Tuesday, April 20, 2021

The extra-ordinary tax payments of US MNCs in Ireland

The US tax collector, the Internal Revenue Service (IRS), has been publishing aggregate data from the country-by-country reports US MNCs have been filing with them.  The data is available here and the most recent year covered is 2018.

Here are a few categories from the 2018 data with the countries ranked by the amount of cash payments made for corporate income taxes to each of them.  The top 15 are shown.

IRS CbCR Ranked by Cash Tax Paid 2018

As would be expected, the United States itself is the largest recipient of corporate taxes from US MNCs.  Of the $261.5 billion of cash payments for income taxes made by US MNCs in the IRS country-by-country statistics just over $140 billion (53 per cent) was paid to the US.

Next on the list is the UK which was the recipient of $10.9 billion of corporate tax payments from the US MNCs in this data.  And extraordinarily, Ireland is next.  The IRS statistics show that US MNCs paid close on $8 billion of Corporation Tax in Ireland in 2018.  This figure is likely to be higher when the IRS updates its data with subsequent years.

Ireland is the third-highest recipient of corporate taxes from US MNCs in the world.  The scale of the payments being made here is highlighted when they are put in terms of national income.  Here they are put in terms of Gross National Income (for countries with a GNI of more than $100 billion) with the highest 30 countries shown.

IRS CbCR Cash Tax Paid as Share of GNI

The $8 billion of tax paid by US MNCs in Ireland in 2018 was equivalent to 2.6 per cent of Ireland’s Gross National Income (if GNI* is used it moves above 3.0 per cent).  No country with a GNI of more than $100 billion comes close to collecting this amount of tax from US MNCs as a share of its national income. 

The are some smaller countries where the share in Ireland is apparently eclipsed.  These are the Cayman Islands($213 million of tax from US MNCs, 6.9 per cent of GNI), Bermuda ($485m, 6.5%), The Bahamas ($516m, 4.2%) and Luxembourg ($1,398m, 3.1%).  However, these are small payments relative to very small economies and is not clear if the tax payments attributed to US MNCs subsidiaries in those countries are made to those countries.  The GNI of the Cayman Islands is around $3 billion which is 100 times smaller than Ireland and it does not have a corporate income tax from which revenue can be generated.

It is worth noting that the US itself in included in the above chart.  In 2018, the corporate tax revenue from US MNCs in Ireland as a share of GNI was nearly four times higher than it was in the United States.

Monday, April 19, 2021

We know so much about Google’s tax structure, how is it possible to get the reporting so wrong?

The taxation of US multinationals continues to make headlines. It is right that these companies are subject to intense scrutiny but given how frequently they are reported on it is surprising how frequently significant errors arise in the coverage. A recent case in point arises in this piece from The Irish TimesThe piece begins:

Google shifted more than $75.4 billion (€63 billion) in profits out of the Republic using the controversial “double-Irish” tax arrangement in 2019, the last year in which it used the loophole.

The technology giant availed of the tax arrangement to move the money out of Google Ireland Holdings Unlimited Company via interim dividends and other payments. This company was incorporated in Ireland but tax domiciled in Bermuda at the time of the transfer.

It looks like there is headline worthy stuff going on here but in just the opening two paragraphs the piece manages to utterly contradict itself.

Paragraph 1: A Google subsidiary shifted profit out of Ireland.

Paragraph 2: This Google subsidiary was based in Bermuda.

How can a holding company in Bermuda shift profit out of Ireland? Sure, Google Ireland Holdings made substantial dividend payments and distributions in 2019 but it was a payment from a company in Bermuda to its immediate parent.  Neither party to the transaction was in Ireland.  And this is clearly set out in the company’s accounts.

Google Ireland Holdings Dividend 2019

Note 9 to the accounts tells us  “the Company is domiciled and tax resident in Bermuda” while Note 10 tells us that the distributions in 2019 comprised $15 billion of financial assets, $27 billion of debt securities, dividends of $30 billion and other net assets of $3 billion.  That is the $75 billion that generated the headline.

Of course, distributions and annual profit are different things.  We can use the very same accounts the dividends and distributions figure came from to get the company’s profit.   To do that all we have to do is look at its income statement.

Google Ireland Holdings 2019 Accounts

Google Ireland Holdings certainly was a profitable company.  It had a pre-tax profit of $13.7 billion in 2019 from turnover of $26.5 billion.  Of course, as a company resident in Bermuda (which doesn’t have a corporate income tax) pre-tax profit and post-tax profit were the same.

The third paragraph of The Irish Times piece goes:

The move allowed Google Ireland Holdings to escape corporation tax both in the Republic and in the United States where its ultimate parent, Alphabet, is headquartered. The holding company reported a $13 billion pretax profit for 2019, which was effectively tax-free, the accounts show.

Hmmm. Didn’t we have a huge amount of coverage last week, including in The Irish Times itself, of proposed changes to the US minimum tax on the foreign profits of its MNCs – the so-called tax on GILTI, Global Intangible Low-Taxed Income. So, yes you can say that Google Ireland Holdings profit “was effectively tax free” once you ignore the tax that its ultimate parent, Alphabet Inc., is liable to pay on those profits to the US. 

Similarly, we could say Ireland is effectively a landlocked country – once you ignore the hundreds of miles of coastline.  We can say it but it means nothing.  

Moving on to paragraph five:

Google has used the double Irish loophole to funnel billions in global profits through Ireland and on to Bermuda, effectively put them beyond the reach of US tax authorities.

It seems somewhat odd given the above statement, that Google would have included the following note in its 2017 annual accounts:

One-time transition tax

The Tax Act requires us to pay U.S. income taxes on accumulated foreign subsidiary earnings not previously subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets and 8% on the remaining earnings. We recorded a provisional amount for our one-time transitional tax liability and income tax expense of $10.2 billion. We have recorded provisional amounts based on estimates of the effects of the Tax Act as the analysis requires significant data from our foreign subsidiaries that is not regularly collected or analyzed.

As permitted by the Tax Act, we intend to pay the one-time transition tax in eight annual interest-free installments beginning in 2018.

This one-time transition tax, or deemed repatriation tax, was levied on the profits that contributed to the dividends and distributions made by Google Ireland Holdings in 2019 and will be paid in annual installments out to 2025. 

So, absolutely you can say that for these profits Google was able to “effectively put them beyond the reach of the US tax authorities”, once you ignore the $10 billion of tax that Google will pay on them.  And, as noted above, any such profits earned since 2018 have been subject to the tax on GILTI.  That tax is in place but as it was introduced in legislation called the Tax Cuts and Jobs Act it is not clear how much revenue is being generated by it.

In overall terms, we can assess Google’s tax payments by looking at its annual financial statements.  Here are the company’s income statements for all years from 2010 to 2020, as well as a line about actual tax payments extracted from the company’s cash-flow statements. Click to enlarge.

Google Income Statements 2010-2020

All told, in the 11 years since 2010 Google has reported a cumulative pre-tax profit of $264 billion.  The provision for income taxes sums to $54 billion giving a effective accounting tax rate of just over 20 per cent.

The provision for the one-time transition tax was made in 2017 and it can be seen that the effective tax rate for that year exceeded 50 per cent as the provision for taxes included $10 billion of tax for accumulated foreign profits.

On a cash basis the company paid $41 billion of tax.  This will increase to match the provision for income taxes as future installments of the deemed repatriation tax are paid.

We move on to paragraph six

Companies exploiting the double Irish put their intellectual property into an Irish-registered company that is controlled from a tax haven such as Bermuda. Ireland considers the company to be tax-resident in Bermuda, while the US considers it to be tax-resident here. The result is that when royalty payments are sent to the company, they go untaxed – unless or until the money is eventually sent home to the US parent.

Hmmm. Untaxed that is if you ignore the minimum tax that the US has on the foreign income of its subsidiaries.  The tax on GILTI was introduced in December 2017 which is surely enough time for the reporting to catch up.

