Sunday, January 28, 2018

Ireland’s Corporation Tax at Davos

One of the sessions at the World Economic Forum in Davos last week was on corporate tax avoidance.  A recording of the session is here while two contributions from one of the panelists, Davide Serra are reproduced below [timestamps].

[16:30] In my view what we have here is very simple.  I think we're lying to voters and I think business has to stand up and do numbers.  So, for example, and I just go through a couple of simple numbers.

Google, not to refer Apple, in Ireland, and I use Ireland simply because the Finance Minister, we can do this the same for Luxembourg and The Netherlands, booked revenue of 22.6 billion euro, 22.6 billion euro in 2015.  They paid to Ireland only 48 million euro.

Ireland says has a tax rate of twelve and a half per cent which is competitive. There is only one problem, in Ireland if you set up a business and the business is 100 per cent controlled abroad you basically pay zero taxes.  So, it's correct within tax law in Ireland. They are correct.  There is only one problem what happens if everybody were to book their foreign subsidiary in Ireland. And that's what happens.

So, running the numbers, this is realised 60 billion euro of tax elusion - evasion.  I consider borderline to criminal in three Member States.  Of course, they're not going to say, and they're not going to put themselves on the back list.  It's easy to put Samoa Islands or someone else.

And why is the system 100 per cent rigged? Because too many benefit out of it: the consultants; the auditors; all the bureaucrats. 

And, so I think it is very simple.  You need to have by law that any corporation that is listed and wants to have global standards give me one number: total tax paid, where, total number.

If you have asked this to Facebook, take Facebook, they pretend to be good citizen. Now they paid four thousand pounds, four thousand pounds of taxes in 2014 in the UK.  If I take reported, if I add every annual report of Facebook globally and I see what's the tax paid, I see the number, it's zero.  They post ten billion dollar profit. 

So, explain to someone if I add every annual report that you file in every country and you pay zero taxes. And you pay zero taxes it is very simple. If you are listed company in the world you must give me one number, total tax paid in which country. And all this discussion, ends.

[28:00] So it's very simple. Within Irish tax code, if you have a multinational that is 100 per cent directed outside Ireland, de facto, you are not taxed. Hence, and this is the law, and I am happy to challenge you in the rule of law.

So, Google 22.6 billion euro revenue in Europe in 2015.  How much taxes were paid in Ireland? Forty eight. Equates to zero point zero zero two. Better deal than Apple. Hence, every study ends the same and I run my regulated business by the CBI in Ireland. So, I am a businessman in Ireland.

Ireland, if you are in Ireland, you are charged twelve and half per cent.  If you are someone global, you put everything there, they don't see you. Now this has equated to more than twenty billion euro elusion per year of European taxes.

When as a European citizen I look at an Irish citizen: since you joined the European Union, Ireland had net contributed to the EU budget 150 million euro.  Why are you allowing elusion, so less revenue, losses to European citizens of 20 billion, it’s a ratio that is five hundred times per year.

I say, and I love Ireland and I have a business in Ireland and it's a great business community, tax everyone no matter where they come from at twelve and a half per cent because if you tax people at zero point zero zero two this is a joke.

[56:00] For me it’s very simple: every corporation in the G20 to report how much tax they paid in local currency, country by country. 

Let me give you a simple example.  I know Google in Ireland 22.6 billion of revenue; only five thousand employees. So each employee in Ireland, in Google, generates 45 million revenues.

And, hence, there is only one way, tell me how much taxes you paid in each country, every corporation. And every citizen through their pension fund, mutual fund, ETF if you don’t see the number I’m sorry I blacklist the institution.

Because before we wait for politicians to agree BEPS, SEPS, OECD and all this acronym there has been ten year of 600 billion euro tax elusion, 6 trillion euro.  As a result it’s time to act; no more words.  And it’s up to citizens to stand up.

At the end, Professor Joseph Stiglitz said “it is only outrage that will stop and reform the system”.  The contributions from Serra satisfy the outrage requirement and would do well if the gauge by which they are judged is that “it wasn’t what you said, it wasn’t how you said it, it was how you made me feel”.

But what is said matters.  And the simple issue with Serra’s contribution is that it is wrong.  The system of collecting taxes from the profits of companies has numerous problems but if the proposals for reform come from outrage rather than analysis we could end up with something that is worse than what we have now.  Let’s look at some of the claims.

First, a 0.002% tax rate for Google.  As a businessman he is surely aware that a corporate profits tax is charged on corporate profits not revenue.  Here is Google Ireland’s income statement for the past two years.

Google Ireland Income Statement 2015 2016

Serra focused on 2015 and we can see that, yes, Google Ireland Ltd. had revenue of €22.6 billion in 2015.  The first thing to note is that €47.8 million is 0.2 per cent of €22.6 billion not 0.002 per cent.  His sums were out by a factor of a hundred.  Ah, but we need outrage on this so that’s ok.

But comparing tax to revenue is not ok.  We have to get to profit before we have something we can compare to the tax bill.  So what expenses does Google Ireland Ltd incur?

The first is €5.5 billion in 2015 for “cost of sales”.  Per the accounts “costs of sales” is:

Google Ireland Cost of Sales note

So, this is the money paid to third-party sites to host Google ads.  After we subtract this €5.5 billion we get to gross profit, then we need to subtract administrative expenses to get operating profit.  The administrative expenses are made up of three items.

Google Ireland Administrative Expenses note

Unfortunately, we don’t get a direct breakdown of these in the accounts but we can get a fairly good handle on them as we did here.  In 2015, staff costs for Google Ireland Ltd. were €365 million with other ongoing costs likely coming to a couple of hundred million euro as well. 

Google Ireland pays about €4 billion to other Google companies in its market area (EMEA) for sales and marketing services carried out by the staff there (with each of those companies also paying some corporate income tax in the countries in which they operate).  Google’s 10k form shows that it incurred a current tax charge of $723 million outside the US in 2015 and this rose to $966 million in 2016.

Google Income Taxes 2014-2016

But back to Google Ireland Ltd.  We still have around €12 billion of the administrative expenses shown in the 2015 accounts to the explained.  We can see what this is from this note from the accounts of Google Netherlands Holding B.V.

Google Netherlands Income

In 2015, Google Ireland Ltd. paid €12.0 billion in royalties to Google Netherlands Holding B.V. who in turn (along with some royalties received from Google Asia Pacific Pte Limited) paid that on in a royalty expense to Google Ireland Holdings which is based in Bermuda.

But back to Ireland.  After some interest income, and expense, we get the profit on ordinary activities of Google Ireland Ltd.  This was €341.2 million in 2015 and on this the company had a tax charge of €47.8 million giving an effective rate of 14.0 per cent.  The accounts explain why this differs from Ireland’s headline 12.5 per cent rate:

Google Ireland Tax Recon

We can see that among the adjustments the company has some expenses which were not deductible for tax purposes (possibly entertainment expenses), had some income that was taxed at higher rates (Ireland has a 25 per cent Corporation Tax rate on non-trading income such as interest), has some income that was not subject to Corporation Tax at all, and also incurred some withholding taxes in other jurisdictions.  Sum through those and you get the €47.8 million tax charge for the year.

