Friday, June 28, 2013

The Anglo tapes and alternatives to the guarantee

Below the fold is a narrative that tries to pull together the revelations in the Anglo tapes this weekend as well as the piecemeal information we already have about the run-up to, and aftermath of, the blanket guarantee introduced in September 2008.  For anyone who has shown even a modicum of interest in these developments there is nothing new that follows but maybe it will help to pull a few threads together on the alternatives that were available and the decisions that were taken.

Retail Sales reverse trend

The Consumption figures in yesterday’s Quarterly National Accounts reflected a trend that was evident from the sharp decline in the retail sales index that began last Autumn.  However, the May Retail Sales Index shows a reversal (for one month anyway) of the downward trend.

Retail Sales to May 2013

The rise in May was not enough to bring the annual changes in positive territory.  The June figures will likely show an annual increase but there will have to be a concerted rise over the coming months just to keep pace with the increases that were seen during the summer and early autumn last year.

Annual Change in Retail Sales to May 2013

Finally, the monthly changes highlight the volatility of the series so a trend reversal of one month should be considered indicative of very little.

Monthly Change in Retail Sales to May 2013

Wednesday, June 26, 2013

IDA’s Barry O’Leary on CNBC

The chief executive of the IDA, Barry O’Leary, made a brief appearance on CNBC this morning.  Here is a clip of the exchange.

Whatever about his answers it’s clear that the spotlight is going to continue to shine on Ireland’s corporate tax regime.

Friday, June 21, 2013

Redemption Profile

The NTMA are going to very busy organising bond sales for the coming decades.  Here is a chart from the latest IMF review showing the impact that a €200 billion debt will have on redemptions.

Redemption Profile

Using their assumptions it can be seen that redemptions are going to average over €25 billion a year (which assumes an average maturity of around 8 years which is relatively long.) 

It is not clear that the above chart includes the redemption of the new bonds created through the Promissory Note swap in February.  These bonds begin to mature from 2037 on though the chart does include their sale by the Central Bank of Ireland into the private market beginning next year.

The above chart will be changed by today’s formal agreement to extend the maturities of the EFSM/EFSF loans Ireland has drawn down from the EU/EZ.  The will have a positive impact in the medium term as loans for the coming decade are pushed out but, as shown above, the rollovers that will be required in the 2020s are going to be very substantial.

Friday, June 14, 2013

Levin and Hodge on Apple and Google

The MNC tax debate continues.  It is due to be on the agenda for the upcoming G8 Summit in Fermanagh but there is little prospect of anything substantive emerging next week, though some changes over the coming years are likely, possible through the OECD.

At present, the focus remains on domestic tax systems to respond to the problem of taxing large MNCs whose profits are based on mobile intellectual property.  The recent investigations into Apple and Google have received significant attention here with a lot of comment on how Ireland is perceived.  What sometimes gets overlooked is what the leaders of the debate in the US and UK actually want to happen.  The changes they recommend are to their domestic tax regimes.

First, here is Sen. Carl Levin on Apple:

Apple is exploiting an absurdity, one that we have not seen other companies use. The absurdity need not continue. Although the United States generally looks to where an entity is incorporated to determine its tax residency, it is possible to penetrate an entity’s corporate structure for tax purposes, and collect U.S. taxes on its income, if the entity is controlled by its U.S. parent to such a degree that the shell entity is nothing more than an “instrumentality” of its parent, a sham that should be treated as the parent itself rather than as a separate legal entity. AOI, AOE and ASI all sure seem to fit that description.

Take AOI. AOI has no owner but Apple. AOI has no physical presence at any address. In thirty years of existence, AOI has never had any employees. AOI’s general ledger, its major accounting record, is maintained at Apple’s U.S. shared service center in Austin, Texas. AOI’s finances are managed by Braeburn Capital, an Apple Inc. subsidiary in Nevada. Its assets are held in a bank account in New York. 

AOI’s board minutes show that its board of directors consists of two Apple Inc. employees who live in California and one Irish employee of Apple Distribution International, an Irish company that AOI itself owns. Over the last six years, from May 2006 through the end of 2012, AOI held 33 board meetings, 32 of which took place in Cupertino, California. AOI’s lone Irish-resident director participated in just 7 of those meetings, six by telephone, and in none of the 18 board meetings between September 2006 and August 2012.

ASI’s circumstances are similar. Prior to 2012, ASI, like AOI, had no employees and carried out its operations through the action of a U.S.-based board of directors, most of whom were Apple Inc. employees in California. Of ASI’s 33 board meetings from May 2006 to March 2012, all 33 took place in Cupertino.

In short, these companies’ decision makers, board meetings, assets, asset managers, and key accounting records are all in the United States. Their activities are entirely controlled by Apple Inc. in the United States. Apple’s tax director acknowledged to the Subcommittee staff that it was his opinion that AOI is functionally managed and controlled in the United States. The circumstances with ASI and AOE appear to be similar.