The “double irish” was original designed around the “same country exception” in Subpart F of the US tax code.  As this IRS note states passive income, such as royalties, received by the foreign subsidiaries of US MNCs was immediately liable for US tax (under the pre-2018 regime).

Generally, the US shareholder of a foreign corporation is able to defer taxation of the corporation’s income until it has been distributed to the shareholder. However, in the case of a controlled foreign corporation (“CFC”), certain types of income are subject to current inclusion (“subpart F inclusion”) by the US shareholder under IRC 951. One such type of income is Foreign Personal Holding Company Income (FPHCI), which includes income of a CFC such as dividends, interest, rents, and royalties. The FPHCI rules eliminate the deferral of US tax on income earned by certain foreign corporations from portfolio types of investments, i.e., where the company is merely passively receiving investment income rather than earning active business income. Consequently, many of the exceptions to current inclusion of FPHCI focus on the recipients of income (i.e., whether the recipients meet certain criteria). 

As the note sets out there are some exceptions to the immediate inclusion of passive income for taxation in the US.

Another exception that looks to the payor of the income for eligibility requirements is the same country exception from FPHCI under IRC 954(c)(3). Under the same country exception, FPHCI does not include dividends and interest received by a CFC from a related CFC payor which is incorporated in the same country as the recipient CFC, and which has a substantial part of its assets used in its trade or business in that same country. Similarly, under this exception, FPHCI does not include rents and royalties received by a CFC from a related CFC for the use or privilege of using property within the same country as the recipient CFC’s country of incorporation. However, the FPHCI implications/treatment of rents/royalties are outside the scope of this Unit and will be covered in a separate Unit.

This is the reason for “double” part of the moniker. The key is to have two companies registered in the same country. Their residence doesn’t matter from a US perspective.  So, Google had a Irish-registered trading company operating in Ireland and an Irish-registered holding company based in Bermuda. 

The trading company paid for the right to use Google’s technology and because the royalty paid was received by another Irish-registered company, the income was not included when earned but the tax payment could be deferred until the profit was repatriated to the US.  The 2017 TCJA abolished the deferral on taxes on this income.

The company in Ireland is Google Ireland Limited and it is the fulcrum of Google’s international operations.

Google Ireland Limited 2019 Accounts

 

Some big numbers there. Google Ireland Limited had turnover of €45.7 billion in 2019.  Of this, around €14.3 billion went on the cost of sales which in this case is fees paid to website owners for hosting ads from Google’s services.

From gross profit if €31.4 billion the company incurred €29.7 billion of administrative expenses.  These include staff and premises costs in Ireland but by large the largest component is the royalty it must pay for the license to see advertising using Google’s technology.

After investment and other income, Google Ireland Limited had a pre-tax profit of just under €2 billion and a tax provision of around €250 million (c.12.5 per cent).  This, along with its €600 million of wage costs and purchases from Irish suppliers represents its contribution to the Irish economy.

The main supplier for Google in Ireland is the entity that produces the technology it uses.  Due to a Irish withholding tax in place at the time the structure was set up the royalties payments make a detour to The Netherlands (the “dutch sandwich”) before finding their way to Bermuda.  Under the EU’s Patents and Royalties Directive, Member States can levy a withholding tax on royalties paid to another EU Member State. 

At the time, Ireland would have levied this withholding tax if the payments went from Ireland to Bermuda but this was easily circumvented  by directing the payments first to The Netherlands and then on to Bermuda.

We have already looked the accounts of the Bermudan company above. It received very significant revenues but we can also saw that it incurred very significant costs.  The accounts give a breakdown of some of these.

Google Ireland Holdings Turnover and Costs 2019

The largest cost is R&D expenditure.  This is a holding company with no employees so it obviously isn’t doing the R&D itself. This is the payment for someone else to undertake the R&D on its behalf.  As the accounts note:

Administrative expenses

Administrative expenses increased from US$11.1 billion in 2018 to US$14.1 billion in 2019, an increase of US$3.0 billion. This increase is primarily due to an increase in research and development (“R&D”) expenses. The Company incurred US$10.4 billion (2018: US$9.6 billion) of R&D expenditure in the year pursuant to a cost sharing agreement with a fellow group undertaking. These expenses increased due to an increase in the worldwide spend on R&D.

Google Ireland Holdings was part of a cost-sharing agreement with Google in the US.  The R&D takes place in the US but the cost was split between the US parent and Google Ireland Holdings.  Google Ireland Holdings made a contribution to Google worldwide spend on R&D based on the relative size of the market it serves.  It look like Google Ireland Holdings paid for around 40 per cent of Google overall spend on R&D.

So while Google Ireland Limited did make a royalty payment of around €26.5 billion that ended up in Bermuda in 2019 around half of that was further transferred to the US to cover the costs of Google technicians, engineers and developers who are behind Google’s technology.  The residual that was left in Bermuda was subject to the US GILTI tax.

However, Google does nothing in Bermuda to justify the profits earned by Google Ireland Holdings.  In recent years, the OECD, through their ongoing BEPS project, have been proposed updates to transfer pricing guidelines that would ensure that the location where a company’s profit is reported better matches the location of the substance that generates that profit.  Google’s structure with $13 billion of profit in Bermuda in 2019 did not align with that.

The changes implemented through the OECD in relation to profits linked to intangible assets such as those produced by R&D are summarised as DEMPE – does a company do sufficient development, enhancement, maintenance, protection or exploitation of the intangible asset do justify the profit allocated to it?

Google Ireland Holdings does nothing so there is no way it had sufficient DEMPE functions to justify the profits allocated to it.  This means that payments made to Google Ireland Holdings would not be tax deductible.  It is these changes to transfer pricing guidelines that have brought an end to structures like these.  For Google this happened at the end of 2019.

Here a paragraph from The Irish Times article that is actually correct. It is a copy and paste of a statement from Google.

“In December 2019, in line with the OECD’s base erosion and profit shifting (BEPS) conclusions and changes to US and Irish tax laws, we simplified our corporate structure and started licensing our IP from the US, not Bermuda. The accounts filed today cover the 2019 financial year, before we made those changes.”

So, the Irish company still has to pay for the rights to use Google’s technology but now those payments go direct to the US instead of ending up in Bermuda.  This is as it should be.  The US should not have allowed a cost-sharing agreement that allowed the profits from activities undertaken within the US to leak out. 

When they did leak out the US wanted their MNCs to “exhaust all remedies” to minimise the amount of foreign tax they paid.  Locating the profits in Bermuda was US companies complying with the recommendations of the IRS. 

This is from an IRS note that sets out what US MNCs are expected to do if they wished to avoid double taxation:

The United States taxes income on a worldwide basis. To prevent double taxation, under the Internal Revenue Code (IRC) U.S. taxpayers are allowed a credit for foreign income taxes paid. However, the ability to credit foreign income taxes paid is limited. Pursuant to Treasury Reg. § 1.901-2(e)(1) U.S. companies may not obtain credits for foreign taxes paid in which they are not legally compelled to pay. If the U.S. Treasury were to allow foreign tax credits (FTCs) without requiring U.S. taxpayers to effectively and practically reduce their foreign tax payments as legally imposed, taxpayers would have no incentive to challenge any foreign tax, whether or not properly imposed. As a result, foreign tax costs may potentially be improperly shifted to the United States. 

As a general rule under Treas. Reg. Section 1.901-2(e)(5)(i), taxpayers cannot claim foreign tax credits for amounts paid to foreign taxing authorities where they have failed to exhaust all effective and practical remedies (including competent authority procedures where applicable).

So what can appear as egregious tax avoidance from, say, a European perspective can be seen as simply ensuring tax payments are maximised from a US perspective.  The US wanted their MNCs to locate their foreign profits in no-tax jurisdictions such as Bermuda.  This ensured that US payments were maximised, albeit that the US had a terrible record of actually collecting this tax.

The updated transfer pricing rules means that restrictions have rightfully been placed on companies reporting their profits in jurisdictions where they have no substance.  Google has responded this need to better align its profit with its substance by licensing its IP from the US and not Bermuda and this has changed how its profit is taxed.

