€12 Billion from Corporation Tax – Again!

In today’s Sunday Business Post David McWilliams has an article that runs under the headline “What’s to be done about tax?”.  Knowing something about it would probably be a good place to start.  [The article is now available here.]

The article repeats a claim made a little over a month ago about American MNCs: 

“If these companies were to pay tax at the very low rate – by international standards – rate of 12.5 per cent, the exchequer would net €12 billion in corporation tax per year. €12 billion!  No doubt some other jurisdictions would claim they should have a share of this, but Ireland is currently where the profits are booked.”

We looked at this €12 billion claim when it was first made.  The starting point for it is data from the US Bureau of Economic Analysis and, in particular, this release on the foreign activities of US Corporations. The very first page shows a “net income” figure of $95.575 billion in the row marked “Ireland”.  And 12.5 percent of $96 billion is $12 billion (we will ignore the fact that the Revenue Commissioners collect tax in euro rather than dollars).

But just because the US Bureau of Economic Analysis labels these earnings as “Irish” does not mean they are in Ireland.  There are “Irish” people living in close to every country in the world.  The details behind the BEA statistics can be found in this methodology with page 12 giving the definitions used for their “Classification by Country”.  A quick read will show that place of incorporation is one of the key determinants used when the BEA decide the location of foreign affiliates of US MNCs.

Can we find this $96 billion of net income in Ireland? Let’s see.  First, lets try the Revenue Commissioners.  Even if the profit is being taxed at a very low rate if should still show up in the the total amount of “net taxable income/profits” in Ireland.  In 2010 (the same year as the BEA figures) “net taxable income” was €40.2 billion.  See the very last figure in this release.  That is €40.2 billion for ALL companies in Ireland.

Second, we’ll try the CSO as they also measure the performance of firms in the Irish economy.  In their Business in Ireland 2010 release they say (page 36):

Foreign multinationals in Ireland – the story for 2010

It is estimated from the Structural Business Surveys that
over 3,100 or 1.9% of the 161,200 enterprises in
selected sectors of the business economy in Ireland
were foreign-owned in 2010.

Despite the small number of foreign-owned enterprises,
they were very significant in terms of employment,
turnover and GVA. They employed almost 257,000 or
22.3% of the 1,151,000 persons engaged in the
selected sectors. They also generated almost €162.4
billion or 54.8% of the €296.5 billion in total turnover and
over €44.0 billion or 55.6% of the €79.2 billion in total
GVA.

So foreign-owned enterprises generated around €44 billion of Gross Value Added (GVA).  To get Gross Operated Surplus (GOS) remuneration of employees would have to be subtracted (257,000 times say €40,000 is a little over €10 billion).  That gives around €34 billion of Gross Operating Surplus for ALL foreign-owned companies in Ireland.

“Gross Operating Surplus” as recorded by the CSO is a different measure, though somewhat similar in principle, to “Net Income” reported to the Revenue Commissioners.  The point is simply that nothing in Ireland gets us close to the $96 billion income figure reported by the BEA.

The CSO’s Balance of Payments gives us a measure of “repatriated profits” out of Ireland.  In the Balance of Payments income flows are accounted for when they are earned rather than when they actually leave the country (one reason for this has to do with the GNP measure of national income). Anyway, here are the income outflows attributed to “Direct Investment Income: Income on Equity” for the past five years:

2009: €33.2 billion
2010: €36.1 billion
2011: €38.0 billion
2012: €38.8 billion

In 2010, equity investment in Ireland (ownership of companies) by foreign nationals had earnings of €36.1 billion.  Again this is for ALL foreign nationals not just US MNCs.

So is the US BEA data wrong? No, it is perfectly correct.  It is the use and interpretation of it that is wrong.  Here are two extracts from the BEA methodology:

If an operation or activity is incorporated abroad—as most are—it is always considered a foreign affiliate.

[.] if a business en­terprise that is incorporated abroad by a U.S. person conducts its operations from, and has all of its physical assets in, the United States, it is treated as an incorpo­rated foreign affiliate in the country of incorporation, even though it has no operations or physical assets there. This treatment ensures that the foreign entity is reported to BEA.