Does putting this number over revenue and spouting about 0.002% tax rates mean anything? Not one thing.  And wouldn’t even if the arithmetic was correct.  If there are issues to be raised it has to be with the expenses deducted to get from turnover to operating profit.

Can there be a problem with the €5.5 billion Google paid to other parties that allowed them to host ads on their sites? Surely not.  Or the €5 billion of staff and other expenses that Google incurred in Ireland and across its market area. Again, surely not.

Maybe there are issues with the €12 billion license royalties paid by Google Ireland? Maybe.  But Google Ireland is selling ads on a platform that was developed somewhere else.  That the Irish company has to pay a royalty for the right to use that platform is not that surprising.

Of course, the technology is developed in the US and it would seem natural that the royalties would flow there, but Google has availed of provisions in the US tax code that allow it to move “offshore” the license to use its technology outside the US and this license is held by a company based in Bermuda.

When the structure was originally set up Ireland would have charged a withholding tax on the outbound royalty payment if it was made to to Bermuda so the money doesn’t flow directly to Bermuda but instead makes a brief stop in The Netherlands.  Ireland is not permitted to charge withholding tax on such payments made to The Netherlands because of the EU’s royalties directive disallowing them for such flows between EU Member States.  The Netherlands then allows the money to flow to Bermuda without being exposed to a withholding tax there.

So, does the €12 billion stay untaxed in Bermuda?  Some of it, yes, but not all of it.  To get the international license for Google’s technology, the Bermudan company must make a cost-sharing contribution to the overall research and development costs incurred by Google Inc.  This contribution is based on the size of the market the license covers. 

It is likely that the Bermudan company has a license that covers markets that generate about 60 per cent of Google’s revenue thus a chunk of the money that flows to Bermuda must in turn flow to the US to cover the group’s R&D costs.  In 2015, Google spend $12.3 billion on R&D so it is likely that the company in Bermuda had to make a payment to cover around $7.4 billion of that. 

The Bermudan company does get to keep what’s left and that adds up to a pretty penny but it is wholly wrong to suggest that the starting point of €22.6 billion generated in the Irish company is profit.  From this we have seen that in 2015 Google:

  • pays out €5.5 billion to the owners of websites on which ads are hosted;
  • incurs around €5 billion of staff and expenses (including tax!) in Ireland and its other markets;
  • contributed around €5 billion to the R&D undertaken in the US.

After all that is accounted for there was probably €7 billion or so left from the original €22.6 billion in 2015 and this accrued to the company in Bermuda.  Does that company have the substance that would justify such profits? No. So where should these profits be taxed?  Pascal Saint Amans, head of the OECD’s BEPS project, provided an answer when he appeared before the Oireachtas Finance Committee a few years ago:

Assuming the best action plan translates into domestic legislation in all countries, including the US, the companies in question would be taxable in the US and would not benefit from what they currently enjoy, which is double non-taxation.

Why should the profit be taxed in the US? Because that is where the key risks, functions and assets that make Google profitable are located.  It is the US system tax allows the international license to be put offshore for an annual cost-sharing payment. 

The OECD would prefer this was profit-sharing with each side getting to keep a share of the profit relative to the risk and value-adding activities that it undertakes.  If all the Bermudan company does is provide funding for Google’s R&D activity then all it should receive is a financial return for providing the funding with the bulk of the profit accruing the Google Inc. in the US. 

It is US tax that is impacted by the Irish structure.  Google’s structure has been put under intensive audit in a number of countries including the UK and France.  Both ultimately concluded that the structure was in compliance with their laws.  The company itself have said they will alter the structure somewhat but the impact on tax payments remains unclear.

If more tax is to be paid in the market countries then it requires a change to the system.  Davide Serra does make an interesting proposal that part of what makes these companies profitable is the data they collect from and on their customers.  This could be considered an asset in the market country which could be used to justify greater tax liabilities to those jurisdictions.  Something along these lines could happen with, for example, the proposed “digital economy tax” in the EU, but absent such a development the bulk of the tax on Google’s profits is due to the US.

How much tax does Google pay? Lots. But we’ll shift our attention to Facebook. Serra said that if we look at Facebook’s annual reports “I see what's the tax paid, I see the number, it's zero.  They post ten billion dollar profit.”  Does Facebook pay zero tax on €10 billion of profit?

Facebook will announce their 2017 results later this week but here are the company’s annual income statements for the five years from 2012 to 2016.

Facebook Income Statements 2012-2016

We can see that Facebook had a net operating income of $10.2 billion in 2016 and that this was after a tax charge of $2.3 billion.  That is a long way from zero.  If we look at actual cash taxes paid we see that Facebook paid $1.2 billion in income tax which was just under 10 per cent of its pre-tax income. 

Facebook’s cash tax payments have been lower than its tax provision in recent years because it had substantial losses carried forward from its early years when it spent huge sums with little no incoming revenue.  These losses have likely been exhausted so it will be interesting to see if there are higher cash tax payments in the 2017 annual report.  There likely will be but for 2016 we can clearly see that the $1.2 billion of tax paid is quite a deal more than the zero claimed by Serra.

It’s probably also worth showing a similar table for Google (which also announces 2017 results this week).

Google Income Statements 2012-2016

Cash tax fell to $1.6 billion in 2016 and on this the company said “the timing of tax payments and refunds had a favorable impact to our cash flows from operations for 2016 compared to 2015.”  It is a bit of a guess that the 2017 accounts will likely show cash tax as a per cent of pre-tax income heading back towards the 18 per cent levels that were seen in 2014 and 2015.

But enough of the $12.4 billion of tax that Google paid in the five years to 2016 and back to Serra and his claims that Ireland doesn’t tax certain companies and that “if you have a multinational that is 100 per cent directed outside Ireland, de facto, you are not taxed.”  It is not clear but it seems likely he is referring to company residence.

But, this only refers to a company’s tax residence in Ireland, not whether it owes tax to Ireland.  If a company has operations in Ireland then regardless of who owns it, where it is controlled from, or where it is resident then it will owe tax in Ireland on the profits it earns in Ireland.

The trouble with Serra’s claim that “you are not taxed” is that, in relative terms at least, Ireland collects a huge amount of Corporation Tax and figures from the Revenue Commissioners show that four-fifths of this is paid by foreign-owned companies.  All of these are multinationals that are “100 per cent directed outside Ireland”.

In 2017, Ireland collected €8.3 billion of Corporation Tax.  With 80 per cent of that likely collected from foreign-owned companies then they paid €6.6 billion of Irish Corporation Tax.  

This notion of foreign companies not being taxed in Ireland is hard to square with the ongoing debate about the sustainability of Ireland’s Corporation Tax receipts at the current elevated levels and the possibility that Ireland is collecting too much rather than too little Corporation Tax.  So “de facto, you are not taxed” doesn’t seem so de facto at all.

Here is a 2016 comparison for two EU Member States.

Ireland and Italy

The bottom line is that, in 2016, on a per capita basis, Ireland collected €1,660 of Corporation Tax compared to €560 in Italy.  There are lots of reasons to get stuck into for why this might be the case.  To think that can be done with tax rates of 0.002 per cent (or even 0.2 per cent) is a joke.  As is putting someone on a panel at the World Economic Forum who actually says so.

