Monday, November 28, 2022

What did we do with €166 billion of Gross National Savings?

The last post used the sector accounts to give the steps that led to there being €166 billion of gross national savings in 2021. Here we will look at bit closer at what this €166 billion was used for.

A large chunk of it was already accounted for by one item included in the previous post – €105 billion of gross capital formation.  This left an excess of just over €60 billion of gross savings over investment. 

Gross Savings and Net Lending by Sector 2021

Accounting for net capital transfers and the proceeds from acquisitions less disposals of non-produced assets meant that the total amount available for net lending was €64.4 billion.  The sectoral split shows that almost all sectors were net lenders in 2021 with the only significant net borrowing being the €7 billion deficit recorded for the government sector.

So, that leads us to ask what did we do with that €64 billion? The answer is in the financial transactions account, though the numbers here are pretty big.  Unfortunately we are not provided with the same sector split in this account (foreign-owned etc.) that is available elsewhere.  Still the main sectors do provide some insight.

Financial Transactions by Sector 2021

Across all sectors, total transactions in financial assets led to an increase in these assets of €644 billion while there were transactions giving a €583 billion increase in financial liabilities.  The gap between them is net financial transactions and this was €60.9 billion in 2021. 

This is not exactly equal to the €64.4 billion of net lending that was available in the capital account but given the scale of the figures it is not a surprise that they do not fully match.  What may be a surprise in 2021 is that the largest contributor to the statistical discrepancy between the two is the household sector.

That aside, the figures for the household sector are the most straightforward.  Households added almost €14 billion to their deposits in 2021.  They also put nearly €4 billion in insurance and pension schemes. 

The figures indicate the household bought nearly €6 billion of equities in 2021. Digging a little deeper into that item shows that around two-thirds of that was made up of purchases of unlisted shares.  Transactions in unlisted shares was something that piqued our interest a few years ago but the scale here is significantly smaller.

The government column shows that there were excess liabilities taken on relative to the deficit that needed to be financed.  With €20 billion borrowed versus a deficit of €7 billion this meant that €13 billion was added to the government’s financial assets, mainly deposits, which are held with the Central Bank.

The Central Bank itself is included as part of the financial corporate sector.  The numbers here are enormous (in large part due to IFSC activities) but the net figures are pretty small.  The figures for the non-financial corporate sector are also large and again it is hard to identify discernible patterns in the components but financial transactions did result in an improvement of around €44 billion in the financial position of the sector.

So what did we do with €166 billion of gross national savings?  Spending on capital formation by all sectors added around €105 billion to the capital stock and left just over €60 billion for net lending. The household sector added €22 billion to its financial position, the corporate sectors sectors €46 billion, the while the government sector had to borrow €7 billion.  The next step will be look at the impact these had on the national balance sheet.

Wednesday, November 2, 2022

What to do with €166 billion of annual Gross National Savings

Over the past week the CSO have published further insights into the 2021 Annual National Accounts with additional tables on disposable income and savings and the 2021 Institutional Sector Accounts.  Here we will give a quick run through the output, income, spending and saving of the Irish economy in 2021.

The turnover of the Irish economy is probably something a touch north of €1 trillion.  Of this, some will be goods and services sold in the same condition as received (e.g. wholesaling and retailing) so do not contribute to output.  The latest estimate of the CSO is that the value of output produced in the Irish economy was around €800 billion in 2021.

Output and Value Added by Setctor 2021

And it is no surprise that the largest contributor to this was the sector of foreign-owned non-financial corporations.  The value of their output was almost half a trillion in 2021.  Of course, the value of output includes the value of intermediate goods and services used in production (e.g. flour for bread). 

Subtracting intermediate consumption (which will include imported intermediate goods and services) gets us to Gross Value Added of each sector.  Including the value of taxes less subsidies on products (which are not sectorised) gives the Gross Domestic Product of the Total Economy.

The operating surplus of each sector is got by adding subsidies on production received (such as wage support schemes) and subtracting taxes on production paid (commercial rates, water charges, motor tax for businesses etc.) and also subtracting compensation of employees paid.

There was just over €110 billion of compensation of employees paid across all sectors of the Irish economy in 2021.  The share of this coming from foreign-owned companies (financial and non-financial) was 33.4%. This is up from 27.3% in 2013.

