC” companies has been increasing while that associated with “non-IFSC” companies has been flat.  The “non-IFSC” current account has improved since 2008 – because of the import reduction and also likely because of the re-domiciled firms – and there is only a very small “non-IFSC” surplus.

It is not clear to what extent the re-domiciled firms are “IFSC” or “non-IFSC” but it can be seen that the “IFSC” current account was largely unchanged in 2010 and 2011 when the effect identified by the John Fitzgerald was increasing.  It seems as though the impact of the re-domiciled firms is reflected in the 2010 improvement in the “non-IFSC” current account.

We can further break the “IFSC” balance into that determined by trade (service exports minus service imports) and that attributable to income (income inflows minus income outflows).

Both improves in 2013, but the balance of services for “IFSC” companies improved in both 2012 and 2013.  What is noticeable is that the service trade gains for IFSC companies is not reflected in an outflow of IFSC income.  The trading gains are likely accruing to Irish-resident companies and are thus recorded as part of GNP.

If the changes in the IFSC balances were due to the timing of the re-domiciling of companies it would only show up on the income side.  As the IFSC service balance is also improving it is the case that the improvement in the Balance of Payments current account (and thus the improvement in GNP) is down to the activities of IFSC companies. 

There aren’t many who would consider that an improvement in “Irish” income.  There are gains from this as around €1 billion of corporation tax is paid by IFSC companies annually (though this is a claim from the IFSC itself).  All this highlights the difficulties in ascertaining anything about the direction of the Irish economy given the impact things like the IFSC and MNCs have on the national aggregates.

In 2008 and 2009 Ireland’s current account improved because of the large drop in imports.  It seems much of the improvement since then can be attributed to re-domiciled firms (which are foreign owned) and the activities of IFSC companies.  They are unlikely to be of much use in helping to pay down our external debt.

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SMEs and 70 per cent of employment

The relative importance of SMEs to the Irish economy has been touched on during the recent discussion of SME debt.  Sometimes it is stated that SMEs provide 70 percent on employment.  That is not quiet true.  Something along the lines of 70 per cent of people engaged (employee or proprietor) by private sector enterprises are with SMEs is better but it can be seen that this excludes all public sector workers and the self employed.

The 70 per cent figures comes from the CSO’s Business in Ireland 2011 survey which opens chapter one starts with “Six Key Findings from Business in Ireland 2011” of which the first is (emphasis added):

1. Key statistics on small and medium enterprises (SMEs)
In 2011, SMEs (employing less than 250 persons) accounted for 99.8% of active enterprises, 68.6% of persons engaged, 50.1% of turnover and 46.0% of gross value added (GVA). GVA is the gross income from operating activities and is the balance available to enterprises to pay employees and realise a return on investment. It is noticeable that while SMEs employed almost seven in every ten persons in the business economy, they accounted for less than half of GVA.

The seven in ten statistic clear refers to “the business economy”.  As stated this excludes public sector employees and the self-employed.

There are around 1.9 million people working in Ireland.  They can roughly be broken down as:

• 800,000 in c. 180,000 SMEs (with < 250 employees)
• 320,000 in c.170,000 micro enterprises (< 10 employees)
• 260,000 in c.15,000 small enterprises (11 to 49 employees)
• 220,000 in c.2,500 medium enterprises (50 to 249 employees)
• 400,000 in c. 500 large enterprises (with > 250 employees)
• 350,000 in the public sector (excluding semi states)
• 350,000 self-employed (with and without paid employees)

SMEs count for around 42 per cent of employment in Ireland.  SMEs are the largest source of employment but not 70 per cent of it.

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Sunday Business Post 16/03/14

Here is the submitted text for an article in this week’s SBP on SME debt, the state of the banks and this year’s stress tests for eurozone banks.  It continues below the fold.

Should we fear an SME loan meltdown?

In 2007 Prof. Morgan Kelly identified the likely 50 per cent fall in Irish house prices. He set out the implications this would have for construction employment but suggested that the larger banks were “well-capitalized” with unemployment and “macroeconomic dislocation” being the main problems that would emerge. The analysis was incredibly accurate on house prices and the consequences for employment and it wasn’t long before the impact on the banking sector also became clear.

The underlying factor to the most recent warning is not property price falls but the banks calling in loans provided to small and medium enterprises (SMEs) and in the event of their inability to repay the banks would foreclose on the businesses. Again the threat is to employment but it is not limited to 300,000 construction jobs; it is to SME employment across the entire economy.

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Questions facing Ireland about Apple

In The Irish Times yesterday John McManus had a piece under the headline ‘Ireland faces questions on fruitful Apple tax deal’.  The three questions posed were:

• Is there a “special” two per cent rate in Ireland for Apple?
• Is there a “loophole” that allows Irish-incorporated companies to be non-resident here?
• Is there a deal in Ireland to allow for “income taxed at lower rates”?
• Should Apple have paid $890 million Irish corporate tax based on the 12.5 per cent rate instead of the $36 million paid?