For companies in general, Serra says “give me one number: total tax paid, where, total number.”  Apple got a frequent airing in the debate but no one ever said how much tax the company paid.  Here are the company’s income statements for the past six years (year-end is September 30th).

Apple Income Statements 2012-2017

Over the past six years Apple has made $64.5 billion in net cash tax payments (equivalent to 18 per cent of pre-tax income).  And Apple have said that they will be paying more tax related to these profits as a result of the recent changes to the US tax code.  Is this where the tax should be paid?  Again, Pascal Saint Amans seems to think so.  And Commissioner Vestager pointed out that her €13 billion ruling against Apple in Ireland would have been lower if the economic value was paid to the US for the R&D activity that takes place there.

Vestager said if Washington chose to tax the profits reported by Apple’s Irish operation, she would reduce her demand accordingly.

The United States could do this by forcing Apple to have its Irish units pay more in fees to Apple in California for the right to license Apple patents.

“If the U.S. tax authority found that the monies paid due to the cost-sharing agreement were too few ... so that they should pay more in the cost-sharing agreement, that would transfer more money to the States and that may change the books and the accounts in the States,” Vestager said.

Does Apple paying $64.5 billion in tax over the past six years and indicating another $38 billion will be paid because of US tax reform mean everything is hunky dory?  Absolutely not.  But if we are going to be outraged, let’s have that outrage based on what is actually happening not some trumped of version designed to engineer outrage.

Wednesday, January 24, 2018

What Apple did next

The huge focus on the taxation of corporate profits over the past few years means that we get some pretty good insight into the structures and practices of major companies, and US companies in particular.  In the case of Apple, we have had the 2012 US Senate Report, the ongoing EU state-aid case and various other official and unofficial releases.

Back in early 2016 we used the available information for this post to assess Apple’s international structure as it was up to the end of 2014.  We will briefly recap that but our main purpose here is to update the narrative to the changes Apple made from the start of 2015.

This chart from the previous post summarises Apple’s original international structure.  The detail behind it is explained in that post. 

Apple Sales International Structure

At the top, the parent company Apple Inc., holds the company’s hugely valuable intellectual property including patents, trademarks, brands and trade secrets.  Through a cost-sharing agreement an Irish-registered subsidiary, Apple Sales International, was granted the rights to use that intellectual property outside the Americas.  This is by far the most important part of the structure.

If the price ASI for that license is close to its economic value (or as the OECD would argue reflective of the value-adding activities of each party) then most of the value will accrue to Apple Inc. and be subject to immediate taxation in the US.  However, because of the cost-sharing agreement the price based by ASI is not based on the value of the license but on the amount of research undertaken by Apple Inc.  The contributions to the R&D are based on the revenue generated by the markets each party has a license for.  It is likely that ASI pays for about 60 per cent of the research undertaken by Apple Inc.  This is a large sum running to several billion a year but small relative to the tens of billions of profit that having the license to use Apple’s IP outside the Americas can generate.

ASI was controlled by a US-based board of directors. For the markets it had the license for, ASI contracted with third-party manufacturers in China to make the products and entered sales agreements with Apple-controlled distribution and retail subsidiaries as well as some large customers.  ASI collected the huge mark-up between the manufacturing fees and costs and the sales revenue and was left with a huge profit after the cost-sharing payment was made.

It is not clear how the sales of ASI were recorded or reported for balance and payments and national accounts purposes.  The company was “stateless” though the entity to which the profit was to be attributed, the head office made up of the board of directors, was based in the US.

To carry-out its underlying activities ASI had a branch in Ireland that undertook the supply, chain, logistics, demand forecasting, administration and other activities involved in getting the products from the manufacturer in Chine to the sales markets.  The US board paid a fee to the Irish branch for these activities and the taxable income in Ireland was based on this fee rather than the global profits earned by ASI.

In the initial post we considered what would happen if they global profits were attributed to Ireland. The estimate was that the tax bill could come to €13.85 billion.

ASI Notional Tax Due

This is a bit higher than the €13 billion figure paraded by the European Commission but only because 2013 and 2014 outcomes for ASI were not publicly available at the time.  Using the figures from Table 1 of the Commission’s decision which show lower profits for ASI in the final two years than shown above would give the €13 billion figure (even though the Commission itself never publicly verified this and only included references to the €13 billion in press releases rather than the final decision).

Anyway, we know what happened.  The Commission have argued that no profit-making substance could be found in the minutes of the meetings of the US-based board of directors of ASI and hence little or no profit could be attributed to the board.  The minutes did set out what banks and funds ASI’s billions should be placed with so the interest income ASI earned on its cash pile was attributed to the board of directors.

But what of the billions made in getting products made in China for $200 and selling them around the world for $600?  Even though the contracts behind these activities were signed on behalf of ASI by US-based personnel, the minutes of ASI’s board meetings did not record the details of the negotiations and contracts so, in the Commission’s eyes at least, that means that the profits could not be attributed to the ASI board. 

So what activities in the company could the profit be attributed to? Well, the only other substance in ASI was the Irish branch so the Commission decision was for “full profit attribution” to the activities of the Irish branch.  The Court of Justice of the European Union will get to decide if this is correct.

Anyway, this is raking over old ground.  What we are interested in here is what Apple did next.  We know Apple changed its structure from the first of January 2015.  This is described in section 2.5.7 on page 42 of the Commission’s decision.  This would be useful but bar telling us that the new structure came into operation on the first of January 2015 everything else is redacted.

Although the details of the new structure were not revealed it was still felt that Ireland was still central to the structure and maybe even more so with the revised structure.  Many of the dramatic shifts that occurred in Ireland’s national accounts and balance of payments data were attributed to Apple but this was largely supposition – even if it was likely to be true.

Now we know it to be true.  Back in November, in response to a leak facilitated by the International Consortium of Journalists, Apple issued a statement on its tax affairs.  Some extracts:  

“The changes Apple made to its corporate structure in 2015 were specially designed to preserve its tax payments to the United States, not to reduce its taxes anywhere else. No operations or investments were moved from Ireland.”

“When Ireland changed its tax laws in 2015, we complied by changing the residency of our Irish subsidiaries and we informed Ireland, the European Commission and the United States. The changes we made did not reduce our tax payments in any country. In fact, our payments to Ireland increased significantly and over the last three years we’ve paid $1.5 billion in tax there — 7 percent of all corporate income taxes paid in that country. Our changes also ensured that our tax obligation to the United States was not reduced.”

“When a customer buys an Apple product outside the United States, the profit is first taxed in the country where the sale takes place. Then Apple pays taxes to Ireland, where Apple sales and distribution activity is executed by some of the 6,000 employees working there. Additional tax is then also due in the US when the earnings are repatriated.”

“When Ireland changed its tax laws in 2015, Apple made changes to its corporate structure to comply. Since then, all of Apple’s Irish operations have been conducted through Irish resident companies. Apple pays tax at Ireland’s statutory 12.5 percent.”
There is plenty here that is significant.  To start we are told that when Apple sells a product outside the US the “sales and distribution activity is executed” in Ireland.  If the sales are executed here (even if they are to another Apple subsidiary) they must be recorded here.

