Friday, October 14, 2016

Facebook responds to IRS court filings

Back in July we briefly looked at court filings the IRS had made into Facebook’s 2010 tax return in the US.  At the time Facebook had yet to respond; but they have now.

Earlier this week Facebook filed their own petition and there is a useful summary here.

Although the additional tax claimed by the IRS for 2010, $1.7 million, is relatively small there are a number of offsetting factors that give rise to the net figure.  Central to the case is the transfer of economics rights of  intellectual property owned by Facebook Inc. to Facebook Ireland Holdings in September 2010 after which date the two companies entered a cost-sharing agreement (CSA) for the continued development and licensing of Facebook’s technology.

As a result of the transfer and the cost-sharing agreement Facebook Ireland Holdings is granted the license to use Facebook’s technology outside of North America.  The IRS make some minor quibbles about the treatment of payments under the CSA but their major issue is the valuation of the IP that existed at the time the CSA for future developments was entered into.

Facebook Inc. put a net present value of $6.7 billion on the intangibles and calculated royalty payments on the basis of that.  The IRS meanwhile have assessed that the intangibles had an NPV of $13.9 billion at the time.  There is quite a substantial gap. In a separate filing related to discovery Facebook claim that their answer was “overly generous”:

Facebook explained that once the IRS errors were corrected, the IRS economic model yielded essentially the same value that Facebook used to prepare its tax returns, or even that Facebook’s tax return position was overly generous to the IRS.

The rights to the intangibles were transferred to Facebook Ireland Holdings on September 15, 2010 and the IRS estimate that an additional royalty payment based on their valuation of $85 million should have been made to Facebook Inc. for the remainder of the year.  Over a full year this would equate to additional payments of around $300 million, assuming payments on a straight-line basis.

So the IRS have revised up Facebook Inc.’s gross royalty income for 2010 by this $85 million (and will likely seek upward revisions of $300 million for a number of years after if the case is upheld).  One would expect that this would have led to a larger tax bill for Facebook Inc. for 2010 of around $30 million (assuming the 35% US CIT rate applies) but the IRS made a number of other adjustments.

Most of these were minor but the biggest of them was that the IRS increased Facebook Inc.’s deduction for Net Operating Loss by around $700 million.  The use of this deduction almost fully offset the additional tax due on the increased royalties.

The IRS adjustments mean that Facebook Inc. will not have the Net Operating Loss deductions applied to 2010 available for future periods and will face higher tax in the US due to the increased royalties that Facebook Ireland Holdings will have to pay. And this latter point highlights the key aspect of many of the global tax strategies used by US MNCs - getting the economic rights to IP developed in the US into entities outside the US (or at least considered ‘offshore’ for US tax purposes).  In this instance ‘offshore’ seems to be Grand Cayman but mentions of that in all the filings to date: nil.

Anyway, if the IRS require much larger payments to Facebook Inc. for the technology developed in the US then Facebook will have much larger US tax payments.  As the company itself says:

On July 27, 2016, we received a Statutory Notice of Deficiency (Notice) from the IRS relating to transfer pricing with our foreign subsidiaries in conjunction with the examination of the 2010 tax year. While the Notice applies only to the 2010 tax year, the IRS states that it will also apply its position for tax years subsequent to 2010, which, if the IRS prevails in its position, could result in an additional federal tax liability of an estimated aggregate amount of approximately $3.0 - $5.0 billion, plus interest and any penalties asserted. We do not agree with the position of the IRS and will file a petition in the United States Tax Court challenging the Notice. If the IRS prevails in the assessment of additional tax due based on its position, the assessed tax, interest and penalties, if any, could have a material adverse impact on our financial position, results of operations or cash flows.

In theory, of course, this is tax that Facebook would have to pay anyway.  But it has set up a structure, as many other companies have, to defer the tax due on earnings made outside the U.S. until those earnings are “repatriated” to a U.S.-registered entity in the company.  Facebook does not make a provision for this deferred tax in its accounts (one reason being that it does not intend to repatriate the profits) so actually paying this tax will have a “material adverse impact” on its operations.

Thursday, September 1, 2016

Why tax campaigners should be aghast at the Apple ruling

The European Commission ruling that Apple should pay €13 billion of Corporation Tax to Ireland has been met with approval in some quarters.  But one problem is that many of those who are approving have a completely different view of how companies should be taxed when compared to the broad logic used by the Commission to reach the €13 billion figure.  It is as if the ruling should be welcomed for the simple reason that it involves more tax (or at least appears to involve more tax).

Would other companies like to replicate the outcome that the ruling reflects?  Absolutely. And particularly for non-US companies as US companies are subject to US tax on their worldwide earnings.  But what about a company in France or Germany?  Would they like to have 60 per cent of their profits taxed at 12.5 per cent in Ireland. You bet they would.

So how can they achieve that?  If we follow the logic of the EC ruling it would be relatively straightforward.

Let’s take a company in France as an example.  The company should aim to have as much of its profits accumulated in a single subsidiary as possible using transfer pricing to maximise the difference between the prices it pays and receives.  There will tax due on the profits on other subsidiaries but the company should be looking for a central ‘hoover’ type subsidiary where as much of the profit as possible is located. 

It could be a company that buys off manufacturing units and then sells on to distribution or retail units or even final customers.  It doesn’t really matter just as long as it captures the maximum amount of profit possible.

This subsidiary can be in France, it can hold intellectual property (which may be how the profit is allocated to it), it can record sales on its accounts, its board of directors can stay in France, its accounts can be maintained in France and its financial assets can be kept in France.  It is crucial though that the company has no employees or physical assets in France.  The company must exist in France “on paper only” (leaving aside the fact that this is  is actually how companies exist).

This subsidiary should then set up a branch in Ireland where the only employees of the subsidiary are located.  The Irish employees implement the decisions of the board of directors.  They can deal with production units within the company and external suppliers.  The can do inventory management on the output to be produced.  They can oversee the logistics of the transport and delivery of the product.  And they can manage the invoicing and payments with customers.

How much profit should be attributed to the Irish branch that undertakes these functions?  Here is the Commission outlining position in the case of the Apple subsidiaries which had their head office in the US and a branches in Ireland with their only employees:

The Commission's investigation has shown that the tax rulings issued by Ireland endorsed an artificial internal allocation of profits within Apple Sales International and Apple Operations Europe, which has no factual or economic justification. As a result of the tax rulings, most sales profits of Apple Sales International were allocated to its "head office" when this "head office" had no operating capacity to handle and manage the distribution business, or any other substantive business for that matter. Only the Irish branch of Apple Sales International had the capacity to generate any income from trading, i.e. from the distribution of Apple products. Therefore, the sales profits of Apple Sales International should have been recorded with the Irish branch and taxed there.

The "head office" did not have any employees or own premises. The only activities that can be associated with the "head offices" are limited decisions taken by its directors (many of which were at the same time working full-time as executives for Apple Inc.) on the distribution of dividends, administrative arrangements and cash management. These activities generated profits in terms of interest that, based on the Commission's assessment, are the only profits which can be attributed to the "head offices".