What has been the effect of this in Ireland?  In reality, there is very change.  The Irish company is still paying for the technology it uses but the destination of those payments has changed.  We can see this from balance of payments data.

Royalty Imports to United States 2008-2020

Whoa!  For pretty all of the last decade royalty payments from Ireland to the US were around €2 billion a quarter.  They skyrocketed in 2020 and, all told, around €52 billion of royalty payments went from Ireland to the US.  It is more than just Google that have moved to licensing their technology for international markets from the US.  Facebook have too.

This means that in 2020 the trading companies in Ireland continued to collect tens of billions in revenue from selling advertising on Google’s and Facebook’s platforms.  For the rights to sell the advertising, their Irish subsidiaries paid for the technology they are using and these payments are now being directed to the where the DEMPE activities that produce the technologies are located: the United States.  These payments may add 0.1 or even 0.2 per cent to 2020 US GDP.

But I wonder how the Irish reports will butcher their “analysis” of Google’s 2020 accounts in Ireland when they are published this time next year?  Because all the evidence is that butcher it they will. It seems “most read” or “most likes” is more important than “most accurate”.

Thursday, April 8, 2021

The non-financial corporate sector in the institutional sector accounts

There are lots of reasons not the look at the figures for Ireland’s non-financial corporate sector in the quarterly institutional sector accounts (ISAs).  They are the figures that are most likely to be revised when the National Income and Expenditure (NIE) accounts are published in the summer.  And a much more information breakdown (by domestic, foreign-owned and redomiciled PLCs) will be published with the annual ISAs in the autumn. 

So, without expected it to be any more revealing that staring into a puddle here are the latest figures for the NFC sector.  First, the current account:

NFC Sector Current Account 2016-2020

Lots of big numbers as can be expected given the scale of the MNCs that operate in the sector.  However, most of the 2020 changes are fairly modest (at least they are in this release anyway).

We can see that compensation of employees paid by NFCs held up fairly well in 2020 only showing a decline of 2.5 per cent or €1.7 billion.  However, this was supported by the government’s wage subsidy schemes and subsidies on production received were up almost 500 per cent. The (mainly domestic) firms receiving these subsidies used them to support the wages of their employees.

Amidst all the big number we see the continued rise in Corporation Tax payments from this sector.  In 2020, the NFC sector paid €9.6 billion of Corporation Tax up from €8.4 billion in 2019. 

Another item worth noting is the continuing rise in the amount of interest paid by the NFC sector.  The interest amount in the ISAs rose a further €2 billion in 2020.  This may be linked to the onshoring of tens of billions of IP assets by US MNCs.

NFC Sector Capital Account 2016-2020

The figures in the capital account are even more murky – particularly those in the lower panel showing capital formation, acquisition of non-produced assets and net borrowing.

The NFC sector in Ireland has been doing an enormous amount of capital formation expenditure in recent years.  This has been to the extent that a €50 billion drop in NFC investment is of concern to no one.  This is because the main reason for the wild fluctuations in the GFCF has been IP onshoring by US MNCs.  These transactions can be worth tens of billions but their impact on the overall economy is limited.

The lower panel shows that their has also been significant expenditure on the acquisition of non-produced assets.  Again this is linked to IP onshoring but is IP that is not the result of R&D activity.  The assets here include licenses and marketing assets such as customer lists.  This shows a large drop in 2020, but, like capital spending, is a figure that is subject to revision in the NIE.

This means that the bottom line is not informative either.  The net borrowing position of the NFC sector may have improved by more than €70 billion but most of this is due to reduced onshoring of IP by US MNCs.  We’ll get a much better picture of what is happening in the business sector in Ireland, and most importantly the domestic business sector, as the CSO works through it release schedule for the year.

The government sector in the institutional sector accounts

The CSO will publish the 2020 Government Finance Statistics (GFS) in the next few weeks but we can get a preliminary look at what they will say from the Institutional Sector Accounts (ISAs) that were published last week.

Here’s the government sector current account for the five years to 2020.

Government Sector Current Account 2016-2020

For 2020, the most significant changes were subsidies paid (+€4 billion), social benefits paid (+€6 billion) and consumption expenditure on goods and services (+€5 billion).  All told, these contributed to a €16 billion deterioration in the current account position of the government sector.

One of the remarkable things is that all of these changes were on the expenditure side with revenue holding up.  There was a decline in taxes on products and production.  Taxes on products (such as VAT and Excise Duty) were down €2.5 billion with taxes on productions (such as commercial rates) down just under €1 billion.  Some of this fall was just to reduced activity while some was due to forbearance and payment breaks.

Taxes on income and wealth rose in 2020. This was entirely due to increased Corporation Tax from non-financial corporates which rose another €1 billion but taxes on income from the household sector (Income Tax and USC) were essentially unchanged in 2020.  Social contributions received (mainly PRSI) were also largely unchanged in 2020.

On the spending side some of the other changes were the eight per cent rise in compensation of employees paid by the government sector with this almost reach €25 billion in 2020.  It might be surprising the the GDP of the government sector rose seven per cent in 2020 (schools closed etc.) but in the absence of prices the value added of the government sector is mainly measured by the wages paid.  Finally from the current account, we can also see that the interest bill continued to fall and the interest amount in the sector accounts falling by a further €1 billion in 2020.

There were also limited changes in the capital account.

Government Sector Capital Account 2016-2020

The most significant change here was the further €1.5 billion rise in government gross capital formation in 2020 to reach €9.7 billion.

There was little change in most other items in the current account meaning that the overall change in the government’s non-financial position was a deterioration of €18 billion.  The government sector went from a modest net lending position of €1.5 billion in 2019 to a net borrowing position of €16.5 billion in 2020.

To the extent the the increased spending highlighted in the current account is temporary this deficit will fall as the need for emergency measures falls.  But if some of those represent permanent spending increases, as is likely, some of the deficit will be persistent.  It is that permanent increase in spending rather than any necessity to “pay the COVID bill” that will impact subsequent budgetary plans.

Thursday, April 1, 2021

The household sector in 2020

The CSO have published the Q4 2020 update of the non-financial Institutional Sector Accounts.  While there may be some revisions when the annual accounts are published later in the year, the quarterly data can be used to get preliminary figures for the year as a whole. 

Here’s the household sector current account for the past four years as well as the annual change in 2020.

Household Sector Current Account 2017-2020

The bottom section tells us that the disposable income of the household sector rose by just over four per cent in 2020.  The biggest reflection of the restrictions that were in place for much of the year is the nine per cent reduction in consumption expenditure.  This meant that the gross saving of the household sector almost doubled in 2020, reaching €28 billion and giving an unusually high savings rate of 23 per cent.

Although it looks like there was relatively serene progression in the aggregate income of the household sector in 2020 there was obviously a lot going on above that.  In overall terms, the compensation of employees received by the household sector was essentially flat in 2020 showing a fall of just –0.3 per cent.  This, however, masks a difference across sectors with all sectors bar the government sector showing a fall in 2020.

Compensation of employees from the government sector rose a further eight per cent in 2020 to almost reach €25 billion.  The increase since 2015 is almost 30 per cent.

GG CoE Paid 2006-2020

The nearly €2 billion rise in compensation of employees from the government sector almost fully offset the reductions elsewhere.  And those reductions would have been even larger were it not for the various wage subsidy schemes introduced which provided a subsidy to firms to support their wage payments to staff.

A little further down, we see that social benefits received by the household sector (excluding benefits in kind) from the government sector jumped from €24 billion in 2019 to €30 billion in 2020.  This increase was primarily driven by the Pandemic Unemployment Payment (PUP) though even the absence of this scheme there would have been an increase in these transfer as most, but not all, of the people impact would have been eligible for existing income supports.

And those are the most significant changes in the table.  It looks like there’s something going on with the FISIM adjustment but it seems to largely net out across interest paid and interest received.  There has been a reduction in contributions to private pensions in recent years. Social contributions paid to the financial sector have gone from €7.3 billion in 2018 to €5.9 billion in 2020.