We know the products aren’t manufactured here so they won’t show up in the standard External Trade data.  The products are made in China but are done so on behalf of an Irish-resident company.  This is a form of “contract manufacturing” and even though the products are never physically in Ireland they are owned by an Irish-resident company and the sales of that company are included in broad measures of Irish exports.  Here are Irish goods exports as recorded in the quarterly national accounts.

Irish Goods Exports QNA 2008-2009

The level-shift in Q1 2015 is pretty clear with around €15 billion adding to quarterly goods exports.  If these were goods made in Ireland we would know a huge amount about them but the additional exports do not appear in the External Trade statistics published by the CSO.  This dataset better reflects the goods that physically leave Ireland (though the inclusion of aircraft on an ownership basis means that it is not absolute).  Anyway, let’s compare goods exports as measured by the national accounting and external trade methodologies.

Irish Goods Exports QNA v ET 2008-2009

As expected almost all of the increase shows up in the gap between the two measures.  The gap reflects a number of issues but one of them is “contract manufacturing”.  Ireland did not suddenly start producing €15 billion a quarter of extra goods to sell from the start of 2015.  What changed was where Apple’s sales were executed and recorded.  This was previously with the head office of the non-Irish-resident ASI, but they have been recorded with an Irish-resident entity since the start of 2015.  It is possible that this is Apple Distribution International, ADI, which took over many of ASI’s activities in 2012, except the contract manufacturing activity.  This may have been added as part of the recent restructure.

The changed structure doesn’t change the profitability of the activity.  Here is Table 1 from the Commission’s state aid decision.

Table 1 EC Apple State Aid Decision

For 2014, the final year prior to the restructure, ASI, which organised the contract manufacturing up to then, had revenue of around $68 billion and this led to a profit of around $25 billion.  We can expect the outturns for the company which carried out this activity in 2015 to be similar.

And maybe we can see evidence of that in the national accounts’ aggregates published by the CSO and, in particular, the changes introduced between the preliminary estimates published with the Q4 2015 Quarterly National Accounts in March 2016 and the first annual estimates published a few months later with the 2015 National Income and Expenditure Accounts.

NIE 2015 Revisions

There can be lots of reasons for revisions to national accounts and it is likely that profits across a number of sectors were increased as more detail behind the 2015 surge in Corporation Tax receipts became known to the CSO.  It is also the case that the differences shown are net outcomes between unseen amounts of various upwards and downwards changes.  However, there is little doubt that one of the key additions for the 2015 NIE was the inclusion of Apple’s contract manufacturing activity for the first time and the recording of Apple’s product sales in the Irish accounts.

Looking at the changes to the expenditure components of national income.  

  • Investment was revised up by €6.8 billion.  In national accounting R&D spending is considered investment (prior to ESA2010 it was intermediate consumption).  The increase in investment in the NIE likely reflects inclusion of the cost-sharing payment for the R&D activity undertaken by Apple Inc. We know that ASI paid around $4.5 billion under the cost-sharing agreement in 2014 (see table six of the state aid decision) which was around 60 per cent of Apple’s overall R&D expense for the year.  In 2015, Apple’s R&D expense increased by 25 per cent which would put the likely cost-sharing payment from the contract manufacturer in the realm of the increase to investment shown in the table above.
  • Exports were revised up by €56.6 billion.  In 2014, ASI had sales revenue of around $68 billion which in 2015 would give a ballpark for the sales now executed and recorded in Ireland.
  • Imports were revised up by €20.2 billion.  We don’t have a cost of sales figure to use but this would represent the manufacturing fee paid to the third-party manufacturer in China as well as the purchase of components from around the world for assembly in China.  Although these goods could be shipped from other European countries to China they are counted as an Irish goods import as they are purchased by an Irish-resident company as part of a contract manufacturing arrangement.  The assembler in China does not take ownership of the components.

Putting these expenditure items together leads to the upward revision in GDP.  This was €41.2 billion which is a good deal more than the profits of ASI in 2014 which we are using as an indicative guide to the impact of the Apple restructure in 2015.  As stated this likely reflects increased profits across a range of companies but something like $25 billion due to Apple cannot be discounted.

We would assume that most of these profits added in the NIE release would be the result of foreign-owned MNCs but we see that the net outflow of factor income was “only” revised up by €19.6 billion.  This means that €21.6 billion of the additional income was counted as accruing to Irish residents.

We know Apple is foreign-owned so maybe the €19.6 billion represents the profits from Apple’s contract manufacturing being attributed back to Apple Inc. in the US.  That would give a nice symmetry and completeness to the 2014 outturns for ASI and the changes introduced with the 2015 NIE for Ireland. 

But as we’ll see our focus should be on the additional €21.6 billion attributed to the GNP of Irish residents rather than the €19.6 billion attributed to non-residents through increased net factor outflows.

To see this, we now turn our attention to the taxation of these profits.  If the relocation of Apple’s contract manufacturing activities to Ireland led to an additional €19.6 billion of profits being attributed to non-residents it must be remembered that this is net profit, i.e. after taxation. 

If €19.6 billion is after-tax profit, it implies that around €2.5 billion of Corporation Tax was paid.  Now this actually could be in line with the large jump seen in Irish Corporation Tax receipts in 2015.  So, did Apple pay a couple of billion of extra Corporation Tax in 2015? No.  How do we know? The company told us.

In their recent statement Apple said in relation to Ireland that “over the last three years we’ve paid $1.5 billion in tax there”.  So that is around $0.5 billion a year.  A lot, yes, but not the scale we’re looking for.

Back when the state aid decision was announced, Luca Maestri, Apple’s chief financial officer said:

“In 2014, Apple paid in Ireland, to the Irish tax authorities, $400 million. $400 million in 2014. We believe, we're not certain, but we believe it's the largest tax payment that any company has made in Ireland.”
From Table 1 of the state aid decision shown above we can see that this did not arise from the contract manufacturing activities undertaken by ASI in 2014 which declared a tax charge of less than $10 million.  It is likely that the $400 million referenced by Maestri refers to other Apple activities in Ireland.

So, did Apple’s Corporation Tax payments in Ireland increase significantly after the 2015 restructure? No, it appears not.  The payments do seem to have increased a bit but not significantly from what three times the $400 million payment for 2014 imply.  This points to Apple not being a significant factor in the 2015 surge in Corporation Tax receipts.  So, why didn’t the Apple restructure and the relocation of its hugely profitable contract manufacturing activities to Ireland lead to a jump in its Corporation Tax payments in Ireland?

May we should shift our attention away from the €19.6 billion increase in net factor outflows that the CSO included with the 2015 NIE and look instead at the €21.6 billion that was added to the estimate of Gross National Product.  But why would tens of billions of profit from what is clearly a foreign-owned company be included in the GNP of Irish residents? 

It is possible that the two questions that conclude the previous two paragraphs are related.
To explore this, we turn to data from the Revenue Commissioners and, in particular, the aggregate Corporation Tax calculation for 2014 and 2015.

Calculation of Net Trading Income

We don’t have any revisions to help us here.  Gross Trade Profits rose by €50.7 billion in 2015 but total amounts deducted increased by €40.0 billion so the increase in Net Trading Income was €10.7 billion.