Why are these important?  These bring us to Apple which has been reporting annual net income of around $40 billion for the last few years.  The company was the subject of a very information US Senate investigation in May.  Here is an extract from the opening statement given by the committee chairman Sen. Carl Levin (D) to the hearing about three Irish-incorporated Apple subsidiaries:

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.

According to the Senate report, Apple Sales International (ASI) reported pre-tax earnings in 2010 of $12 billion.  As the statement from Sen. Levin makes clear ASI carries out all its activities in the US.  In the BEA statistics this income is attributed to Ireland because AOI is an Irish incorporated company.   These companies are not resident in Ireland for either Revenue or CSO purposes or any purposes.

The McWilliams article asks “where do you think enormous amounts of US multinational money is on deposit?  Yes, you guessed right, in the deposit accounts of the big US banks in the IFSC.”  Well, in the case of Apple that is plain wrong.  In its submissions to the US Senate Apple was clear that its “foreign” cash is “held in a bank account in New York” and “managed by Braeburn Capital, an Apple Inc. subsidiary in Nevada.”  There is no evidence that the money ever even passed through Ireland.

The structures of other US companies provide similar conclusions.  Companies such as Google and Microsoft have large sales operations in Ireland but these operation do not report very large profits. Why? Because they pay patent royalties for the rights to use their parent company’s intellectual property.  Ireland is a low-tax country for corporations but it is not low-tax enough for them to shift the economic rights of their intellectual property here and it is to the IP that most of the profit is attributed. 

Here is a chart from the CSO’s Balance of Payments on patent royalty flows in and out of Ireland.

What does it show us?  There are massive outflows of royalty payments (€28 billion in 2010) and much smaller inflows (€2 billion in 2010).  There have been efforts in recent Finance Acts to make Ireland more attractive for holding companies but the effect is small compared to the outflows of royalty payments.  The outflows hugely reduce the profitability in Ireland of the MNCs operating here.

In 2010 there was a €22 billion outflow “other business services”

Where does this money flow to?  Much of it flows to small island nations like Bermuda and the Cayman Islands.  Google book massive advertising revenues in Ireland but the profit is attributed to intellectual property that is held in Bermuda.  The holding company, Google Ireland Holdings is Irish incorporated but the royalty payments made to it are outflows in the Balance of Payments and the profit is not taxable in Ireland.  Microsoft’s Round Island One is also resident in Bermuda though Irish incorporated.

In recording massive sales for US MNCs in Ireland the BEA is correct.  These are also evident in the CSO data.  However, the profit from these sales is shifted out of Ireland in the form of patent royalty payments.  The BEA attribute these profits to Ireland as the holding companies are Irish incorporated. 

The Apple holding companies are currently tax resident no where and thus pay no corporation tax.  (Last month’s Budget announced that such a structure using Ireland will no longer be possible from the start of 2015).  Google, Microsoft and other companies are their holding companies, and profits, in Bermuda (the rate of corporation tax in Bermuda is zero). 

Companies should not be able to claim “stateless income” and curbs have to be put in place on their ability to shift profits to no-tax jurisdictions.  This is one of the goals of the OECD’s BEPS initiative but it is far from clear that anything substantive will be achieved.

Do US MNCs pay their “fair share” of corporation tax in Ireland?  This is what they do pay from a recent article by Keith Walsh, economist with the Revenue Commissioners:

In 2009, US companies paid 43% of all Corporation Tax paid in Ireland.

In 2010, the amount of taxable income recorded by the Revenue Commissioners was €41.2 billion.  The amount of Corporation Tax paid was €4.2 billion – an effective tax rate of 10.3 percent.  In the SBP piece is is argued that:

Multinationals in Ireland do not pay 12.5 per cent; they pay on average 2.5 per cent tax on profits.  This is a joke and the joke is on you because that which they don’t pay, you do.

If there was some way we could stop the MNCs shifting their profits out of Ireland this might be relevant.  But at the moment we can’t.  The sales are booked here but the profits are not.  It is a bit of a joke to suggest that:

The gain to Ireland would be huge.  The budget deficit would be eliminated immediately and the country would run a surplus.

According to Keith Walsh, US companies contribute close to €5 billion to Ireland’s total tax take.  Next year Exchequer tax revenue will be around €40 billion.  Now that is really 12.5 percent.