Per the EC ruling ALL of the profits of this subsidiary should be “recorded with the Irish branch and taxed there”.  The tax to be allocated to France is nil – except for the interest earned on French bank accounts.

If the company can set up this structure they can get a good chunk of their profits taxed at Ireland’s 12.5 per cent and may not have to pay any more corporate income tax on those profits.

How big a chunk depends on the structure of the company and what it does.  Apple is an unusual case in that so much of its profit is derived from IP – design, brand, reputation, innovation etc.  Its central hoover subsidiary had about 60 per cent of the companies profit accumulating in it.  And per the Commission ruling this 60 per cent of Apple’s profits will be subject to Ireland’s 12.5 per cent rate of Corporation Tax. 

This isn’t much of a gain for Apple as US companies are liable for the US 35 per cent federal corporate income tax on their worldwide earnings (though obviously they can defer this).  But France operates a territorial system.  In theory, at least, this means that French companies are only taxed on their profits earned in France.  Profits earned abroad are not subject to French tax.

So our example company could set itself up with a French subsidiary that has a branch in Ireland and have all the profit of that subsidiary taxed in Ireland as long as the only employees of that company are in Ireland.  And it doesn’t matter how many employees. Just a few will do. 

Now we really have Ireland acting as a tax haven.  Think of the possibilities.  Companies all over the world can set up this central subsidiary that hoovers up as much of their profit as possible (within the confines of transfer pricing regulations).  This subsidiary maintains its board of directors in the home country but sets up a branch in Ireland that has the subsidiary’s only employees.  As long as this is the only “operating capacity” of the subsidiary then ALL of the profits will be allocated to the Irish branch and taxed in Ireland.

This would lead to huge profit shifting and significant exploitation of Ireland’s 12.5 per cent Corporation Tax rate.  Countries with territorial system would see large parts of their tax bases shifting to Ireland.  There is no other country in the world where this would be possible but the application of the EC ruling means that this is what Ireland should do. 

Any time the Revenue are faced with a non-resident company with an Irish branch then 100 per cent of profits of that company should be taxable in Ireland if Ireland is the only country that company has employees in.  This is being a tax haven on a grand scale.

How would the authorities in France react if one of its companies tried to pull this stunt?  They would be up in arms.  And rightly so.  There is no way they would accept Ireland taxing 100 per cent of the profits of that subsidiary just because Ireland was the only country it had employees in. 

They would say to Ireland to look at the branch operating there and collect tax based on the risks, functions and assets in the branch and leave the residual profit with the “head office” for the French to tax.  France will only allow Ireland to collect tax based on what happens in the Irish branch.

But this would put Ireland in contradiction to the EC ruling.  The two paragraphs quoted above clearly state that if the subsidiary only has employees in an Irish branch ALL of the profits are taxable in Ireland.  The Revenue Commissioners are between a rock and a hard place.  To avoid falling foul of further state-aid inquires all branches should be treated as the EC ruling requires but France will only allow Ireland to levy tax on the functions that the Irish branch actually undertakes.

This is why there have been many people saying that the EC ruling “flies in the face of international tax practice”.  But not only does it do that it opens the possibility of Ireland becoming a tax haven of grand proportions.  Maybe we should scrap the IDA and set up an agency with the tagline “set up a branch in Ireland, pay all your tax here”.  For companies in countries that have territorial tax systems it would be hugely attractive.  There could be tens of billions in revenue in it for us (if it was possible, which it is not!).

This is all a bit whimsical.  And although what the Commission have done in the case of Apple goes against all principles of taxation what is here is not enough to say they are wrong on the particulars of that case.  We will come back to that.  But it does highlight the inconsistency of some of the reaction to the ruling. 

If other companies set up structures to try and avail of what the ruling offers they would be accused of tax avoidance by many of those welcoming the ruling.  And they would be right. So, rather than welcoming this ruling, if anything, campaigners should be aghast at what this ruling means.  Do they really want the tax system to function as implied by the two paragraphs quoted above?    

Does the arithmetic behind the €13 billion stack up?

In a word: yes.  This is from a post last March which looked at ASI in detail.

But what if the profits of ASI were to be deemed taxable in Ireland?  All the noises are that this is a determination that the European Commission could make.  There seems little basis in fact to support it but I guess there are arguments that could be made.  These may be that:

  • ASI should be deemed tax resident in Ireland
  • ASI is an Irish-registered company
  • ASI has employees in only one country – Ireland
  • ASI only has substance through its Irish branch which is enough to deem the parent, which has no substance, taxable in Ireland
  • Such is the nature of the activities of the Irish branch that ASI’s sales should be considered to be fully completed by it

What happens if all of ASI’s profits are deemed taxable in Ireland? Without the exact calculations it is difficult to tell but if it does happen we will be really at the races and the talk will be of billions not millions.

Assuming ASI performance in 2013 tracked that of the overall company then the cumulative profit earned by ASI over the ten-year period from 2004 to 2013 is somewhere around $113 billion.  If we just do a crude approximation and apply a 12.5 per cent tax to that you get $14 billion.

And you can’t just rock up to the Revenue Commissioners in 2016 and say you want to pay tax due for 2004.  At the very least interest will be applied and the interest rate used by the Revenue Commissioners since 2009 has been the equivalent of eight per cent per annum.   If we apply eight per cent interest to this notional $14 billion of tax due over the ten years then the total liability reaches $19 billion.

The calculation was from 2004 to 2013 and is based on the figures in the table below showing ASI’s profits and taxes.  Convert to €, add in the amounts for 2014 and interest for another 8 months and you get around €13 billion of tax and around €6 billion of interest.  There is nothing wrong with the Commission’s arithmetic.

The table below also shows some of the effective rates used by the Commission in their press release. 

ASI Tax Outcomes

Getting the arithmetic right is one thing; getting the logic right is another.  As shown above we suggested five possibilities through which the Commission might conclude that the entire profits of ASI could be deemed taxable in Ireland.  They went for a variation of the fourth:

  • ASI only has substance through its Irish branch which is enough to deem the parent, which has no substance, taxable in Ireland

Essentially what the Commission have said is that because the parent – which the Commission describe as the “head office” and with the quotation marks! – has no substance (in their view) all the profit allocation within the company should be zero to the “head office” and 100 per cent to the Irish branch (bar some interest income).

So while they have the arithmetic right the key question is do they have the basis for the logic behind the arithmetic right.  We only have the press release to go on so far so it can be hard to tell what the exact justification is.  The government and Apple have the full 130-page ruling so they are in a better position to assess what the Commission have done.  But once the smoked has cleared it is something we will come back to over the next while.

Tuesday, August 30, 2016

Some take outs from the Apple ruling

Lots to muse over in the €13 billion tax ruling from the European Commission in the Apple case today.  And that’s just the tax.  Add the Revenue Commissioner’s 8 per cent per annum simple interest bill on top of that you’re probably looking at something close to €19 billion.  I didn’t think they’d do it but they have. 

Here are some extracts from the Commission Press Release in the order they appeared:

These profits allocated to the "head offices" were not subject to tax in any country under specific provisions of the Irish tax law, which are no longer in force.