Our legal system has a preference to respect the corporate form. But the facts here present this issue:  Are these offshore corporations so totally controlled by Apple Inc. that their identity as separate companies is a sham and a mere instrumentality of the parent, and if so, whether Apple’s claim that AOI and ASI owe no U.S. taxes is a sham as well?

Second, here is Margaret Hodge MP on Google:

Google generates enormous profits in the UK. But despite an $18 billion turnover between 2006 and 2011 it paid the equivalent of just $16 million in taxes to the UK government.

Google brazenly argued before this committee that its tax arrangements in the UK are defensible and lawful. It claimed that its advertising sales take place in Ireland, not in the UK.

This argument is deeply unconvincing and has been undermined by information from whistleblowers, including ex-employees of Google, who told us that UK based staff are engaged in selling. The staff in Ireland simply process the bills. Google also conceded at this second hearing that its engineers in the UK are contributing to product development.

The company’s highly contrived tax arrangement has no purpose other than to enable the company to avoid UK corporation tax.

Confidence in HMRC has also been weakened. It is extraordinary that the department did not challenge Google over the complete mismatch between the company’s supposed structure and the substance of its activities.

In the conclusions and recommendations of the report from the committee (page 5) it states:

Any common sense reading of HMRC’s own guidance and tests suggests HMRC should vigorously question Google’s claim that it is acting lawfully. In contrast to evidence given to us previously, Google has also conceded that its engineers in the UK are contributing to product development and creating economic value in the UK We note that HMRC has never challenged an internet-based company in the Courts on the question of its permanent establishment.

The key issues in both cases refer to the interpretation and implementation of domestic tax law rather than tax avoidance loopholes provided by the Irish tax system (though Ireland clearly facilitates the use of these strategies by the MNCs).

Sen. Carl Levin is clear that the holding companies used by Apple should be judged to be an “instrumentality” of the US parent and thus subject to US tax law. Margaret Hodge MP is clear that the activities of Google should be judged as a “permanent establishment” in the UK and thus subject to UK tax law.  Ireland has nothing to do with these domestic concerns.

Would the changes that Levin and Hodge propose end the tax avoidance strategies of Apple and Google?  No. 

If the Apple holding companies were deemed by the IRS to be resident in the US for tax purposes, Apple could simply move the companies to Bermuda and use the “Double-Irish” loophole to continue to defer its US corporate tax liabilities. 

If Google’s operations were deemed by HMRC to be a permanent establishment, Google UK could enter a “cost-sharing agreement” with Google Ireland and continue to transfer its profits to Ireland (and subsequently to Bermuda) via royalty payments on its intellectual property.

The chase to tax MNC profits may have begun but there will be a huge number of twists and turns before they are caught, if ever.

Tuesday, June 11, 2013

Mortgage Debt in Ireland

The Q1 2013 update of the Private Household Credit and Deposits series from the Central Bank gives the following chart for mortgage debt in Ireland.

Total Loans for House Purchase

Since peaking at €149 billion at the start of 2009 the amount of mortgage debt issued by banks in Ireland to Irish households has fallen to €126 billion.  However, there are two reasons why these figures are not directly comparable.

First, it should be noted that a good portion of this drop is accounted for by the exit of Bank of Scotland (Ireland) from the set of reporting institutions following its withdrawal from the Irish market in December 2010 (see step decline at that time in chart above).  

Second, December 2010 also saw a change in how the data are reported.  From the explanatory notes:

As of December 2010, the outstanding amount of loans is reported at nominal value, i.e. the gross position owed on loans by the credit institutions’ counterparties. Prior to December 2010, the book value of loans is reported, which reflects the carrying value of these loans on credit institutions’ balance sheets and are net of impairment provisions recognised against those loans. As a result, the outstanding amount of loans and related series increased substantially in December 2010.

This change may have “increased substantially” the outstanding amounts the departure of BOSI and its estimated €10 billion mortgage book meant there was an €8 billion decline in the reported total for December 2010.

All told there probably has been a nominal reduction of around €17 billion in the total amount of mortgage debt owed by Irish households in the past four years.  Separate data from the Irish Banking Federation show that €8 billion of new mortgage debt has been issued to first-time buyers and mortgage top-ups.  It also likely that some elements of the loans to mover-purchasers, re-mortgagers and BTL borrowers would lead to more new debt.

Given the €17 billion reduction in the nominal amount owing and the €8 billion increase from new debt then something around €25 billion of the mortgage debt that existed at the peak Q1 2009 has been repaid.  This is a repayment rate of around €1.5 billion per quarter.

Of course a large portion of the €126 billion that remains will never be repaid and very slow steps are being taken to address that.  The scale of this problem is usefully described in this chart from a recent piece in The Atlantic magazine.


The following table breaks down the total amount of mortgage debt by Private Dwelling House and Buy-To-Let loans with detail on the interest rates applicable to each also provided. [A small amount of loans for second homes/holiday homes are omitted].  Click to enlarge.

Mortgage Debt