This is perhaps surprising given the general increase in savings behaviour in 2020.  However, there was still a greater amount contributed to private pensions funds then paid out in benefits from those funds – the adjustment for pension entitlements in the second-last row was +€1.4 billion.

We can turn to the capital account to see what happened to see how the rest of the savings were used.

Household Sector Capital Accounts 2017-2020

Gross capital formation by the household sector was down in 2020, falling from €7.2 billion in 2019 to €6.8 billion in 2020.  This is probably not a surprise given that the main capital expense of the household sector is housing (purchases of new units and refurbishments of existing dwellings).  Restrictions would have reduced output in the construction sector.

The bottom line shows that most of the savings was carried through the capital account.  Net lending by the household sector exceeded €20 billion in 2020.  This means that most of the additional saving made its way to the financial accounts: higher deposits, lower loans and maybe increased investment in other financial assets but higher deposits and lower loans are likely to dominate.

To conclude here is the savings minus investment positions of the household and government sectors.  The figures shown are four-quarter moving sums.

Gross Savings minus Investment for Gov and HH 1999-2020

The turmoil of 2020 is clearly seen but is also noticeable is that as the year progressed the [S – I] deficit of the government sector was growing faster than the [S – I] surplus of the household sector.  The overall position across the two sector was still positive: if necessary the deficit of the government could be funded from domestic sources. 

Maybe the next 12 months will see an erosion of that savings behaviour possibly to fund a consumption boom which, in turn, will boost the government’s position.  It doesn’t even need the accumulated savings to be unleashed, just a reduction in the savings rate.

Friday, March 26, 2021

Latest Country-by-Country Reporting Data for US MNCs

The IRS have published their aggregate statistics for the 2018 country-by-country reports filed with them by US MNCs.  The figures show that companies who came under the scope of the regulation made $7.9 billion of cash payments for corporate income taxes to Ireland.  This was a significant increase on on the $4.3 billion of tax payments that US MNCs made to Ireland in 2016 and the $5.2 billion paid in 2017.

Relative to the population in 2018 (4.857 million) the Corporation Tax payments of US MNCs were equivalent to $1,636, close to €1,400, for every person in the country.  This figure is likely to be larger now. In 2018, revenues from Corporation Tax totalled €10.4 billion, last year they were €11.8 billion.

The IRS reports show that these companies had 151,000 employees in Ireland in 2018 but the benefits of the their presence here extends well beyond that group.  In equivalent terms, it could be said that the Corporation Tax payments US MNCs are making in Ireland are covering the costs of the State pension which had 600,000 beneficiaries in 2018.

Whatever about the relative impact of these tax payments in Ireland, the relative size of them across the EU is remarkable.

IRS CbCR for the EU27 Tax Payments 2018

This chart is not done in per capita terms or as a percent of national income; it is just the nominal figures.  US MNCs make more corporate tax payments to Ireland than they do to any other country in the EU and by some distance.

In total, the MNC groups in the IRS data made $261 billion of cash tax payments in 2018.  Of those three percent were made to Ireland.  Indeed, Ireland was the third-largest of all recipients of corporate tax payments from US MNCs only coming behind the US itself ($140.6 billion) and the UK ($10.9 billion).

Here is a table of outcomes for ten selected jurisdictions as well as the U.S. itself and the outcomes “stateless entities” (most of which likely operate in the U.S.).  All of the figures in the main part of the table are taken directly from the IRS dataset. The last column on the right, average cash tax rate, and the rows at the bottom showing shares are calculated using the IRS data.  Also note that to get a more accurate indicator of the average tax rate the table is “limited to reporting entities with positive profit before income tax”.

IRS CbCR Average Tax Rates Selected Jurisdictions 2018

Assuming there is no double counting, the jurisdictions here account for around 80 per cent of the profit of the reporting groups in the data with the ten selected jurisdictions accounting for around 20 per cent of the total.  The jurisdictions are are ranked by profit before income tax.

This places the US at the top and it is followed by “stateless entities” while the top five of the selected jurisdictions are Bermuda, Singapore, Netherlands, Luxembourg and Switzerland.  Ireland is next.

Ireland would be top of this group if ranked by revenues, cash tax paid or tangible assets and would be third for employees (trailing Singapore and the Netherlands).  Ireland would also be first if the ranking was done by average tax rate.  Indeed, at 11.4 per cent of reported profits before tax, Ireland is the only jurisdiction in the table with an average tax rate that makes it into double digits.

For earlier years in the IRS data the equivalent average tax rates for Ireland were 9.4 per cent in 2016 and 12.8 per cent in 2017.

The IRS figures show that, in 2018, the US MNCs included in this table reported over $100 billion of profit in Bermuda and unsurprisingly paid very little tax there.  Similarly low tax rates are reported for the near $60 billion of profit in the Cayman Islands and the $12 billion in Barbados.

Profits of around $85 billion are reported for both Singapore and the Netherlands with $3 billion of tax paid in Singapore and $4 billion in the Netherlands.  Both of these have average tax rates of less than five percent.  The average tax rate for Luxembourg is even lower: $1 billion of tax on $68 billion of profit giving an average tax rate of 1.5 per cent.

Within the selected ten Ireland could be considered a bit of an anomaly.  Yes, there are large profits but relative to the rest of the group there are high tax payments, high tangible assets and high employee numbers. These conclusions would not be significantly altered if companies reporting negative or zero profit before tax are included.  For Ireland, those companies would add another 30,000 employees bring the total employment in Ireland of US MNCs in the IRS’s CbCR statistics to 150,000. 

The IRS also provide a breakdown of the effective tax rates by country.  They use accrued tax rather than cash tax.  Here is the 2018 breakdown for Ireland.

IRS CbCR Ireland by ETR 2018

The largest group are those with an effective rate of “10% to less than 25%” but there are also significant profits in groups that show an ETR of less than 10% and groups with an ETR of 25% or greater.

The data also gives a sectoral breakdown which we again show for Ireland.

IRS CbCR Ireland by Sector 2018

This shows that the most important sector from an Irish perspective is manufacturing which accounts for the largest share of all the items shown in the table.  There are three times as many employees in US manufacturing groups in Ireland as there are in information groups.

Outside of the selected ten jurisdictions one of the surprising results in the table could be just how low the tax payments to the US itself are.  The average tax rate is below 10 per cent.  It is seems the Tax Cuts and Jobs Act is living up to the first part of its name.

The average effective tax rate in the U.S. for companies reporting a positive profit was 17.6 per cent in 2016. It was 16.0 per cent in 2017 but fell to half of that in 2018, the first year the TCJA was in force.  This outcome is discussed in detail in a recent staff report from the Joint Committee on Taxation in the US Congress. (See section IV.B from page 57 of report JCX-16-21).

Maybe now there will be a bit more focus on the US being the tax haven for US MNCs.

Thursday, March 11, 2021

Changes in the Corporation Tax calculation for companies with no net income

In recent years we have been tracking companies whose net trading income is negative or nil in the Corporation Tax Distribution Statistics from the Revenue Commissioners.  One might think this would be a set of companies with little going on. One would be wrong.

Here is the aggregate corporation tax computation for companies with no net trading income for each year from 2014 to 2018 (latest available).

Aggregate CT Companies with no net income 2014-2018

The row of duck eggs for Net Trading Income are quickly evident but there are lots of big numbers above those zeroes.  Indeed, the set of companies with no net trading income were responsible for Ireland 26 per cent GDP growth rate in 2015.

The top line of the table is Gross Trading Profits and for companies with no Net Trading Income went from €13.5 billion in 2014 to €40.0 billion in 2015.  That increase drove the surge in GDP.

That increase was no linked to the surge in Corporation Tax revenues that began the same year.  The additional Gross Trading Profit were fully offset by Capital Allowances.  As we can see the amount of Capital Allowances available for these companies rose from €12.8 billion in 2014 to €38.4 billion in 2015.  All the extra gross profit was offset by capital allowances meaning no Corporation Tax was paid on those profits.