This seems to be a bit of a contradiction to what follows later and also a bit of a stretch of what Irish tax law can achieve.  I doubt Irish tax law can be used to argue that profits in other countries are not subject to tax there.  And if these specific provisions of Irish tax law deemed that the profits of the head offices were not subject to tax in Ireland how is that state aid?

This selective tax treatment of Apple in Ireland is illegal under EU state aid rules, because it gives Apple a significant advantage over other businesses that are subject to the same national taxation rules.

Not sure I get this.  If what Apple did was under “specific provisions of the Irish tax law” why couldn’t other companies do it.  I guess some probably did!

This tax ruling was terminated when Apple Sales International and Apple Operations Europe changed their structures in 2015.

Well I guess that confirms where the 26% GDP growth rate in 2015 came from!

Apple set up their sales operations in Europe in such a way that customers were contractually buying products from Apple Sales International in Ireland rather than from the shops that physically sold the products to customers. In this way Apple recorded all sales, and the profits stemming from these sales, directly in Ireland.

Hmmm. I’m not sure that’s true.  Some customers, such as online customers, may have bought from ASI but anyone going to a shop bought the product from that shop – especially when they bought from non-Apple stores such as Currys, Carphone Warehouse, Dixons etc.  These retailers may have bought from ASI but that’s a bit different to saying the customers did.

And even for Apple stores it’s not clear that the customers were buying from ASI.  Apple Retail UK Ltd which runs Apple stores in the UK had £900 million of sales in 2014 (accounts here).  The shops might have bought the devices from ASI but the customers bought them from Apple Retail UK Ltd.

Only the Irish branch of Apple Sales International had the capacity to generate any income from trading, i.e. from the distribution of Apple products. Therefore, the sales profits of Apple Sales International should have been recorded with the Irish branch and taxed there.

And this is the contradiction.  We have “specific provisions in the Irish tax law” in the first extract saying the profits are not subject to Irish tax and the factual position set out by the Commission that only the Irish branch has substance.  The Commission are going for substance over law.

The "head office" did not have any employees or own premises. The only activities that can be associated with the "head offices" are limited decisions taken by its directors (many of which were at the same time working full-time as executives for Apple Inc.) on the distribution of dividends, administrative arrangements and cash management.

I’m not sure “limited decisions” is how best to describe the activities of the board of directors.  They signed the cost-sharing agreement with Apple Inc. which the Commission highlight as being key to the profit earned by ASI.  They negotiated and signed the contract manufacturing agreements with the manufacturers in China.  And they set the price at which ASI could sell the products.  All the key elements of ASI’s costs and revenues were controlled by the board of directors and not the responsibility of the Irish branch.

These activities generated profits in terms of interest that, based on the Commission's assessment, are the only profits which can be attributed to the "head offices".

So the EC are attributing 60 per cent of Apple’s global profits to what goes on in Hollyhill in Cork because the “limited decisions” of the board of ASI only generate interest income.  Everything else is down to the staff in Cork. That’s serious productivity!

This is only a first run through the ruling and this is only from the press release.  In a couple of months we’ll get the full 130-page decision (minus some redactions) so we’ll see then if the Commission have their ducks in a row. 

And if you want to look through the finer details of Apple Sales International they are in this previous post which showed that the approach proposed by the Commission gives a tax bill of $14 billion for 2004 to 2013.  Add 2014 and you get to in and around the €13 billion figure the Commission have come out with.  And the interest probably comes to another €6 billion or so (if we apply the Revenue Commissioner’s 8 per cent simple interest rate).  €19 billion. Who’d have thunk? Not me!

Tuesday, August 16, 2016

The latest Corporation Tax pot of gold

Ireland’s Corporation Tax generates a huge amount of domestic debate.  There are a couple of common themes that run through it.  One of them is that “we would collect X billion in extra tax if only we did Y.”  The latest of these relates to companies who have no liability for Corporation Tax under the headline “68% of companies paid no Corporation Tax in 2014”.

There is, of course, a pretty simple reason why most companies don’t pay Corporation Tax: they don’t make a profit.  This is because they have never started trading, stopped trading or are trading but didn’t generate a taxable profit.  There a several reasons why companies are established with trading for profits being only one of them.

However, the story doesn’t end there and goes on to say that companies with no Corporation Tax liability actually had earnings of €17 billion in the period from 2009 to 2014.

The Irish Corporation Tax regime is actually relatively straightforward.  Once a company’s taxable income is determined it is multiplied by 0.125 (or 0.25 in some cases) to get the gross tax due.  There are then a limited number of credits and reliefs available which give the ultimate calculation of tax payable.  Here is an aggregate calculation using 2011 data.

So if there are €17 billion of earnings out there that results in a tax payable of zero it shouldn’t be too difficult to work out what is going on.  And it isn’t.  First here are the annual figures:

Companies wth no CT liability

The average amount of net taxable income per company with no Corporation Tax liability is just under €32,000.  But the distribution is probably highly skewed because it requires the use of the limited credits and reliefs we have to get the gross tax due from the €16.8 billion of net taxable income to a tax payable of zero.  And indeed those making the queries were told as much:

The Department of Finance says there is a range of tax reliefs available to companies which explains much of this, such as double taxation relief, which prevents companies being taxed on profits they have already paid tax on elsewhere or tax reliefs that apply to research and investment.

But that didn’t stop some heroic conclusion jumping been made:

Sinn Féin says vital public services have suffered as a result. Employers, however, say Irish businesses already face high taxation.

TD Louise O’Reilly said: “Our estimation is that from 2009 there could potentially be 2.1 billion euro in tax revenue that has been forgone by the State through whatever means. I think when you’re looking at figures that size though, you’re not talking about simple loopholes. You’re talking about government policy.”

Yes, €16.8 billion multiplied by 0.125 is €2.1 billion but wouldn’t it be helpful to actually understand why the tax payable on this net taxable income is zero and propose to remove the provision that results in it rather than just shooting off blindly.

Here are the reliefs and credits used by the companies with nil or negative Corporation Tax liabilities over the six years in question.

Companies wth no CT liability reliefs and credits

And there is the €2.1 billion reduction of the €2.1 billion gross tax due to give tax payable of zero.  Almost 95 per cent refers to Double Taxation Relief.

Ireland operates a worldwide Corporation Tax system whereby Irish-resident companies owe Irish Corporation Tax on their earnings no matter where earned and can owe Irish Corporation Tax on dividends from subsidiaries and other passive income receipts.

However, if an Irish-resident company earns profits through a branch or subsidiary in another jurisdiction it will pay corporate income tax on those profits in that jurisdiction.  In Ireland these profits will be included in the company’s taxable income and the gross tax due will be calculated including foreign profits.  To avoid double taxation the company can apply for relief of the gross tax due in Ireland based on the corporate income tax paid in the foreign jurisdiction. 

It is fairly obvious that in this instance we are dealing with a small set of companies who have no domestic profits (which would trigger a tax liability excluding them from the above table) and have foreign earnings where the foreign tax paid exceeds the amount of gross tax due at Ireland’s Corporation Tax rates thereby giving a tax payable figure of zero.  These companies are not avoiding tax; they have already paid it.  If the amount of eligible foreign tax paid was less than the amount of Irish tax the company would have to pay the balance to make up in the difference.