At the time of the US Senate last May they was a lot of noise around a special 2 per cent tax rate that Apple had apparently negotiated with the Irish government.  There is no doubt that there were targeted and generous tax breaks given to MNCs who set up operations in Ireland in the 1970s and 1980s but there is no 2 per cent rate for Apple.

McManus calls it “the 2 per cent rate it told Congress that it had agreed with Ireland” and writes:

Apple have never withdrawn this assertion, but at the same time they have stood back and let the Government kick up as much dust as they can around the issue.

During the hearing it was the Senators who said there was a two per cent rate not the Apple executives.  Although put to them the Apple executives did not address it in the Senate hearing but around a week later, Apple CEO, Tim Cook, gave an interview (video here) where he said:

“I’ve seen something in the press that says that some people think that we have a deal with the Irish, a special deal with the Irish government, to pay two per cent flat tax rate.  We have no special deal with the Irish government that gives us a two per cent flat tax rate.  So let me just set that aside.”

So no special deals on rates.  Is there a special deal on something else?  McManus further adds:

The counter narrative advanced by the Government was that there is no special deal but Apple instead availed of a loophole in Irish law that allowed companies to be Irish registered but not Irish domiciled. This quirk of Irish tax law opened the door to low tax heaven we were told.

The loophole was closed in the Budget and the Government seems to have got the “no special deals” narrative back on track. Until last week that was.

Yes, Irish law does allow Irish registered companies to be non-resident.  There is nothing unusual or “quirky” about that.  The change announced in the Budget was not about making Irish-incorporated companies resident here.  The change was a minor one which did not change the residency rules. 

It merely said that if an Irish-incorporated company owned or controlled by foreign residents was not deemed to be resident in Ireland, under the test of management and control, that the company had to tell the Revenue Commissioners where they were resident.  There is no change in the ability to have non-Irish resident, Irish-incorporated companies it is just that such companies have to declare their tax residence and cannot be “stateless”.  These residency rules apply to all companies; not just Apple.

To conclude McManus goes back to rates with reference to “income taxed at lower rates” in ASI’s 2009 accounts.

Is this then the special deal that Apple told the US Congress existed but the Government denies? In the absence of any clarification it is a basis for legitimate suspicion and potentially a fatal hole in the “no special deals ” claim.

This puts them in a very difficult position because the EU and the European Commission – who seem to have bought the no special deal line – may be wondering quite rightly if they have been sold a pup. They no doubt would like to know what “income taxed at lower rates” means as should anyone else paying the full statutory rate of 12.5 per cent corporation tax.

The meaning of “income taxed at lower rates” is a legitimate question.  The answer is a tax rate of zero because the US allows Apple to defer the US taxes its owes on certain foreign-source income.

ASI will be taxed on the profits it generates from holding the global rights to Apple’s intellectual property in the country in which it is resident.  This could be in Cayman or Bermuda where there is no corporation tax or a corporation tax of zero.  Instead Apple set up a structure and chose to have ASI tax resident “no where”.  The corporate tax rate in “no where” is also zero.

Everything ASI does is in the US but because it is not incorporated there it is not deemed to be resident there.  ASI is incorporated in Ireland but it is a ‘relevant’ company to which the test of management and control is applied to determine residency.  ASI is not managed and controlled in Ireland.

The “income taxed at lower rates” is achieved by ASI because it is “stateless”.  The US does have the right to collect corporation tax on all the profits earned by ASI but this has been deferred until the profit is repatriated as dividends to the US.

The corporate tax liability on ASI’s profits is 35 per cent.  The corporate tax paid on ASI’s profits is almost nil.  The US does not want to see Apple pay corporation tax on this profit in another country as it will reduce the amount it can collect.  Ireland does not have any questions to answer on this.  It is a US decision to allow ASI to defer its US tax liability.

So,

• is there a “special” two per cent rate in Ireland for Apple?
• is there a “loophole” that allows Irish-incorporated companies to be non-resident here? 
• is there a deal in Ireland to allow for “income taxed at lower rates”?
• is Apple avoiding paying $850 million of Irish corporation tax?

These are all legitimate questions but the answers are known. 

• There is no “special” two per cent rate in Ireland. 
• There is nothing unusual about Ireland’s residency rules.
• The “income taxed at lower rates” is taxed at zero as allowed by the US.
• Apple is a US company so owes US taxes on its profits 

There is nothing Ireland can do that will result in more tax being paid in any other country.  Ireland can levy tax on profits that are sourced here by non-residents or earned anywhere by residents.  ASI does not source its profits here and is not resident here.  We could make ASI resident here by having all Irish-incorporated companies deemed Irish resident but what would happen then…

UPDATE: The Tánaiste, Eamon Gilmore, was asked these questions in the Dáil today by Joan Collins T.D.  The answer he provided is here. 

It deals with some of the issues but avoids others.  It is noticeable that the United States, US corporation tax or deferral provisions are not mentioned at all.  In the Senate hearing last May the US Senators were quick to heap blame on Ireland for outcomes caused by US tax laws – many that they had voted for.  On this side of the Atlantic we daren’t even say the name the country.

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