And for 2018 we can see that these profits have dropped out of this set of companies.  Gross Trading Profits for companies with No Net Income fell from €50 billion in 2017 to €18 billion in 2018. We will come back to where these profits ended up shortly.

The rest of the story for companies with no Net Trading Income is essentially one of Foreign Income.  Around three-quarters of the Taxable Income of these companies each year is Foreign Income. 

This is included in the Corporation Tax computation because Ireland has a worldwide regime with the profits of all resident companies subject to tax in Ireland, wherever earned.  Foreign profit will already have been subject to tax abroad and the only additional tax that would be due in Ireland is if the rate paid abroad was less than the relevant rate here. 

Given that Ireland’s Corporation Tax rate is lower than most other countries this means that very little additional Irish tax is due on the Foreign Income included in the Corporation Tax calculation.  That is main reason for the low effective rates shown at the bottom of the table.

So, back to those missing profits.  We can track them by looking for where the claims for capital allowances ended up.  Here are the claims of capital allowances by range of net income.

Plant and Machinery Capital Allowances by Range of Net Income 2014-2018

The top line shows the drop in capital allowances for companies with no net trading income.  Most of 80,000 or so companies who file tax returns with the Revenue Commissioners are not US MNCs.  The income ranges reflect that with the final category being for companies with a net income of more than €10 million.

We can see that the capital allowances moved down the table in 2018, but not all the way down. The increase in capital allowances can be seen in the row for companies with a net income of between €1 million and €5 million with these companies having €34 billion of claims for capital allowances.

That is a an incredible result with a huge gross trading profit resulting in a relatively tiny net trading income.  All bar a tiny amount of the additional profit for companies in this range of net income was offset by capital allowances.

As the previous posts noted these are profits and capital allowances linked to intangible assets.  These are assets (or maybe even just one!) that were moved to Ireland prior to October 2017.  Since then there has been an 80 per cent cap on the amount of profit in any given year that can be offset by capital allowances for intangible assets. 

This cap doesn’t apply to the profits in question here and we get €30 billion plus of gross profit being reduced to a net trading income of something between €1 million and €5 million.  This again shows that while intangible related profits were responsible for the surge in Ireland’s GDP they are not the source, yet, of the surge in Corporation Tax.  But when those capital allowances run out…

Some pointers in the sector accounts to the modified current account

The current account of the balance of payments is equal to gross savings minus investment in the sector accounts.  Ireland’s current account is hugely distorted by aircraft for leasing and intellectual property licenses for the technologies developed by US MNCs. 

The CSO publish quarterly figures for the balance of payments but given these distortions it can be hard to identify the underlying trends.  The CSO also publish a modified current account that strips out the distortions.  The is published on an annual basis and usually around six months into the following year so it will June or July before we get 2020 figures for the modified current account.

The sector accounts can give some general pointers.  Here is gross saving minus investment for the government and household sectors from Q1 2000 to Q3 2020.  All figures are on a four-quarter moving sum basis.

Gross Savings minus Investment for Gov and HH 1999-2020

Obviously, this excludes the corporate sectors (both financial and non-financial) but just looking at the government and household sectors does give the underlying trends.

We can see that in the run-up to the pandemic both the government and household sectors were running [S – I] surpluses, relatively small in the case of government and around €8 billion on an annual basis in the case of the household sector.

The pandemic has resulted in significant changes.  By Q3 2020, the government by running an [S – I] deficit of €11.5 billion,. while the surplus of the household sector had ballooned to €18.6 billion.

This meant that the combined outcome over the two sectors was actually little changed.  In Q3 2019, their combined [S – I] position was +€9.2 billion; in Q3 2020 it was +€7.2 billion.

As the chart shows, this is a world away from where we found ourselves in 2008 where a large deficit position needed to be reduced.  The COVID crisis has upended the economy but there is no underlying deficit to be reduced. 

In aggregate terms, we are living within our means even if individual sectors are running deficits, i.e. the government sector.  There will be a rebalancing when the crisis passes.  There won’t be a simple return to the 2019 position  but households will increase their spending and the need for government income supports will fall. 

There may some government spending that becomes permanent or other spending programmes could be expanded.  In the absence of revenue sources to fund any such increases there could be a deterioration in the underlying position.  But the above shows that when the modified current account is published later in the year we would be doing so from a position of relative strength.

Monday, March 8, 2021

Why exaggerate when the reality is bizarre enough

The taxation of US multinationals is always good for a headline and given that many of them organise their international operations through Ireland a headline including Ireland is usually within reach.  A few weeks ago The Currency grabbed one and ran a story where the headline (and also the concluding sentence) was:

What does it say when a multinational can book a $3.6bn profit in Ireland and not pay any tax here?”

This certainly would be a story to raise outrage – if it were true.  The headline is about a subsidiary within Dell/EMC called EMC International Company but what the story fails to mention is that this company is based in Bermuda.  The accounts for EMC International Company state that "[t]he administrative office address is Clarendon House, 2 Church Street, Hamilton HM11, Bermuda.”

While it is true that the company did not pay any tax in Ireland (which is true for the vast, vast majority of companies around the world) it is not true that the company “booked” its profit in Ireland (which is also something that is true for the vast, vast majority of companies).  It is a glaring omission to leave out that the company is based in Bermuda and simply wrong to say that its profit is booked in Ireland. 

Up to April 2019, EMC International Company was part of a typical “double-irish” type structure.  This is old ground but it well-known that this type of structure involves a trading company operating in a low-tax jurisdiction such as Ireland and a holding company based in a no-tax jurisdiction such as Bermuda.  The choice of either location is not central to the overall effectiveness of the structure. 

EMC International Company was that holding company within the Dell/EMC group and this is even stated in The Currency piece:

The company was part of Dell/EMC’s Double Irish structure, a tax efficient strategy that is now being wound down.

The profit this company earns is tax-free in Bermuda because Bermuda doesn’t have income taxes but all the profit subject to tax in the United States - which is the source of most of the profit in the first place.

The United States has a complicated system. It was changed with the Tax Cuts and Jobs Act of December 2017, but it essentially remains a worldwide regime.  All of the profits of US MNCs, wherever earned, are subject to US tax with, most of that paid by the parent company. 

US MNCs cannot generate tax-free profits with a variety of provisions now in place to collect US tax on profits that might appear low taxed in Ireland or completely untaxed in Bermuda.  And the US does not want their companies paying any more tax outside the US then they have to. 

Indeed, the IRS requires US MNCs to minimise their foreign tax payments if they wish to avoid double taxation when claiming foreign tax credits in the US.

The United States taxes income on a worldwide basis. To prevent double taxation, under the Internal Revenue Code (IRC) U.S. taxpayers are allowed a credit for foreign income taxes “paid.” However, the ability to credit foreign income taxes paid is limited. The Treasury regulations prevent U.S. companies from obtaining credits for foreign taxes they are not legally compelled to pay. Treas. Reg. § 1.901-2(e)(1). A system under which the U.S. Treasury allows foreign tax credits (FTCs) without requiring that U.S. taxpayers effectively and practically reduce their foreign tax payments as legally imposed would potentially create a hazard. Taxpayers would otherwise have no incentive to challenge any foreign tax whether or not properly imposed, thereby transferring the foreign tax cost to the United States. Taxpayers are required to exhaust all “effective and practical” remedies (including competent authority procedures provided under applicable tax treaties) to reduce, over time, its liability for (foreign) tax.

So what the rest of the world sees as aggressive tax avoidance can be seen in the US as maximising US tax payments.  Of course, the US didn’t have a great record of actually collecting these tax payments with companies easily able to engineer a deferral of the US tax due.  The deferral of US tax on passive income was the outcome double-irish type structures were designed to achieve.