So, in theory, we could have collected €2 billion of extra Corporation Tax over the last six years if we had abolished Double Taxation Relief from 2009.  And the figure would be even higher as this €2 billion only includes companies who have nil or negative Corporation Tax liabilities.  Over the past six years the total amount of Double Taxation Relief granted to all companies has been almost €4 billion (and was almost €1 billion in 2014 alone).

But getting at this latest pot of gold depends on these companies with foreign profits continuing to be Irish resident which would subject them to an additional 12.5 per cent (or 25 per cent) tax on top of the corporate income tax paid where they earned their profits.  Would companies stick around for such double taxation? And if Irish-resident shareholders move away with them we would lose the income tax collected from distributed dividends.

Double taxation relief is not just “government policy” it is international best practice in taxation around the world.  And it is probably going to get more attention in Ireland as inversions and re-domiciled PLCs increase the number (and size) of companies who are eligible for it.

Monday, August 15, 2016

A Processor Surge

Here’s yet another unusual chart extracted from Ireland’s External Trade data.


The chart gives monthly exports for category 77 in the Standard Industry Trade Classification: Electrical machinery, apparatus and appliances not elsewhere specified and parts.  In the first half of 2015 exports in this category were €1.4 billion; for the first six months of 2016 exports have surged to €3.2 billion.  The dramatic nature of the increase at the start of 2016 is apparent from the chart.

So what are we exporting over a billion and a half’s worth more of in this category.  We can get added insight from the CSO’s Trade Statistics publication (though the most recent release only gives data to the end of May).  Anyway within that our attention is drawn to subcategory 776.42: Processors and controllers.  Here is the relevant extract from the May 2016 release.

SITC 776_42

Exports in this sub-category were €421 million in the first five months of 2015 but have reached €1,958 million in the first five months of this year.  Thus processors account for the surge shown in the first chart above.  Over the full year we could be looking at an increase of around €3 billion in this category.  That the primary destinations of these exports are  Israel and the United States should not come as a surprise. 

What may be a little surprising though are the volume changes.  The Trade Statistics also give data on quantities which in the case of many commodities are measured in tonnes – signified by (t).

The quantity given for 2015 is 62 tonnes while that for this year is 52 tonnes.  The notional price of processors given by this data has gone from €7 million a tonne in 2015 to nearly €38 million a tonne this year.  Processors are obviously not a product sold by weight but this change is indicative of something going on. But what?

Monday, July 25, 2016

The size of the provision for depreciation

The key reason for the 26 per cent rise in Irish GDP was the large increase in the productive capacity of the economy as represented by the €300 billion increase in the gross capital stock.  The addition of these assets to Ireland’s capital stock hugely increased the amount of value added that the economy could produce.

We know that most of the changes are due to the actions of MNCs so most of the increase in GVA accrued to them.  Infact 80 per cent of the increased GVA came from firms in the “Industry” sector (as shown here).

If GVA formed the tax base then the provision for depreciation wouldn’t really be an issue but firms can avail of “capital allowances” for the acquisition of certain assets, i.e. they can offset (part of) the cost of the asset against their taxable income for a given period (generally eight years).  This is somewhat similar to the “consumption of fixed capital” concept in national accounts where the value of capital assets is reduced as they are used and become obselete. 

Both are generally described as “depreciation” but there are important differences between them.  We only have the 2015 consumption of fixed capital figure from the national accounts for now but there is no reason to believe that capital allowances in 2015 will not have followed a similar pattern, i.e. a massive jump up.

So although there may have been a large increase in gross value added this may not correspond into an equally large increase in the tax base if capital allowances impact on the calculation of taxable income.  It is a pretty safe assumption that the capital allowances used by companies increased broadly in line with the consumption of fixed capital shown in the national accounts.

So is this an issue?  Possible.  GDP is commonly used for international comparisons.  If the amount of depreciation is the same across countries then it gives ratios that have a value in making comparisons.  Here is depreciation as a per cent of GDP for the countries of the EU (excluding Luxembourg for which data does not seem to be available).

Depreciation to GDP

The 2015 figure is for Ireland and this puts Ireland at top of the pile and the 2014 figure shows the huge impact the 2015 figures had on our position.  In relative terms Ireland now has the largest provision for depreciation though the gap to the next country, Latvia, is relatively small.  As depreciation is removed from the corporate tax base through capital allowances this means GDP may overstate Ireland’s tax base relative to other EU countries.

We already knew that GDP overstated the Irish tax base as it includes the profits of MNCs based here.  We can have great fun with hybrids etc. but lets just put the provision for depreciation in terms of Gross National Income (seeing as this aggregate is used in the  calculation of a country’s contribution to the EU).

Depreciation to GNI

And here we can see the outlier that Ireland i2 for 2015 compared to the mid-table ranking for 2014. Within Ireland’s GNI there now is a disproportionate provision for depreciation.  And as this is value added which is not included in Ireland’s tax base we get close to little of benefit from it.

We now have a situation where using GNP or GNI as a denominator excludes the profits of MNCs that we can get a 12.5 per cent chunk out of before they leave but includes a massive provision for depreciation for these companies that we get nothing from.  If these effects offset each other then maybe GNI is a useful denominator for EU contributions and the like but with the headline data we have at the moment it is impossible to tell.

How did the capital stock increase by €300 billion when investment was just over €50 billion?

There are many mysteries in the 2015 National Income and Expenditure Accounts published by the CSO two weeks ago.  The change that had the biggest impact on the accounts and was the source of the 26 per cent GDP growth was the €300 billion rise in the gross capital stock.  The bizarre nature of this is shown in this chart from a recent NTMA investor presentation.

NTMA Capital Stock

We know very little about this €300 billion increase.   The CSO will be publishing final figures for the capital stock later in the year but it is not clear that the sectoral and type figures usually provided will be made available for 2015.

Most commentary has linked the increase to inversions by US MNCs and redomiciling by PLCs from other countries.  It is not clear that this is the cause of the increase.  A company moving its headquarters does not automatically mean that it’s stock of fixed assets are included in Ireland’s capital stock. 

If a US pharmaceutical company does an inversion with an Irish company the manufacturing plants the company has in the US and other countries will remain part of the capital stocks of those countries.  The company may move intangible assets to Ireland but that would be a move separate to the inversion.  Also the only inversion in 2015 was the Medtronic-Covidien match-up which comes no where near the scale shown above.

A key problem is that we don’t know the type of assets that made up the €300 billion increase in the capital stock.  We can take it that much of it is intangible assets (leased aircraft are also said to have played a role but that may have been overstated).  The reason for this uncertainty is that gross fixed capital formation was just over €50 billion.

So how do we get a €300 billion increase in the gross capital stock with a little more than €50 billion of investment?  This seems hard to explain.  With the scrapping and obsolescence of some existing capital we should expect the increase in the gross capital stock to be less than the level of gross investment.  And, in theory, the movement of assets between countries should be de-investment in one country and investment in another country.  The ‘G’ in GFCF refers to depreciation.  Capital formation itself is made up of the net of acquisitions and disposals of fixed assets.

So why was the increase in the capital stock nearly six times greater than the level of investment?