Of the deductions, the most notable increase is the €27.5 billion increase in Trade Capital Allowances.  Capital allowances are the tax equivalent of depreciation.  When a company buys a capital item the expenditure on that item can be offset against profit and capital allowances spread that expenditure to be offset against gross trade profits over a number of years.

When the ICIJ reported on the latest data leak last November there was speculation that Apple was using capital allowances to offset the gross trading profits of its contract manufacturing activities which had relocated to Ireland in 2015.
The statement did not respond to speculation in this and other media outlets involved with the Paradise Papers project, that Apple has used Ireland’s capital allowances regime to avoid having to pay tax on massive profits being booked through Ireland.
But if Apple had over €20 billion of additional profits in Ireland in 2015 with no noticeable increase in its tax payments then some offset mechanism was used to reduce the €2.5 billion of Corporation Tax payments that would typically ensue such profits.

In the “double irish” structure used by other companies such a reduction is achieved by outbound royalty payments.  Some of these are shown as Trade Charges in the above table from the Revenue Commissioners but this excludes some which as classed as an administration fee and deducted “above the line” for the above table.  The broadest coverage of these is in the royalties/license payments item in the Balance of Payments.

Royalty Imports

These did increase recently but almost all of that happened before 2015 and there is no level shift evident from the time of the Apple restructure in Q1 2015.  Apple did not move to a “double irish” type structure with the 2015 restructure.

So that brings us back to the €27.5 billion increase in capital allowances in the Revenue statistics.  The Revenue data is annual but it would be better to try and identify this increase in depreciation in quarterly data.  Here is the consumption of fixed capital (the national accounting treatment of depreciation) for the non-financial corporate sector in the Institutional Sector Accounts.    
  NFC Depreciation

We have a winner. There can be no doubting the level-shift that occurred in Q1 2015 with the depreciation of the non-financial corporate sector rising by over €6 billion at staying at the new elevated level.

Such a rise in depreciation can only occur if there is a significant increase in the stock of assets.  If Apple is responsible then it would be the case that the license to use Apple’s intellectual property outside the US was relocated to Ireland.  And, in order, for capital allowances to be claimed capital expenditure must be incurred.

Unfortunately, we don’t see direct evidence of such expenditure as it seems the company undertook the expenditure before becoming Irish resident, i.e., there was a balance-sheet relocation.  But we can look for impact of the newly-Irish-resident companies on aggregate balance sheet data.  If a company is going to acquire the license to Apple’s IP it may have had to borrow the money to fund the acquisition.

Direct Investment Debt

Whoa!  There’s that Q1 2015 level-shift again but this time it is of the order of €250 billion.  What was this debt used for? To buy assets it seems.  And the chart also suggests that this debt is being repaid at a fairly healthy clip.  The national accounts data indicate that the money is not leaving Ireland in the form of an income flow and here we can see that it is likely leaving the country in the form of a debt repayment.

Ireland capital stock jumped by €300 billion in 2015 which was a 40 per cent increase in just one year.  This was not new infrastructure (buildings, roads etc.) though data suppression by the CSO means we are left with a residual to be explained by transport equipment (including aircraft for leasing) and R&D assets.  Figures for these two parts of the capital stock have not been provided since 2015 though their sum shows they were responsible for the jump in the capital stock.

Transport Equipment and RD Assets

Between them the stock of transport equipment and R&D assets increased by €260 billion in 2015.  This increase does not show up in the capital formation data for that year for these were added to Ireland’s capital stock through balance-sheet relocations.  

A typical second-hand wide-body aircraft might have a value of, say, €30 million. A thousand such aircraft would have a value of €30 billion. We cannot be certain but there is unlikely to have been 1,000 wide-body aircraft re-located to Ireland in 2015. Even if there was we are still left with an unexplained increase of €230 billion in Ireland’s capital stock. By process of elimination this is due to the relocation of intangible assets to Ireland, a large part of which is likely the relocation of the license for Apple’s IP outside the US to Ireland.

So this points to the use of capital allowances that have enabled Apple to keep their tax payments steady while relocating their contract manufacturing activity to Ireland with the subsequent execution and recording of their ex-US product sales in Ireland.  But the company themselves haven’t said this is what they are doing.  Or have they? 

Consider this from the company’s 10-Q SEC filing from February 2017:

Income Taxes

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The Company will adopt ASU 2016-16 in its first quarter of 2019 utilizing the modified retrospective adoption method. Currently, the Company anticipates recording up to $9 billion of net deferred tax assets on its Consolidated Balance Sheets. However, the ultimate impact of adopting ASU 2016-16 will depend on the balance of intellectual property transferred between its subsidiaries as of the adoption date. The Company will recognize incremental deferred income tax expense thereafter as these deferred tax assets are utilized.

This relates to deferred tax assets linked to the internal transfer of non-inventory assets.  Capital allowances are a form of deferred tax asset and the transfer/sale of a license from one subsidiary to another would be an intra-entity transfer covered by the new standards.  Maybe Apple has loads of licenses to be transferring around but the rights to use the company’s intellectual property outside the US is as big as it gets. 

Apple states that the income tax consequences of such transfers when it begins to recognise them in the first quarter of 2019 as a result of accounting standards changes that become effective at that time will be $9 billion.  If this relates to the use of capital allowances in Ireland then we are looking at a minimum of $72 billion of capital allowances ($72 billion x 12.5% = $9 billion) being available at that time – and that is after tens of billions have been claimed each year since 2015.

We can see that impact these capital allowances have had on the company’s tax bill by looking at another dataset produced by the Revenue Commissioners.  This is the aggregate tax calculation for companies with nil or negative net trading income.  We previously looked at that in detail here

Aggregate CT Companies with no net income

We are primarily interested in the change from 2014 to 2015.  For 2015, we see that companies with no net trading income had €40 billion of gross trading profits, an increase of €26.5 billion and a near trebling of the 2014 level.  If Apple are responsible for a large part of the increases in capital allowances and depreciation we saw above then the capital allowances figure here is very revealing.  For 2015, the amount of capital allowances available increased by €25.6 billion which one its own was almost enough to fully offset the increase in gross trading profits.

Net trading income feeds in taxable income on which Corporation Tax is levied.  How much tax is due on net trading income amount of nil? Nil.  The reason Apple’s tax bill didn’t increase in 2015 is because they were able to fully offset the gross profit from the contract manufacturing activity relocated to Ireland with capital allowances.

If should also be noted that such an outcome would not have been possible prior to 2015.  Up to that time there was a cap on the amount capital allowances that could be used in a single year.  This cap was set at 80 per cent of the income eligible to be offset by the capital allowances.  So, if a company had, say, a profit of 20 and 25 of capital allowances available for that year the most that could be used in that year is 16 (80 per cent of 20) with the unused capital allowances carried forward to later years.  For 2015 this cap was raised to 100 per cent so that all income could be offset provided sufficient capital allowances were available.  See this note for a discussion.   

Although it appears that Apple was able to fully offset the profit from the “contract manufacturing” activity in 2015 this may not be the case in future years if the level of profit rises above the annual amount of capital allowances available and, over a long enough period, continued profits will result in the capital allowances being fully exhausted at some stage with no further amounts available to deduct.