None of this was news to the IRS and the IRS set out how it works here (emphasis added):

Generally, the US shareholder of a foreign corporation is able to defer taxation of the corporation’s income until it has been distributed to the shareholder. However, in the case of a controlled foreign corporation (“CFC”), certain types of income are subject to current inclusion (“subpart F inclusion”) by the US shareholder under IRC 951. One such type of income is Foreign Personal Holding Company Income (FPHCI), which includes income of a CFC such as dividends, interest, rents, and royalties. The FPHCI rules eliminate the deferral of US tax on income earned by certain foreign corporations from portfolio types of investments, i.e., where the company is merely passively receiving investment income rather than earning active business income.

Another exception that looks to the payor of the income for eligibility requirements is the same country exception from FPHCI under IRC 954(c)(3). Under the same country exception, FPHCI does not include dividends and interest received by a CFC from a related CFC payor which is incorporated in the same country as the recipient CFC, and which has a substantial part of its assets used in its trade or business in that same country. Similarly, under this exception, FPHCI does not include rents and royalties received by a CFC from a related CFC for the use or privilege of using property within the same country as the recipient CFC’s country of incorporation.

The same country exception was originally enacted in 1962 as a part of the broader subpart F legislation. The Kennedy administration and Congress were concerned with tax haven deferral – the shifting of income earned in one country to a tax haven jurisdiction. Because payments between related parties located in the same country don’t shift income to another jurisdiction, such same-country payments were excluded from the definition of FPHCI.

The “double-irish” is to avail of the “same country exception” in US tax law.  The payment of royalties between to companies registered in the same country (it could be any country) means that the Subpart F requirement that the US tax due on those profits be paid in the current period could be deferred. 

That is why US MNCs had trading companies and holding companies registered in the same country, with the use of two companies leading to the “double” part of the moniker.  The royalties could be paid to the holding company without triggering the current US tax payments that Subpart F required.  And although the holding company had to be registered in the same country as the trading company, the holding company could actually be based anywhere – and Bermuda was a popular choice. 

It was a huge deficiency of US tax law that only assessed the location of a company of the basis of it place of incorporation.  There is an extract here of Sen. Carl Levin’s opening statement to the 2012 US Senate hearing on Apple where he rightfully calls this an absurdity.

The general issue of deferral of US tax on passive income was removed with the passing of the TCJA and now such profits are subject to immediate taxation in the US under provisions such as the aptly named Global Intangible Low-Taxed Income – GILTI!

Of course, there is also the issue of how these valuable IP rights got out of the US in the first place but again that is a matter of US tax law which allowed them to leak out  – cost-sharing agreements are the culprit here.  But back to Ireland.

A day after the story about EMC International Company, The Currency, ran a similar piece under the headline:

A monster payment: How a global energy drink giant made €1.2bn in Ireland tax-free

Once again the headline is misleading but at least time there is a recognition in the piece that the no-tax outcome for the company is not generated in Ireland:

“And the profits were entirely tax free. Filings show that Monster Energy International was “tax resident in Cayman Islands and not subject to corporation tax” in Ireland. Indeed, its company secretary is a vehicle called Maples Secretariat (Cayman) which lists an address PO Box Address at Ugland House in Georgetown in Grand Cayman. Essentially, the company was operating a Double Irish structure.”

But why the disconnect between the headline which talks about tax-free profits “in Ireland” and the text which states the company was “tax resident in Cayman Islands”?  Of course, this company didn’t pay any tax in Ireland; it is not in Ireland.  By a similar logic we could say that the Collison brothers are earning huge sums tax-free in Ireland, despite they actually living in Southern California.

And what if we check the first sentence of the above paragraph: “And the profits were entirely tax free.”  To so we can check the consolidated accounts of Monster Beverages Inc.  Subsidiaries are helpful guides but nothing can be hidden in the consolidated accounts: everything must be included. 

Here is the group’s income statement for 2017 to 2019 which was available at the time The Currency piece was published.

Monster Beverages 10K Income Statement

This information is easily accessible and can be found in seconds unlike the accounts for subsidiaries which can be much harder to locate and usually mean incurring a cost to get access to. Yet, the information that is readily and freely available is rarely presented.

These show that Monster Beverages had an average pre-tax profit over the three years of around $1.3 billion and an average tax provision of $330 million, giving an effective tax rate 25.3% which is somewhat removed from “entirely tax free”.

The accounts also show that most of the group’s provision for income taxes is made of current federal taxes, i.e. US taxes:

Monster Beverages 10K Income Taxes

On the GILTI provision the company includes the following note:

The Company evaluated the various provisions of the Tax Reform Act, including, the global intangible low-taxed income (“GILTI”) and the foreign derived intangible income provisions. The Company will treat any U.S. tax on foreign earnings under GILTI as a current period expense when incurred.

The tax due on apparently low-taxed foreign income will appear as current federal tax in the company’s consolidated accounts. Within the group it will be in the accounts of the parent company and not in the accounts of subsidiaries in countries like Ireland.  Of course profit can appear “entirely tax free” when you leave out the tax actually paid on it.

Any reports on the taxation is US MNCs should set out how much tax the company pays.  This information can be found in seconds from the filings publicly-quoted companies in the US must make to the Securities and Exchange Commission (SEC). 

The most relevant of these is the 10K report which provides the annual financial statements of listed companies.  Yet, almost no reports on the taxation of US MNCs include that information which you would think is most important: the amount of tax they actually pay.

And there is actually no need to exaggerate or leave out important details.  The reality of the operations of US companies in Ireland is bizarre even without the need to claim that profits in Bermuda or the Cayman Islands are in Ireland.  Here are a couple of illustrations.

First, the gross operation surplus in 2018 of US-controlled enterprises operating in what is now the EU27 from figures published by Eurostat.

Gross Operating Surplus of US Companies in the EU27 2018

Gross operating surplus is the measure of corporate profits that is counted in a country’s GDP.  In 2018, the gross operating surplus US-controlled companies had in Ireland was greater than the gross operating surplus US-controlled companies had in the rest of the EU27 – combined!

And as with corporate profits in most low-tax or no-tax jurisdictions it is all about companies from one country – the US.  Again from Eurostat, here are the gross operating surplus by controlled country for enterprises operating in Ireland.  The figure for the US makes the rest of the chart pretty much unreadable. 

GOS in Ireland by Controlling Country 2018

In 2018, the gross operating surplus of US MNCs operating in Ireland was €117 billion; companies from the UK are next with €5 billion of gross operating surplus.  The gross operating surplus of US MNCs was responsible for 35 percent of Irish GDP in 2018. A version of the above chart excluding the US is here

We can also scale the chart by the GDP of the home country.

GOS in Ireland by Controlling Country GDP 2018

Four observations stand out: Cyprus, Luxembourg, Malta and the United States.  The combined gross operating surplus in Ireland of companies controlled in the first three sum to less than €500 million.  Significant perhaps in the scale of their small economies but not in the broader scheme of things.

The gross operating surplus of US companies operating in Ireland is equivalent to 0.7 per cent of US GDP.  Our nearest neighbour is the UK and their companies generate the equivalent of 0.2 per cent of UK GDP in Ireland – and most of that is from companies serving the domestic Irish market such as British retailers with stores in Ireland. 

UK companies do not shift profits to Ireland, or more accurately UK companies can’t shift profits to Ireland.  The US system does enable US companies to shift profits abroad and many US companies do just that.

If the gross operating surplus of its companies in Ireland was a state, in 2018 it would have had a GDP larger than around a third of US states.  When ranked by GDP, Kansas is the 33rd ranked state and accounts of 0.8 per cent of the national total.  The profits of US companies in Ireland can nearly match that.

Of course, these figures are in “gross” terms which in context of gross operating surplus means before depreciation.  And there are plenty of odd things going on with depreciation in Ireland again without the need to make things up.

For example, here we considered figures from the Revenue Commissioners showing how companies with €50 billion of Gross Trading Profits ended up with zero Net Trading Income to tax.  From €50 billion to zero in the first five rows of this table.