One reason could be that different assets are included in each but that seems unlikely as they are supposed to be related measures.  It could be that US MNCs have transferred the economic rights to exploit their intellectual property to Irish-resident entities and that these economic rights are counted in Ireland’s capital stock but as the patent is retained by the US parent there is no investment expenditure in Ireland.  Not sure.

Another possibility are valuation differences between how the assets are counted for investment and for the capital stock.  It could be that these assets are counted in the investment data on some sort of “cost-plus” basis, i.e. the amount of R&D expenditure it took to actually produce them.  While in the capital stock the assets are counted on the basis of how much they are worth.

There was a large increase in R&D expenditure in 2015 in the €54 billion GFCF total and it went from €9.6 billion in 2014 to €21.3 billion in 2015.  But is €12 billion of additional R&D expenditure enough to explain an increase of a few hundred billion in Ireland’s capital stock.  I suppose it depends on what intellectual property rights were moved to Ireland the value of which does not necessarily depend on the R&D expenditure that went to generating them.

Whatever the reason it seems we need a more nuanced story than linking the increase in the capital stock to inversions and redomicilied PLCs.  In fact, given the massive increase in external debt linked to direct investment shown in previous posts such corporate restructurings don’t seem like a useful explanation at all.

Hundreds of billions more on the stock of FDI debt but where are the interest flows?

The last post looked at the revisions of Ireland’s international investment data.  Here we look for the impact the massive changes shown there have on the flows in the current account.  As was shown there have been huge changes in the stock of debt associated with direct investment (both inward and outward).

Direct Investment Debt

Gross external debt associated with inward direct investment shows an incredible €300 billion level shift in Q1 2015 which is associated with the transfer of intangible assets to Ireland by foreign-owned MNCs.  On the other hand external debt assets which is linked to outward direct investment, and likely driven by inversions and redomiciled PLCs, has been shown a strong increase since the middle of 2013 and is up around €200 billion over the period.

But we look at the flows on income on direct investment debt in the current account we see the following:

Direct Investment Income on Debt

The flows have barely moved over the period.  The stability on the outflows seems particularly odd given the massive once-off level-shift of €300 billion that the first chart shows in the stock of debt.  So FDI entities in Ireland have massive external debt liabilities but aren’t making  increased outbound interest payments. What gives?

Friday, July 22, 2016

Revisions to Ireland’s International Investment Data

Back in March we looked at the FY2015 International Investment Data with a post showing that Ireland’s net external debt was zero at the end of 2015.  Although most of the attention over the past ten days has been on the revisions to GDP and related measures there were also massive revisions to the international investment and external debt data which were published on the same day. 

Most of the changes are linked to the take-out chart from the CSO presentation on the national accounts revisions.

Gross Capital Stock

This shows that Ireland’s gross capital stock increased by an incredible €300 billion in 2015.  GFCF was a little more than €50 billion so there must be a lot of reclassifications going on.

At the headline level it now appears that saying that Ireland’s net external debt was zero was out by the little matter of €200 billion or so.

External Debt

It’s pretty clear when all of the action happened – Q1 2015 when Ireland’s gross and external debt rose by around €300 billion.

The sector that this additional borrowing resulted from is fairly easy to identify.

Gross External Debt by Sector

All of the increase was associated with direct investment.  This is debt associated with the assets transferred to Ireland in 2015.  The Irish-resident entity which now holds the assets owes a debt liability to an external entity based on the value of those assets. 

This would suggest that most of the asset transfers are not linked to inversions because in that instance there would not be an external debt as the asset would be owned by the now Irish-resident parent of the company.  And the fact that the shift happened in Q1 raises issues about the number of firms involved.  If it was a large number of firms would they all have been in a position to make the transfer at roughly the same time?

Inversions and redomiciled PLCs are part of the overall story but do not seem to have been significant in the massive level-shift seen in Q1 2015.  If we look at external assets in debt instruments (i.e. money owed to Irish-residents) we see the following:

External Assets in Debt by Sector

There is a rise in external debt assets related to direct investment but that began in the middle of 2013 and has continued at a relatively steady pace since then.  The number of inversions of US companies to Ireland has been relatively small and there was just one in 2015 (Medtronic and Covidien).

What this means is that the scale of the figures for the NFC (non-financial corporate) sector is now approaching the realm of the IFSC as we will have to begin counting them in trillions.  However, one significant different to the IFSC is that the overall net position is not close to zero.  Here are the total foreign assets and liabilities of Irish-resident NFCs.

Foreign Assets and Liabilities of NFCs

We can see the massive gap that opened up in 2015.  The gap is largely explained by the huge amount of intangible assets that Irish-resident entities now hold domestically which obviously don’t appear in international investment figures.

So where does this leave us in trying to determine the underlying net international investment position of the Irish economy?  Well, here are the net external debt positions by individual sector.

Net External Debt by Sector

The stand-out figure is obviously for direct investment which shows a bizarre pattern.  The net position associated with direct investment became more negative (debt assets exceeding debt liabilities) from the middle of 2013 through to the end of 2014.  There was than a massive level-shift of €200 billion in Q1 2015 after which the previous downward trend resumed.

The two effects can be better seen here which gives the external debt liabilities and assets associated with direct investment.  The net position is as shown in the previous graph.

Liabilities and Assets of Direct Investment

We can see that gross external debt for direct investment is relatively stable save for the massive level-shift in Q1 2015.   This is linked to the transfer of intangible assets to Ireland.

External debt assets associated with direct investment begin rising in mid-2013 and has continued at a relatively steady pace since.  This is related to inversions and redomiciled PLCs.

It is pretty clear that these don’t really reflect the underlying position of the economy so it would be better exclude direct investment from the total economy figures (while excluding the IFSC at all times!).

External Debt ie

These outcomes can be compared to those shown in the second chart above and better reflect the improvement in Ireland’s underlying external debt position.

And we include all financial assets and not just debt instruments we get this final picture for our overall net international investment position.

Net International Investment Position

The total economy figures are polluted by the direct investment effects outlined above.  The underlying position is better identified if we exclude NFCs and we see that Ireland has a small positive NIIP (excluding NFCs).  The government sector’s external debt of €150 billion is roughly offset by financial intermediaries (mainly Irish pension funds) external assets of a similar amount.

So what do all the revisions tell us?  It is hard to  know but it does seem that asset transfers played a greater role to what happened in 2015 than corporate inversions.

Why did the assets transfers happen?  A key factor seems to have been the BEPS project which has the underlying objective of linking profit to substance and increased transparency through country-by-country reporting.  We know that lots of US MNCs already have substance here but that doesn’t really explain why the assets were transferred here rather than through outright purchases (which would appear in GFCF).  Another factor is that it is possible that the assets were held by Irish-registered but non-resident entities.  Making these entities Irish-resident would bring the assets with them. 

So companies may be continuing to avail of the ‘double-irish’ but now actually have the two companies in Ireland (as opposed to having both registered here but one managed and controlled in the Caribbean). How will Uncle Sam feel now that we are taking a 12.5% chunk out of these profits?

Wednesday, July 13, 2016

26% GDP Growth: Where did it come from and who got it?