In their recent statement Apple said “[t]he changes we made did not reduce our tax payments in any country.”  This is true for Ireland.  Prior to 2015, Apple did not pay tax to Ireland for the contract manufacturing as it was not located here.  When this activity was moved here in 2015 the amount of tax paid was also close to nil as the capital allowances wiped out the gross profits.

From an Irish perspective there isn’t anything hugely egregious about this.  The Irish operations of US MNCs use technology and intellectual property that was almost exclusively developed in the US.  That the Irish subsidiaries have to pay for the use of that technology is pretty standard. 

In many cases this is achieved through royalty payments with the Irish company “renting” the license to use the technology.  The expenditure on these outbound royalty payments reduce the taxable income in Ireland as they are incurred. 

In more recent times we have seen Irish subsidiaries “buying” the license outright via IP onshoring.  This once-off capital expenditure is also allowable as an offset to reduce a company’s taxable income with rules setting out how much can be claimed each year until the full amount is used.

Of course, in both cases these are payments for technology developed in the US so the payments should go to the US to reflect the value-adding activities that are carried out there.  That the US allows companies to “offshore” their technology licenses for a cost-sharing payment based on the amount of research expenditure incurred rather than the amount of profit earned is a matter for the US.

But the European Commission has decided that what happens in Ireland is a matter for it.  Back in November, Commissioner Vestager indicated she had some interest in what Apple did next:
“I have been asking for an update on the arrangement made by Apple, the recent way they have been organized, in order to get the feeling whether or not this is in accordance with our European rules but that remains to be seen”

“We are looking into this of course without any kind of prejudice, just to get the information.”
Page 42 of the state aid decision suggests that the Commission have all the information they need.  Through an Irish lens the new arrangement does not pose concerns, from a tax perspective at any rate.  An Irish company is exploiting technology developed elsewhere and has incurred capital expenditure buying a license for the right to use that IP - how much would you pay for the ex-US rights to Apple’s IP? 

The company didn’t pay much tax to Ireland on this activity in 2014 (because it happened somewhere else) and everything points to them not paying much tax to Ireland on it in 2015 (because the company in Ireland had to pay for the right to do it).

But what about through the lens of the European Commission? And in particular this subsection from the section of the Irish Taxes Consolidation Act (section 291A) that sets out how capital allowances for the acquisition of intangible assets can be claimed:

(7) This section shall not apply to capital expenditure incurred by a company—

(a) for which any relief or deduction under the Tax Acts may be given or allowed other than by virtue of this section,

(b) to the extent that the expenditure incurred on the provision of a specified intangible asset exceeds the amount which would have been paid or payable for the asset in a transaction between independent persons acting at arm’s length, or

(c) that is not made wholly and exclusively for bona fide commercial reasons and that was incurred as part of a scheme or arrangement of which the main purpose or one of the main purposes is the avoidance of, or reduction in, liability to tax.

OK, while paragraph (a) means that a deduction of the capital expenditure incurred can only be taken once and paragraph (b) means that the amount to be deducted cannot exceed the arm’s length value, our interest is in paragraph (c): a claim for capital allowances for expenditure on intangible assets cannot be made as part of a tax avoidance scheme or to reduce a company’s tax liability.  Let’s repeat some sentences from Apple’s recent statement:
“The changes Apple made to its corporate structure in 2015 were specially designed to preserve its tax payments to the United States, not to reduce its taxes anywhere else.”

The changes we made did not reduce our tax payments in any country.”

“There was no tax benefit for Apple from this change and, importantly, this did not reduce Apple’s tax payments or tax liability in any country.”

And, yes, the company did put the second of these extracts in bold.  There are keen to state that the structure did not reduce their tax liability.  The final extract is actually in reference to Apple’s decision to redomicile the company that holds (or at least held) its overseas cash to Jersey.  That is pretty much a non-issue.  US companies must pay US corporate income tax on passive income they earn from third parties (such as interest) in the period in which it is earned. 

If Apple had made that company Irish resident they would have had to pay our 25 per cent Corporation Tax rate for non-trading income and then pay an additional ten per cent to reach the then US rate of 35 per cent.  By domiciling in Jersey no tax is due in that jurisdiction but the full 35 per cent would have been due to the US in any event.  The Jersey element of this is a non-story.

But back to what might become a story.  How might the European Commission view Apple’s decision to shift the “contract manufacturing” activity to Ireland in 2015? If viewed through their lens could it be construed as tax avoidance? Absolutely. 

The logic of the state-aid decision is that, up to 2014, Apple owes tax on the profits from its “contract manufacturing” activity to Ireland because the only substance the Commission could see that was able to generate those profits was in Ireland.  The Commission could not see evidence that the US-based board of directors was responsible for the profits so all the profits were attributed to the activities in Ireland.  Of the €13 billion figure suggested by the Commission around €2.5 billion will be due to profits earned in 2014.

In 2015, Apple carried out much the same functions in Ireland but now the sales were executed and recorded in Ireland and the license for the IP was onshored to Ireland.  From the perspective of the Commission the tax liability on the profits went from €2.5 billion to nil.  Is that reducing a tax liability? 

Maybe 291a(7)(c) would be satisfied if the company that received the money for selling the IP license had paid capital gains tax.  But that didn’t happen.  And maybe you could argue that from an Irish perspective it is up to the jurisdiction where the IP originated to ensure that the appropriate CGT is charged. 

But the IP left the US when the cost-sharing agreement was put in place way back in 1980 and right up to 2015 it was held by a stateless company and located nowhere.  The CGT rate in nowhere is zero.  And the Irish branches had the use of the IP up to 2014.

If the Commission’s €13 billion decision is upheld by the courts then Apple will owe €2.5 billion of Corporation Tax for the €20 billion of profit earned by ASI in 2014.  In 2015, much the same profit was earned by a related company in Ireland which carried out much the same activity except it has paid a couple of hundred billion to buy the license for the IP underlying the activity.

Again, from an Irish perspective this isn’t a huge issue.  The profit linked to the IP wasn’t here in 2014 so wasn’t taxed here.  The IP was onshored in 2015, which resulted in the profit being located here as the GDP changes illustrate.  The profit was generated by an asset now located here so the profit offset by the depreciation of that asset was included in Ireland’s GNP.  The company earning that profit had bought a license giving it the right to use that IP and such a payment would typically be deductible for tax purposes.  The appropriate Irish law was followed appropriately.

But if you are the European Commission and your view is that €2.5 billion of tax is due to Ireland for 2014 then what else could you say but that the use of capital allowances in 2015 against the same profit (albeit in a different company) had as one its main purposes the reduction in liability to tax.  Through the Commission’s lens such a claim for capital allowances would not be allowed per S291a(7)(c) though as well as showing that there was a reduction in the tax liability they would also have to show that it was not a bona fide commercial transaction so it is far from clear that such a view would hold up under legal scrutiny.

This means that what is at stake when the original state-aid decision is finally decided by the courts may not just be the €13 billion plus interest for the period from 2004 to 2014 but possibly also €2.5 billion to €3 billion for every year since.  There would be no basis to challenge the use of capital allowances in the 2015 restructure if the €13 billion ruling isn’t upheld.
One question that arises is why didn’t Apple move to a “double irish” arrangement in 2015.  They could have done so.  The company had to change its original structure in response to the restrictions on “stateless” companies that was due to come into effect at the start of 2015 but the provisions against “double irish” structures in non-treaty partner countries that came in at the same time were grandfathered for existing companies until the end of 2020, and it may also have been possible to find a treaty partner country in which such an arrangement could achieve similar tax outcomes.  Possibilities along this line were provided here.

