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.