The reaction yesterday to the publication of the National Income and Expenditure Accounts showing 26 per cent real GDP growth was as one would expect given that such a growth rate was completely unexpected.  There was lots of talk of the numbers not reflecting the reality of the Irish economy but I didn’t come across anybody who said they did while talk of “leprechaun economics” was just derogatory.  The underlying growth rate of the Irish economy is probably somewhere around six per cent which is just fine, thank you.

Yesterday’s figures show that real GDP expanded by 26 per cent in 2015. We have known for a long time that GDP is a problematic measure for Ireland and recent developments just accentuated this. 

What change resulted in the transfer of €300 billion of assets to Ireland?  We can safely assume that much of this is related to tax but the Irish corporate tax regime has hardly changed over the past few years.  The Knowledge Development Box only applies to intellectual property that is developed here and, if it was in any way effective at all, would show up through increases R&D activity in Ireland rather than the transfer of assets to Ireland.

What has changed is the international tax environment.  The OECD’s BEPS project has an underlying goal to align profit with substance and the aim of providing more information for tax authorities through country-by-country reporting.  It is clear that one consequence of this has been for companies to move more risks, functions and assets to Ireland.  There may have been the view that Ireland was a target of the BEPS project but, for now at least, it is clear that we are a beneficiary of it.

And the benefits are massive.  Increased profits in Ireland means increased taxable income subject to our Corporation Tax.  We know the Corporation Tax receipts rose from €4.6 billion in 2014 to €6.9 billion in 2015 with a good likelihood of a further increase in 2016.  €2.3 billion is a massive amount of money.  If the cost of collecting an extra €2.3 billion in tax is a few days of headlines about bizarre growth rates sign me up.

So where did the growth come from?  Well the standard Y = C + I + G + (X – M) isn’t very helpful as the level of noise between the components makes identifying underlying trends almost impossible.  To be fair consumption is unaffected by much of this and grew by 4.5 per cent in 2015 which is a good clip.

To get a better picture we should look at the output method and the gross value added generated by the different sectors of the economy.  Here are the gross value added in nominal terms for the six sectors used by the CSO.

Gross Value Added

As can be seen gross value added increased by €61.5 billion in 2015 and when we add in the €1.1 billion increase in net product taxes we get the €62.7 billion increase in nominal GDP.

The sectoral data show that over 80 per cent of this came from the Industry sector.  We are usually provided with a further breakdown of this into sub-sectors such as chemical and pharmaceutical, computers and instruments, and medical and dental devices but this was not published by the CSO on this occasion.

There has been a lot of attention on the impact of aircraft leasing on the figures but the impact of this sector on the growth outcome seems to be overstated.  Aircraft leasing is included in the broad category of “Other services”.  This sector accounts for only ten per cent of the increase in gross value added and aircraft leasing will only be a portion of that.

Next we turn to the beneficiaries of this growth surge and look at the wage and profit gains from net value added and also the important changes to the provision for depreciation.

Net Value Added

We can see that of the €62.6 billion increase in GDP only €30.9 billion went to households and firms in the form of wages, profits or mixed income.  Another €1.1 billion went to the government in the form of product taxes but the most notable change in the €30.7 billion rise in the provision for depreciation.

It is pretty clear that most of this applies to companies in the industry sector.  In this sector alone gross value added rose by €50.7 billion while the profits of all companies rose by €23.1 billion.  There are two ways to cut the reconcile this difference of €27.6 billion. 

The first is employee remuneration which is up but only by €4 billion or so.  The second is depreciation which is subtracted from gross value added to get net value added.  The provision for depreciation in the Industry sector must make up a large part of the overall €30 billion provision for depreciation.  And foreign companies will dominate this.  In a bit of a simplification companies are making gross profits (sales minus cost of goods sold) and a large portion of this is going to cover the reducing value of assets that they hold.

The €23 billion rise in company profits before tax is roughly in line with the €2.3 billion rise in Corporation Tax (suggests an effective rate of around 10 per cent which is before financing costs above FISIM are accounted for).  It can also be seen that the net factor income outflow roughly corresponds to the increase in company profits which is what we would expect.

Gross National Product strips out most MNC profits but it does not account for depreciation and it is now clear that most of the provision for depreciation in our national accounts accrues to foreign firms.  We should be counting this as an outflow as well which may be angle the CSO might take if looking to provide some auxiliary economic indicators.

So if we look at the €62.7 billion increase in nominal GDP we can break it down as:

  • Households
    • €4.2 billion of employee remuneration
    • €1.5 billion of self-employed/mixed income
  • Companies
    • €23.1 billion of company profits (mainly foreign companies)
  • Government
    • €1.1 billion of product taxes
  • Non-Sectorised
    • €30.7 billion for depreciation (mainly foreign companies)
    • €1.9 billion for stock adjustment/statistical discrepancy

Tuesday, July 12, 2016

The IRS are investigating the crucial component of Facebook’s tax structure

The ongoing investigation by the US Internal Revenue Service into Facebook’s 2010 tax return attracted some renewed attention last week when the IRS filed a court petition in California looking for further documentation from Facebook.

The investigation relates to the most crucial aspect of the international tax structures used by US MNCs – getting the global rights to their intellectual property outside the jurisdiction of the US.  In 2010, Facebook Ltd transferred the global rights to its IP to Facebook Ireland Holdings.  The IRS are investigating the nature of this transfer and whether the correct price was paid for the assets transferred.

We know that Facebook has a trading company here, Facebook Ireland Limited, and that this company collects substantial revenue from selling advertising and other services on the Facebook platform.  However Facebook Ireland Limited doesn’t own the rights to the IP and must pay royalties for the right to use the Facebook platform.  These royalties are paid to Facebook Ireland Holdings who obtained the rights from Facebook Ltd.

We know that other US companies (Google, Apple etc.) have somewhat similar structures and that these companies have R&D cost-sharing agreements whereby their offshore subsidiaries are granted the non-US rights to their IP in return for making contributions to the cost of their development.

It is likely that Facebook has a similar arrangement in place but this can really only apply to new or ongoing IP development.  When the transfer was made in 2010 the Facebook platform was already in existence and Facebook Ireland Holdings would have to pay based on the value of this existing technology at the time rather than the historical cost of its development.  Although few details are available it seems that it is this price paid in 2010 that the IRS is investigating.  It is also possible that the outcome will affect subsequent tax years if the R&D cost-sharing agreement is found to be inappropriate.

From an Irish perspective almost all reports on the court petition state that the rights to the IP were transferred to Ireland.  However, this is not correct.  Facebook has its international operating company in Ireland but the holding company is not based in Ireland – even though it is called Facebook Ireland Holdings.

Facebook Ireland Holdings is registered in Ireland but it is not managed and controlled in Ireland nor has it any risks, functions or assets in Ireland so it is not liable for Irish Corporation Tax.  They have been some reports linking Facebook Ireland Holdings to the Cayman Islands but with no corporation tax or filing requirements there it is hard to tell.  And, of course, as we have seen in the case of Apple this holding company could be managed and controlled in the US and still generate the same tax outcome.