As Irish-registered companies before the grandfathering cut-off Apple could have availed of the provisions to allow the company holding the IP to become resident in a no-tax jurisdiction until the end of 2020.  When the residency rules first began to change we thought that is what the company would do (see last paragraph). 

Apple could have had an Irish operating company exploit their IP and executing the sales but get the money out of Ireland via a royalty payment to the IP holding company.  The restructure needed to be put in place from the start of 2015 and the grandfathering would have given a six-year timeframe for a structure using, say, Bermuda.

Now, maybe the company didn’t want to go down the line of using a pure tax haven and they may also have believed there was a risk that the European Commission would examine “double irish” type structures as part of the ongoing state aid investigations. This is precisely what the Commission have done in the Amazon-Luxembourg case – see discussion here – and it is possible that similar two-company arrangements in Ireland will be put under the microscope in due course.  But it equally must have been the case, back in 2014 at any rate, that Apple’s expectation of a “full profit attribution” outcome to their state aid case must have been low.

Anyway, we are where we are.  Apple onshored their IP to Ireland in 2015 and the consequences for the company and the country can be traced though various figures and statistics as we have done here.  Since the restructure was put in place we have had the Commission’s announcement in August 2016 of their conclusions in the state aid case and the rapid progression of changes to the US tax code through Congress in late 2017.  There are also a number of mooted changes to Irish Corporation Tax possibly coming down the tracks.  It is highly likely we will have another Apple restructure to pick through in due course but until then what is at stake in the state aid court case will potentially be getting larger and larger.

Monday, January 15, 2018

Where do Ireland’s housing problems show up in the SILC?

The Survey of Income and Living Conditions gets a lot of attention for the income and inequality data that it provides.  But it is far more than that.  The SILC contains lots of information on housing and housing costs.  Some insight into what is collected can be found by looking the the section on the “household questionnaire” beginning in this fieldwork manual for the survey.  The previous post was a data dump of what the SILC can tell us about housing and some background to the measures used here can be found there.

The most recent data from the SILC is for 2016 and covers household surveys that took place between January 2016 and December 2016 with the reference period being the twelve months prior to the time the survey is taken.  So, for households surveyed early in 2016 the reference period can go back to January 2015 (which is now three years ago).

When looking for evidence of the impact of the ongoing housing problems it may be that they do not appear in a survey like this.  That is because a lot of the problems arise at the margin. That is, people looking for accommodation and/or people unable to find accommodation (to rent or buy).  Most households remain in their accommodation, are not looking for an alternative and do not experience any change.

However, it should be possible to identify some of the pressures that lead to people having difficulty finding accommodation.  Here we will look at:

  • Housing costs (particularly for tenants)
  • Housing overcrowding (including young adults living with their parents)

So let’s start with housing costs.  Eurostat provide a measure of “total housing costs” to disposable income.


In 2016, in Ireland the weighted average of housing costs to disposable income was 14.6 per cent and the median was 11.8 per cent of disposable income.  These are some of the lowest shares in the EU15 and show no increase in recent years.

Of course, tenure status may matter here and the impact of changes experienced by, say, tenants in the private sector, may be drowned out by a lack of change elsewhere.  Here is the distribution of households by tenure status in the 2016 SILC across the EU15.


In comparative terms we see that Ireland ranks high for people living as tenants with rent at reduced price or free and ranks low for people living as tenants with rent at market rate.

We will try to isolate changes for tenants.  Eurostat provide an average of the total housing costs incurred by tenants.  As discussed in the previous post this includes actual rent paid and any insurance, taxes or charges, utility bills or maintenance costs incurred by the tenant.  Thus, the measure of housing costs is fairly for complete for tenants.  For owners with a mortgage, the interest component of repayments is included but not the principal component.

Anyway, our focus here is on tenants.  Here are the housing costs of tenants in Purchasing Power Standard (PPS) units to allow a comparison across countries.


In 2016, tenants in Ireland had the fifth lowest housing costs in purchasing power units across the EU15.  What is surprising is the lack of increase in recent years with increases of averaging just two per cent showing since 2012.

One reason for this is composition.  The above includes all tenants.  Around 55 per cent of tenants in the 2016 Irish SILC pay less than the market price, e.g. rent from local authorities.  If, as we might expect most of the increase in housing costs for tenants arose for tenants paying the market price then this group were likely experiencing increases in housing costs of four to per cent per annum (and there would likely be variation within that again). 

A break of housing costs for tenants paying the market price and tenants paying less than the market price is not provided by Eurostat.  It would be useful if some breakdown along those lines was provided by the CSO but they do not tend to independently publish many (any?) findings from the SILC relating to housing costs.

Eurostat do provide rents paid as a share of disposable income for tenants.  Again though, it is for all tenants so those paying a reduced price and the market price will be included in the one category.  


As a share of the disposable income of households who rent Ireland has the lowest rents in the EU15 – and the share is falling!  It was 21.4 per cent in 2011 and had fallen to 19.6 per cent by 2016.

Of course this won’t be because rents have fallen; but because incomes have risen.  Here are the nominal mean incomes for both groups of tenants in Ireland.

SILC Disposable Income of Tenants CSO 2004 to 2016

From 2011, the mean disposable income of tenants paying the market price increased from €36,500 to €42,700.  Over the same period this increased from €25,200 to €32,200 for tenants paying less than the market price.

Eurostat measure the housing cost overburden rate as being the share of population living in households where total housing costs exceeds 40 per cent of household disposable income.  In 2016, Ireland had the second lowest housing cost overburden rate in the EU15.


Ireland might have the next-to-lowest level for all households but as with most of these measures there is plenty going on under the surface.  Here is the 2016 breakdown of the housing cost overburden rate by tenure status.


Ireland’s overall rate might be 4.6 per cent but for tenants with rent at the market price the housing cost overburden rate is 19.6 per cent.  Thus, just under one-fifth of tenants paying market rates had housing costs in excess of 40 per cent of their disposable income.  As shown here this has always being the tenure status with the highest rate in Ireland.


It may also be surprising how little this is changed over the past few years. Though there has been some increases for tenants paying the market price since 2013, the increases are unlikely to be statistically significant and the 2016 rate is pretty much bang on the average since 2004.

The picture is much the same if we reduce the threshold.  The next chart looks at the share of the population by tenure status where “total housing costs” exceed 25 per cent of disposable income.  Again tenants paying the market rate fare worst but lack of deterioration over recent years is again notable.


Here is a chart of the housing cost overburden rate for tenants renting at the market price across the EU15.  Ireland, has generally had one of the lower housing costs overburden rates for this group since 2004. 


Given increases in asking rents one might have expected the housing cost overburden rate for tenants paying market prices to have increased in recent years but that is not what the SILC is showing – up to 2016 at any rate. 