Corporation Tax Computation for Companies with No Trading Income

US companies have moved very significant amounts of IP licenses to Ireland in recent years and their Irish-resident subsidiaries that have bought these licenses can use capital allowances to offset the acquisition costs against their trading profits.  That is how €50 billion became zero.

Such extreme outcomes are not possible for transactions bringing IP to Ireland since October 2017.  Since then a 80 per cent cap is in place for the amount of gross trading profits that can be offset by capital allowances for intangible assets in any one year.

The bizarre outcomes in Ireland aren’t limited to gross profits and depreciation.  The unwinding of “double-irish” structures means there are significant changes in the nature of outbound royalty payments from Ireland. 

As shown above some of the IP has been bought by Irish-resident companies but other companies have moved their IP back to the US which has led to a huge spike in outbound royalty payments from Ireland to the US which could potentially add 0.1 per cent to US GDP.

Royalty Imports to United States 2008-2020

And we can also show some bizarre outcomes when it come to the taxes paid by US MNCs.

The latest IRS statistics from the country-by-country reports filed with them show that of the cash taxes paid by US MNCs to the countries of the EU27 in 2017, more tax was paid to Ireland than any other country.  Table version here.

IRS CbCR for the EU27 Tax Payments 2017

This is obviously not as bizarre as Eurostat’s figures for gross operating surplus with the figure for Ireland exceeding the sum of the rest of the EU27.  However, it can still be seen that for the set of US MNE groups in the IRS country-by-country reporting data their largest cash tax payments in 2017 for the EU27 were to Ireland.

In 2017, US MNE’s in the IRS data made $28.2 billion of cash tax payments to the countries of the EU27.  Of this, $5.2 billion (18.4 per cent) was paid to Ireland.  Around 1-in-6 of every dollar of corporate taxes that US MNEs paid in the EU27 in 2017 was paid to Ireland.  Their payments in Ireland were larger than their payments to the bottom 19 countries in the above chart combined.

On these matters it is always worth noting that the headlines are almost exclusively about US MNCs, even when they are wrong.  From the OECD’s country-by-country data here is the profit in a set of low-tax and no-tax jurisdictions (including stateless) by the country of the ultimate parent.

OECD CbCR data for 13 jurisdictions

In 2016, US companies had almost $350 billion of profits in the set of jurisdictions set out at the bottom.  No other country comes close to the scale of profits US MNCs report in these locations.

The taxation of US MNCs is certainly worthy of attention.  But given how much we know about them, it should also be possible to report on them in an accurate fashion.  There is no need for exaggeration, half-truths or the omission of key details.  The reality is more than bizarre enough for catchy headlines. 

Wednesday, February 24, 2021

Two views of Irish prices

Everyone loves a comparison.  Figures from the CSO today have been reported with the headline:

Prices in Republic 35% above EU average, CSO figures show

The cost of basic products and services in the Republic was 35.4 per cent higher than the EU average in 2019, and the second highest after Denmark, a new report by the Central Statistics Office (CSO) shows.

[.]

The CSO’s report shows that price levels here were 25.9 per cent above the EU average back in 2009. This dipped to 21.1 per cent above the EU average in 2011 as the economy entered into a recessionary period, before increasing again in recent years (to 35.4 per cent in 2019).

And here is a chart illustrating these figures.

PPP Price Levels Ireland EU27 2009-2019

The price level for the EU27 as a whole is set equal to 100 for each year with the Irish price level in 2019 estimated to be 35.4 per cent higher than this.  Denmark is also shown.   In 2019, Ireland had the second-highest price level for household final consumption expenditure in the EU, after Denmark.

So, this is one view of Irish prices.  In the last ten years Ireland’s price level has risen faster than the price level of the EU27 as a whole moving from being 20 per cent higher in 2010 to 35 per cent higher in 2019.  Irish prices started off higher and became even higher again.  Relative to EU’s highest price level, we can see that the Irish price level was significantly below the Danish price level in 2010 but has converged on the Danish level over the past decade.

Here’s a second view.  This is from the harmonised index of consumer prices (HICP).  This is what is used to measure inflation across the EU.  It does not give relative price levels across countries but gives an estimate of relative price changes within a country (i.e. the inflation rate).

HICP Ireland EU27 2009-2020

The indices for Ireland, Denmark and the EU27 are set equal to 100 for 2009 and the relative prices changes that occurred within each are shown by the changes from this point.  And it can be clearly seen that HICP inflation in Ireland has been much lower than for either Denmark or the EU27.

Since 2009, Danish consumer prices are up almost 12 per cent while for the EU27 as a whole there is an estimated price rise of over 15 per cent.  On the other hand, Irish prices in the HICP are up less than four per cent on 2009.

So there you have it.  Two different views.  The price level indices for household final consumption expenditure show that the Irish price level has risen by about 10 percentage points relative to both the price levels of Denmark and the EU27 (when the EU27 is set equal to 100).  On the other hand, the harmonised index for consumer prices shows that inflation in Ireland since 2009 has been eight percentage points lower than in Denmark and 11 points lower than the inflation for the EU27.

This is not to suggest that there is something wrong with either of these views of Irish prices.  The price level for household final consumption expenditure and the harmomised index of consumer prices are different things.  And as the Irish Times point out a lot of the action is linked to housing:

“The CSO’s Measuring Ireland’s Progress 2019 study suggests the primary reason for the higher cost of living here is housing.”

If you want to take, a very deep, trip into the weeds to see how housing can explain some of the divergence between the charts above see here.

Monday, February 22, 2021

Tiger phases of income inequality

A feature of the distribution of disposable income in Ireland over the past 20 years is how stable the standard measures of inequality have been, even as the economy has swung from boom to bust. Income inequality in Ireland is lower than it was in the 1980s and early 1990s (and likely much lower than it was in the 1970s) but measures such as the gini co-efficient appear to have been largely unchanged since 2000.

Gini Coefficient Ireland 1995-2019

Indeed, given the confidence intervals of the estimates it is likely that very few of the annual changes gave rise to a significant change in inequality.  In recent years, the confidence intervals have been of the range +/- 0.7 or 0.8.  This means there would have to be an annual change in the gini coefficient of 1.5 points, or more, in order for there to be a statistically significant change in inequality in a single year.

The lack of annual changes that are significant is probably no surprise.  Yes, inequality is impacted by conditions in a particular year but it is also the result of policies and outcomes going back several years, maybe even decades.

A sequence of changes in the same direction can result in a significant change in inequality.  For example, if the Irish gini coefficient was to start at a particular level and fall by one point in each of the following two years, then it is likely that neither of the annual changes would be considered significant (the confidence intervals for adjacent years would overlap) but the change over the two years would be significant (the confidence intervals for the starting and final years would not overlap).

With the above chart it is hard to set out any narrative for income inequality in Ireland apart from stating that inequality now is lower than it was in the 1990s.  But maybe we can extract a tale or two if we make a couple of adjustments:

  • truncate the vertical axis so that the changes are highlighted
  • calculate a three-year trailing average to smooth out some of the volatility in the single-year estimates.

By doing the above (and adding some annotation) we get the following:

Gini Coefficient Ireland 3YMA 1997-2019 Phases

These are the estimates available from Eurostat.  There is no estimate for 2002 so the figures in the above chart for 2002,2003 and 2004 are based on an average of two rather than three years.

The changes are now somewhat exaggerated (as the vertical axis is so narrow) but we can fit a narrative that links changes in inequality to the widely varying performance of the Irish economy over the past 25 years.  And given the confidence intervals of the individual-year estimates it is likely that the peak-to-trough changes shown in this chart are significant.

We start with the “good tiger” phase of the 1990s when the Irish economy underwent a transformation with a huge expansion in employment opportunities and strong income growth based on increased output and exports.  This period saw a relatively steep fall in the inequality of disposable income.

Then we enter the “bad tiger” phase of the early 2000s with a credit-fueled, construction dependent economy and significant net inward migration.  This period was accompanied by a rise income inequality though with around half of the gains of the late 1990s reversed.