Anyway the central element is to get the global economic rights to Facebook’s IP outside of the US.  If the holding company has to pay a high price to the parent then the profit becomes subject to the US corporate income tax.  However, even if the price is low it shouldn’t really matter as the US has a worldwide corporate income tax regime with all profits of US companies being subject to US tax regardless of where they are earned so a bit more than just getting the IP outside the US is required.

For this we look to the the deferral provisions in the US tax code where the payment of the corporate income tax due on foreign profits does not become due until the profits are formally repatriated to a US-registered entity in the company’s structure.  There is a general deferral for trading profits.  This means the profits earned by Facebook Ireland Limited are not subject to US tax until they are repatriated.

However, Facebook Ireland Limited is not a massive profit generator.  It collects large revenues (€4.8 billion in 2014) but most of this is paid out in royalties as it is granted to rights to sell on the Facebook platform through a cost-plus agreement with Facebook Ireland Holdings.

Facebook Ireland Holdings receives significant royalty payments from Facebook Ireland.  There is no general deferral provision from the US tax due for passive income so, in theory at least, Facebook would have to pay the 35 per cent US corporate income tax on the royalties received by Facebook Ireland Holdings.

There are, however, a number of exemptions that grant a deferral of the US tax due on passive income.  One of the most crucial of these is the “same-country exemption”.  Under this provision passive income transfers between companies in the same country do not trigger the payment of the US tax due on the profits from such transfers.

The US tax system judges this on the basis of country of incorporation.  Thus if two companies are registered in the same country a passive income transfer between them does not trigger a US tax payment until the profits are repatriated.  Both Facebook Ireland Limited and Facebook Ireland Holdings are Irish incorporated so the transfer between them is eligible for this exemption. 

The IRS are not investigating this transfer and the cost-plus arrangement between the Facebook subsidiaries would be a matter for our Revenue Commissioners (while the European Commission have taken up investigating some of the cost-plus arrangements entered by Apple).  The IRS are investigating how much money gets from Facebook Ireland Holdings (possible in the Cayman Islands) back to the parent in the US.

This is the crucial component of the tax structure.  If Facebook Ireland Holdings pays most of the profit back to Facebook Ltd in the US then the rest of the structure is largely moot as the US tax becomes due anyway.  But if Facebook Ireland Holdings pays a substantially lower price relative to the royalties it receives then the structure can successfully defer the payment of significant corporate income tax payments to the US.  And it does!

It is the IRS that matters in all of this and they are clearly not satisfied with the size of the transfer between Facebook Ireland Holdings and Facebook Ltd.  There isn’t really a lot that other countries can do about it.  Countries can look at the activities US companies carry out in their jurisdictions and determine whether they are taxed appropriately.  In the UK, HMRC completed a six-year audit of Google earlier this year and accepted the basic principles of Google’s structure.  And no matter how many times it is erroneously linked the location of customers is not a taxable activity of a company!

Monday, June 27, 2016

At-Risk-Of-Poverty Rates and Work Intensity

The following table gives at risk-of-poverty rates (disposable income less than 60 per cent of the median) for people aged 60 and under by the work intensity of the households.  The countries are ranked from lowest AROP rate to highest for each work intensity level (very high to very low) with Ireland’s position highlighted.

AROP by HH Work Intensity

In this, albeit limited, view of poverty rates Ireland is the best-performing EU country.  Across the five work-intensity categories Ireland’s average ranking is 2.6.  The next best countries are Denmark and The Netherlands with an average ranking of 5.2.  Sweden has an average ranking of 20.6.

Tuesday, June 21, 2016

Repossession orders received by the Dublin City Sheriff

Just over a year ago we looked at a presentation given to Dublin City Council on the arrears and repossessions associated with their mortgage loans.  We can now expand this a bit with data from the Dublin City Sherriff on possession orders received and then subsequently executed or withdrawn.  The data is summarised in the following table:

Repossessions Orders Dublin City Sheriff

What do we see?

1 Orders Received From

Over the past five years the Dublin City Sheriff has received 561 possession orders for residential property.  Of these 320 (57 per cent) came from Dublin City Council, 195 (35 per cent) came from banks or building socities, with a small residual classed as “Private” (most of these arise from rental situations and the Residential Tenancies Board).

2 Outcome of Orders Received

The data indicate that around 60 per cent of possession orders are executed (342 out of 544).  The remaining 40 per cent are mainly instances where the situation is settled prior to repossession (possible because the borrower and lender have entered an alternative repayment arrangement) with a small number of instances where the order is withdrawn because they have expired (possession orders usually have a 12- month shelfl life).

Dublin City Council has the lowest execution rate for orders (though does present the most orders).  Around two-thirds of orders presented by banks and building societies are executed with this rising to almost four-fifths for orders listed as “private”.

3 Orders Executed For

In the past five years DCC has had 178 possession orders executed by the Dublin City Sheriff.  This compares to 128 for banks and building societies.  Possession orders sought by DCC will be for a range of situations such as loan delinquincy, rent arrears or anti-social behaviour.  The presentation linked to above states that:

At the end of 2014, a total of 251 accounts are categorised as unsustainable with 154 being assessed for mortgage to rent and the balance of 97 being assessed for possession (there are 25 properties due for repossession in 2015, 12 of which are abandoned).

In terms of DCC repossessions, to date there have been 16 cases of voluntary surrender and 93 District Court repossessions (a total of 109 properties have therefore been taken into DCC’s possession). The vast majority of these (n=100) relate to shared ownership including ‘affordable’ shared ownership. Repossessed properties are located across the city, with the majority in Dublin 10 and Dublin 11.

To date, only TWO households entered homeless services as a result of possession. Both departed to PRS.

So we have 93 loan-related repossessions by DCC up to the end of 2014.  In the four years to the end of 2014 there were 84 repossession orders executed for for banks and building societies in Dublin City.

The presentation also showed that DCC have issued loans to around 2,600 households.  Census 2011 showed that there were 53,000 households in Dublin City who were owner-occupiers with a loan or mortgage.  This suggests that around 50,000 households have loans with bank/building socities/lenders other than DCC.

Thus the 93 repossessions by DCC represenent about 3.5 per cent of the households they have lent to while the repossessions by banks and building socities are about 0.3 per cent of the households they have lent to.  As a percentage of the number of households they have lent to, the repossession rate of DCC is ten times greater than that of banks and building societies.

DCC have around 600 households who are 12 months or more in arrears so the 93 repossessions represents 15 per cent of that figure.  We don’t have regional arrears data for banks and building societies but for the country as a whole 6.3 per cent of accounts are more than 12 months in arrears.  If this holds for mortgaged households in Dublin City then around 3,200 households in Dublin City have mortgage arrears of 12 months or more with repossessions by banks and building societies over the past five years being four per cent of that figure.  Thus as a percentage of households in arrears of more than 12 months, the repossession rate of DCC is around four times greater than that of banks and building societies.

You can look for mentions of local authority repossessions in the report issued last week by the Housing and Homelessness Committee. You won’t find any.  But you will find a recommendation for a moratorium on repossessions. Go figure.