As “total housing costs” used to calculate the above shares and rates excludes capital repayments on mortgages a broader measure is used to give a full insight into housing costs, particularly if we want to look at all households not just those who are renting.  To this end, participants in the SILC are asked to assess the “financial burden” of their housing costs (including capital repayments on mortgages) on the scale of:

  • is a heavy financial burden,
  • is a financial burden, and
  • is not a financial burden.

Here is the share of people living in households who consider the impact of their housing costs  to be a heavy financial burden.


This is likely closer to what we expect for Ireland. The share of people living in households experiencing a heavy financial burden due to housing costs increased after 2007 and reached 43.3 per cent by 2013. It has since fallen back and was down to 32.4 per cent in 2016, though still the fifth highest in the EU15. 

The above pattern for Ireland is reflected in the pattern of arrears.  It should be noted that in the SILC arrears is measured as missed payments in the previous 12 months rather than a measure of the build-up of cumulative arrears in the past.


Of course, these measures of financial burden and arrears are probably more a function of the general performance of the economy as a whole rather than specific problems relating to housing.

Another indicator that may reflect some of these problems is overcrowding.   The Eurostat definition of overcrowding is here and in 2016 Ireland had the lowest housing overcrowding rate in the EU15 with no notable increase evident.


Again, it may be informative to look at this by tenure status which is shown.  Although there has been little or no change in the overcrowding rates for owner-occupiers in the past few years, an upward since 2012 or 2013 can be identified for both groups of tenants.


A final measure from the SILC which could reflect some of the ongoing problems is the share of young adults living with their parents.  Ireland’s doesn’t have a particularly high rate but the increase since 2013 is notable.

EU15 SILC Adults Living at Home  2004-2016

In 2013, 19.4 per cent of young adults in the SILC aged between 25 and 34 were living with their parents.  In the 2016 SILC this share had increased to 27.2 per cent.  Through all the measures of costs and overcrowding that is probably as a clear an impact that can be identified in the SILC of the ongoing housing problems.

Households, Housing and Housing Costs in the SILC

There is lots of data on housing in the Survey of Income and Living Conditions.  Almost all of it is published by Eurostat rather than directly by the CSO itself.  That alone means much of it can be hard to find and even harder to pull together.

The initial intention was to look at the data for the impact of the current housing problems in Ireland but this post has ended up being a bit of a data dump – a hodge-podge of what the SILC has to say about housing and housing costs without any real end-point in mind.  It may be better to move to the next post which will try to isolate those bits that reflect the Ireland’s current housing problems rather than plough through the 11 tables and 22 charts that follow.

So, what can the SILC tell us about households, housing and housing costs? Quite a lot actually.  We will look at:

  • household type and tenure status
  • housing size and under-occupied housing
  • housing and environmental deprivation
  • housing costs and the burden of housing costs

Monday, January 8, 2018

Some trends from the Survey of Income and Living Conditions across the EU15

Before Christmas the CSO published the 2016 update of the Survey of Income and Living Conditions.  Some of the Irish trends are  explored here.  This time we will look at the Irish data relative to the rest of the EU15 as the full set of figures are now available.

First, median nominal equivalised disposable income.


This is useful for trends but a measure that takes into account inflation within countries and relative price differences between countries would give a better indication of the living standard that are supported by those incomes. Eurostat produce real incomes in units of purchasing power standard (PPS), a unit that has the fixed purchasing power through time and across countries.


By 2008 Ireland had risen to fourth in the EU15 on this measure, but 2016 Ireland had fallen to tenth.  For real household income Ireland is, at best, a mid-ranking member of the EU15.  This position could improve again over the coming years as Ireland has moved back towards the top of the growth rankings.


Over the past decade Ireland has gone from the top, to near the bottom, back to near the top of the growth rankings of this income measure.

But how is this income distributed? How does Ireland’s gini coefficient compare to the rest of the EU15?

Even with the above volatility in income growth Ireland’s gini coefficient has been largely unchanged for almost a decade and in 2016 was ranked exactly in the middle (8th) of the EU15.


Ireland was also eighth in 2016 for the income share ratio of the top 20 per cent to the share of the bottom 20 per cent. The gradual upward trend of those countries below Ireland could see this ranking improve.


Another relative income measure is the at-risk-of-poverty rate which shows people with equivalised income less than 60 per cent of the median (as set for each country). Ireland had the fifth highest at-risk-of-poverty rate in the EU15 in 2016 with the top five made up of the PIIGS.


To try and assess changes in absolute poverty we can use a threshold from a fixed point in time  and the adjusted it for inflation in future years. This allows us to compare incomes to a fixed threshold in real terms.

Here we use 2005 as that fixed point in time and look at the relative change in the proportion of people below that threshold in each country.


Relative to the 2005 threshold for each country Ireland has the second largest reduction in absolute poverty by 2016 though it can also be seen that Ireland had performed even better than this by 2008 but those improvements were not maintained.  The proportion of people in Greece below the 2005 at-risk-of-poverty threshold has more than doubled.

The above changes in absolute poverty are reflected in the changes in the material deprivation rate. Eurostat uses a set of 9 items reflecting economic strain and deprivation linked to durables.  A household is deemed to be materially deprived if it suffers from an enforced absence of three of more of those items.  The nine items are:


In 2016, Ireland had the fourth highest rate of material deprivation in the EU15, though this has declined rapidly in recent years.


Here is the breakdown by item for 2016 (click to enlarge).

EU15 SILC Materical Deprivation by Item Table 2016 2

As we examined here the items that have the largest impact on Ireland’s material deprivation rate as measured by Eurostat are:

  • Arrears
  • Afford a holiday 
  • Dealing with unexpected expenses

These are the items that Ireland has levels greater than the arithmetic mean of the EU15.  For the other six items, Ireland is either roughly at or below the mean of the EU15 countries.

An issue for Ireland is the distribution of income before social transfers (with public and private pensions excluded from social transfers). Ireland has both the highest gini coefficient and at-risk-of-poverty rate in the EU15 before such social transfers.  As shown here this has been true for significant periods for both measures.



A significant factor behind this is households with little or no earned or market income. In 2016, Ireland extended to ten years it’s run as European champions for “jobless households”.


Even with a relatively low unemployment rate Ireland has more people aged under 60 where the level of earned income of the household is zero or near-zero. 

The following table gives the at-risk-of-poverty rates by household work-intensity in 2016,


For all levels of work intensity other than “very low” Ireland has some of the lowest at-risk-of-poverty rates in the EU15.

For those working, the at-risk-of-poverty rate in Ireland in 2016 for employees was 3.5%, the third lowest in the EU15 bettered only by Belgium and Finland.


Finally, here is a variation of the at-risk-of-poverty rate that takes into account housing costs.  If is the proportion of households who are below the standard at-risk-of-poverty threshold after “total housing costs” have been deducted from their income. For this measure Ireland has the 5th lowest rate in the EU15.


The items included in “total housing costs” are outlined here.


Unsurprisingly, comparisons of the 2016 figures across the EU15 reaffirm the improvements that were highlighted when the Irish results were looked at in isolation.  All measures are either improving or unchanged with almost none showing a deterioration. 

If the government have some cash available for strategic communications they could so far worse than to direct it to the CSO to accelerate the publication of the 2017 SILC. Denmark already have data for 2017 available from Eurostat!

Denmark SILC 2017 on Eurostat