It didn’t last and the “sick tiger” began to cough and splutter in 2008 as the credit binge came to an end.  Initially the crash led to fall in inequality perhaps as some of the high incomes of the boom evaporated but as the economy continued through recession and austerity inequality rose as we moved in the early 2010s.  Again, the rise saw about half of the reductions in equality of the preceding fall reversed.

Eventually, the “sick tiger” was replaced by the “recovering tiger”.  From 2014 on, there was a return to strong employment growth and even some modest wage inflation.  Without needing the stimulant of credit to act as a P.ED., this period seemed to mirror the performance of the economy in the 1990s though this time the reduction in inequality was at a slower rate.

Still, the outcome of the rollercoaster was that, at the end of the 25 years, disposable income inequality in Ireland was at its lowest ever measured level in 2019. 

Of course, the “recovering tiger” has been replaced by the “covid tiger”.  It is really difficult to tell what impact the pandemic will have on income inequality in Ireland.  Many households have seen their income largely unchanged (social welfare recipients, many employees, some self-employed). 

Other households have suffered very large income shocks – though state supports such as the PUP, TWSS and variants have meant that there continued to be strong growth in aggregate household disposable income in 2020.

It could be 2020 from an inequality perspective is much like most of preceding 20 years and will not have a statistically significant change in inequality.  We know that the hardest-hit sectors have been in the services part of the domestic economy.  These sectors have a higher share of low-paid workers.  But we also know, that:

  1. Low-paid workers are in households right across the distribution of disposable, and
  2. The income replacement rates for low-paid workers on the PUP and TWSS will be higher.   

It will be some time yet before we have updated inequality statistics for 2020 (and the CSO will also be working to ensure consistency with previous estimates) but, at this remove, as good a guess as any would that there will not be a statistically significant change in the gini coefficient in 2020.  Maybe.

Thursday, February 18, 2021

Distribution and Participation

Figures from the World Inequality Database show that the top one percent share of pre-tax fiscal income rose from around six per cent the mid-1980s to around 12 per cent in the mid-2010s.

Top One Percent Income Share 1983-2015

Figures from Eurostat show that the share of the population in non-agricultural employment rose from around 25 per cent in the mid-1980s to 45 per cent in 2019.

Non Agri Employment as Share of Population 1983-2019

The distribution of fiscal income is a useful indicator but the data is based on a sub-sample of the population that is always change: only those who have fiscal income, i.e. those with tax returns filed either by themselves or there employer.  The income shares across the population have to be estimated and it is assumed that those people who are not included in the data have no income – or, at least, have no pre-tax fiscal income.  

Changes in participation could have an effect on how the distribution of pre-tax fiscal income should be interpreted.  Changes in the distribution of pre-tax fiscal income among recipients may not necessarily reflect changes in the distribution of that income across the full population – even with the assumption of zero income for those with no pre-tax fiscal income.

Top One Percent Income Share and Employment 1983-2015 2

From the EU-SILC we do have a top one per cent share for disposable income, albeit for a shorter time period.  Of course, there may be issues with the use of a survey to measure incomes at the extreme of the distribution (super-high incomes may be under-represented in the sample) but to the extent that this is a consistent problem with income surveys the trends in incomes shares towards the top of the distribution may be relatively unaffected.

Top One Percent Share of Disposable Income 2005-2019

The top 1 per cent share of disposable income in the SILC fell from around seven per cent in 2005 and 2006 and dropped under five per cent after 2010. In recent years it has risen but at 5.5 per cent of so remains below the levels of the mid-2000s.

For what it’s worth, the bottom cut-off for the top one per cent in 2019 was an equivalised disposable income of just over €100,000 or €210,000 for a household of 2 adults and 2 children.  The SILC suggests there are close to 50,000 people living in such households.

The work of Kennedy et al (2019) gives income shares for both gross and disposable income in the fiscal data from tax returns.

Top One Percent Shares Gross and Disposable Income 2006-2015

This is different to measure of disposable income in the SILC but the pattern is roughly the same.  In the table we can see that the top 1 per cent share of disposable income fell from 2006 t0 2012 and rose thereafter but remained below the 2006 level.

Tuesday, February 16, 2021

Ireland to add 0.1% to 2020 US GDP

US MNCs causing distortions within Ireland’s national accounts is not unusual.  As a small economy it means the impact of these can be outsized (e.g. the 26 per cent GDP growth rate in 2015). 

It looks like something similar to happen to the US national accounts for 2020 – though the relative impact on the much larger US economy will be much smaller. Here we identify something that could add 0.1 per cent to US GDP.  This is small but non-trivial.

The issue in question is something we have looked at before: the changing nature of outbound royalties from Ireland.  The earlier post goes through more of the details but for our purposes here we note that there has been a very significant drop in outbound royalty payments from Ireland to The Netherlands and directly to Offshore Financial Centres.

Royalty Imports to EA and OFCs 2011-2020

It is easy to see that these collapsed in 2020.  Royalty payments to the Euro Area – almost all of which went to The Netherlands – plunged in Q1 2020, while the same happened for payments to Offshore Financial Centres – Bermuda, Cayman etc. – in Q3 2020.  This corresponds to announcements by companies such as Google and Facebook that they were unwinding their “double irish” (and “dutch sandwich”) structures.

Some companies have chosen to onshore their IP to Ireland thereby eliminating the royalties shown above.  On the other hand some companies have repatriated their IP to the US.  This means there are still outbound royalty payments from Ireland but now they are directed to the US which is where US GDP comes in.

Here are outbound royalty payments from Ireland to the US up to Q3 2020:

Royalty Imports to United States 2008-2020

Up, up and away!  For ten years up to 2019, these payments were little changed and typically were between €6 billion and €8 billion a year.  They surged to €9 billion in Q1 2020 alone, with the first three quarters of 2020 already totaling €28 billion.  If the Q4 figure is close to what was seen in Q3 then the annual figure will be something around €40 billion.

Previously these payments, for licenses to use technology developed in the US, went to the likes of Bermuda and the Cayman Islands, sometimes with a stopover in The Netherlands.

The profit accumulated in these jurisdictions did not contribute to US GDP but it did contribute to US GNP via factor flows in the balance of payments.  The profit is no longer being reported on small islands and the inbound factor flows to the US have been replaced by royalty income.

What are royalty imports in Ireland are royalty exports in the US.  The payments are now going to where the R&D that developed these platforms is undertaken.  Some payments would have gone from Bermuda and Cayman to the US to co-fund the R&D undertaken but the amount of these US exports would have been calculated as a share of the R&D cost. Now more of the value of the IP is flowing to the US.

So, in 2020, it looks like there be an additional €30 billion of royalties flowing from Ireland to the US.  There will be a partially offsetting reduction of around €10-15 billion in R&D exports from the US to Bermuda and the Cayman Islands etc.  So there could be a net increase in US GDP of €15-20 billion or so from these changes.

Of course, pretty much nothing will have changed in the US economy.  Just like little changed when Irish GDP recorded a 26 per cent increase.  Early estimates suggest that US GDP in 2020 was around €19 trillion, with 0.1 per cent of this being €19 billion. 

Balance of payments figures from the BEA do not seem to reflect the changes in royalty payments shown above in Ireland’s balance of payments data.  When this is incorporated it could could add something in the region of 0.1 per cent to GDP.

And, yes, the title here is a little bit disingenuous. There isn’t really anything that has happened in Ireland to change US GDP.  In overall terms the level of outbound royalties from Ireland is actually little changed.

Royalty Imports to All Countries 2008-2020

There is a reduction in the recent data and this is likely due to onshoring of some IP but outbound royalties from Ireland in 2020 are likely to have been around €70 billion, in line with the 2018 outturn. The dramatic changes of the earlier charts have to do with the destination of these royalties more than the quantum of them.

Now more of the payments are going to the US and making a larger contribution to US GDP. This better reflects the economic reality of these companies as the majority of the R&D behind their technology is undertaken in the US.

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