Friday, June 10, 2016

Mortgages with Non-Bank Lenders

A relatively recent feature of our ongoing mortgage crisis has been the focus on “vulture” funds.  Since the end of 2013 the Central Bank have provided some data on mortgage accounts held by “non-bank lenders” and the coverage of this has increased in recent releases.  Some of these entities are probably not “vultures” as  typically used and may be interested in servicing performing loans rather than trying to work through a package of non-performing loans.

First we can look at the number of accounts held by non-bank lenders.  The data go back to the end of 2013 and we can see that there has been little change in the total number of accounts (PDH + BTL) over the past 18 months or so.

Mortgages non-bank lenders

Around 40 per cent of the loans held by these entities are showing arrears of more than 90 days with more than two-thirds of these over 720 days (two years) in arrears.  Non-bank lenders hold 26 per cent of all accounts (PDH+BTL) that are more than two years in arrears and as with the overall number of accounts the number of accounts in arrears as been relatively steady over the past 18 months or so.

These lenders have 9,356 PDH accounts that are more than 720 days in arrears.  The average balance on these accounts is just over €250,000 and the average arrears amount is nearly €70,000.  It is pretty obvious that many of these accounts of three, four or even more years in arrears.

The average balance on the 3,657 BTL accounts held by these lenders with more than 720 days of arrears is €311,000 with an average arrears amount of €111,000 which again indicates that some of the accounts are hugely in arrears.

Today’s data from the Central Bank gave some insight into the restructuring of accounts held by non-bank lenders but it is not clear if the restructures were carried out before the loan was sold by the original lenders.  For what it is worth here are the restructured accounts held by non-bank lenders.

NBL Restructures

These do not seems like substantial restructures given the scale of the arrears apparent in the loan book.  Exactly half of the restructures are “arrears capitalisation” which isn’t much of a restructure at all.  See here.  The next most common restructure is “reduced payment” which may be only temporary in nature.

And the final extra piece of data this quarter relates to the repossession activities of non-bank lenders:

NBL Repossessions

Non-bank lenders repossessed 15 properties on foot of a court order in the first quarter of 2016.  This represents 0.1 per cent of the 13,000 accounts they have that are more than two years in arrears (and as we noted these entities have had these accounts for at least 18 months now).  A further 57 properties were voluntary surrendered or deemed to be abandoned to non-bank lenders during the quarter.  The release does not indicate the number of legal proceedings issued by non-bank lenders which would be a useful addition if the data was to be expanded further. 

As can be seem below there was an increase in the overall number of court proceedings issued in Q1 for PDH properties but we cannot tell where these originated from.

Court Proceedings Issued

Thursday, June 2, 2016

Why the French are looking for tulips and not shamrocks

A while back we looked at some of the audits and investigations into Google’s tax structure and concluded that while it was definitely about Google it wasn’t necessarily about Ireland.

All the details are in the previous post but an additional little factoid here about the French investigation shows the description was on the right track: the French called the investigation ‘Operation Tulip’ with reference to the Netherlands rather than something like ‘Operation Shamrock’ which many might have expected.

The French authorities are investigating whether the company that sells Google’s advertising has a permanent establishment in France.  But that is only the first step in trying to establish that Google owes more tax in France.

Google’s sales operation has a permanent establishment in Ireland but the tax liabilities that arise here don’t result in anything close to what is been suggested for France.  The reason is that the Irish sales operation pays substantial royalties for the right to use Google’s intellectual property and to sell advertising on Google’s platforms.

Even if the French investigation does conclude that Google’s sales operation has a permanent establishment in France the presence of the outbound royalty means that the residual profit to be taxed would still be small.  And the reason why the French investigation is focusing on The Netherlands and not Ireland is because this royalty is paid to a Google holding company in The Netherlands (before passing to Bermuda and ultimately being owed to Google Inc. in the US).

If the French want to collect significant taxes from Google they must first determine that Google’s sales are carried out through a permanent establishment in France but more importantly they must address the issue of the royalty payment.  There are a number of approaches they can take.  They could argue that the outbound payment should be liable to a withholding tax payable to France; they could argue that the quantum of the payment should be much lower than is allowed in Ireland (which appears to be determined on a cost-plus basis) or they could try to disallow the payment altogether as a deduction.  It is not clear that any of these will succeed.

Of course, they may not even clear the first hurdle.  In the UK, HMRC concluded a six-year audit of Google and determined that Google’s sales operations did not have a permanent establishment in the UK. 

A difference of facts or a difference of interpretation could mean a different outcome in the case of France but that just gets us as far as the royalty payment which is obviously an issue that the HMRC audit did not address.  It is all very interesting (and no doubt our own Revenue Commissioners will have an eye on it) but with the French saying they have “several terabytes” of data to process hopefully we won’t be waiting too long for a conclusion.

Thursday, April 14, 2016

The Corporate Sector in the 2015 ISAs

Here is just a quick snapshot of the corporate sector in the non-financial institutional sector accounts published by the CSO. Click to enlarge.

Corporate Accounts

The first item to look for here is the increase in Corporation Tax and we can see it in line seven.  The accounts show a 47 per rise in “current taxes and income and wealth” paid by the corporate sector to €7.2 billion.  Is this increase reflected elsewhere in the accounts? It would see so.

It can be seen that Gross Operating Surplus rose by €16.2 billion.  GOS is akin to earnings before interest, tax, depreciation and amortisation and changes in GOS, in the absence of big changes in interest and depreciation, will reflect changes in the tax base.  Fairly crudely, a €16.2 billion increase in the base for our 12.5% rate of Corporation Tax corresponds to around €2 billion of extra tax revenue.

Gross Household Disposable Income rose 9.4% in 2015

Today the CSO have released the Q4 2015 update of the Non-Financial Institutional Sector Accounts.  By summing the quarterly data we can get provisional annual figures though these remain subject to revision when the full-year figures are finalised.

The annualised figures show that gross household disposable income increased by nearly 10 per cent to €94 billion in 2015. The €8.1 billion increase can be broken down as:

Change in Disposable Income

Clearly the biggest factor underlying the increase was the increase in gross operating surplus/mixed income.  Gross operating surplus for the household sector is mainly imputed rent for home-owners and mixed income is earning from self-employment (and is also the balancing item in the accounts).

The output produced by the household sector surged in early 2015 and is now back (in nominal terms) to the level briefly seen in mid-2007.


We have previously looked at the employee compensation received by the household sector and the pattern of this series in the sectoral accounts now seems to better reflect what would be expected (previously is was not exhibiting an increase).

Compensation of Employees Received

The increase in 2015 comes in at €2.5 billion but remains below those levels seen in 2007 and 2008.  Around 45 per cent of the increase last year came from payments by the household sector itself (the self-employed paying staff).  Compensation of employees from the government sector rose by close to €1 billion while payments from companies rose by less than half a billion (falling €200 million for financial and rising €600 million for non-financial companies).

Of course, a near 10 per cent increase in household disposable income hasn’t converted into an increase of consumption expenditure of anything near the same amount.  We now have a growing gap between the two series (shown here in seasonally adjusted terms).

Income versus Consumption

The  effect of this is that the household savings rate increased from 5.0 per cent in 2014 to 9.5 per cent in 2015. 

Here is a modified table showing the household sector in the non-financial accounts for the last three years.  Click to enlarge.

Household Accounts