To get from operating surplus to national income we add in the recipients of the compensation of employees and the net recipient of taxes and subsidies on products and production.  These obviously are the household and government sectors but in both cases there are some minor cross-border flows.  And then account is taken of net property income comprising dividends, retained earnings, interest and other investment income. In overall terms, these resulted in a net outflow of €103 billion from the Irish economy in 2021.

Operating Surplus and Income by Sector 2021

Again, there is no surprise that the largest source of these outflows was foreign-owned companies.  These companies generate significant value added and operating surplus in Ireland but the main beneficiaries of these profits are their foreign-resident shareholders.

It is the net profits that are allocated to non-residents.  In national accounts net means after depreciation.  So some of the profits of foreign-owned companies are included in Ireland’s Gross National Income to cover the maintenance and/or replacement of the capital assets used in the production process.  Their profits also contribute to national income via the corporate taxes paid on them.

The above table also includes €10 billion of net property income received by redomiciled PLCs – companies who have moved their legal headquarters to Ireland.  This inflow is mainly the difference between the retained earnings of these companies’ subsidiaries in other countries and the dividends paid out to their, mainly non-resident, shareholders.  The retained earnings of these foreign subsidiaries is counted as Irish foreign-direct investment abroad though outside of the legal headquarters Irish residents will not be the ultimate beneficiaries of that investment.

We next look at the transition from Gross Income to Gross Disposable Income which involves accounting for taxes, social transfers and other current transfers.

Gross Income and Gross Disposable Income by Sector 2021

Here we see the Corporation Tax paid by foreign-owned firms.  Foreign-owned non-financial corporates paid €11.5 billion in 2021 with foreign-owned financial corporates paying a further €1.2 billion.  These payments contribute to Ireland’s Gross National Disposable Income.

Some cross border transfers such as foreign aid and Ireland’s contribution to the EU budget means that Gross National Disposable Income is a few billion lower than Gross National Income (€319 billion versus €323 billion).  Though EU subsidies to agriculture were counted as in inflow earlier in the sequence.

And then we come to the use of that disposable income.  On the current side, there is consumption expenditure and on the capital side there is capital formation.  There is an adjustment for the change in pension entitlements (the difference between household contributions to private pensions operated by the financial sector and household pension benefits received from the financial sector).  This only changes the sectoral balances of those two sectors and not the balance for the Total Economy.

Disposable Income Consumption Savings and Capital Formation by Sector 2021

We can see that Consumption Expenditure uses €153 billion of the €319 billion Gross National Disposable Income.  This resulted in Gross National Savings of €166 billion in 2021 that is used in the title of the post.

In principle, this is savings that is available to add to national wealth – in either financial or non-financial assets.  Of course, an immediate pause for thought is that €90 billion of it arises in foreign-owned non-financial corporations (with a further €10 billion with redomiciled PLCs).  Yes, we would like them to have savings to maintain and/or replace the capital assets they have deployed against Irish labour (factories, plant & equipment etc.) but this level of savings goes well beyond that.

The savings also coves the depreciation of assets owned by Irish-resident subsidiaries of foreign-owned companies but which are not deployed against Irish labor.  This include the aircraft fleets of aircraft leasing companies and the produced intangible assets that US MNCs have onshored here in recent years. 

These companies will seek to repair/maintain and ultimately replace these assets and the savings shown above are to cover that.  The savings can also be used to repay any debts that may have been used to acquire those assets.  These savings are not available to use by the broader economy The pilots and cabin crew who fly the aircraft and the scientists and engineers who undertake R&D for US MNCs are almost exclusively based outside of Ireland.  The assets might nominally be located, or registered, in Ireland but the activity they underpin takes place elsewhere.

The aircraft might be flying around south-east Asia but there is some activity in Ireland. That is primary related to the financing and leasing activities of the companies.  A US pharmaceutical MNC might undertake its R&D in the US but it could have significant manufacturing facilitates.  From an Irish perspective we are really on interested in the savings that can allow those activities to continue – mainly to repair and/or replace buildings and plant and equipment.

It is true that aircraft leasing companies resident in Ireland have significant savings to cover the costs of the aircraft fleets and the Irish-resident subsidiaries of US MNCs have significant savings linked to the produced intangible assets they have onshored here but these are not savings in the “national” sense.  They cannot be used for other purposes and cannot be used to add to the wealth of the resident population.  But even stripping out foreign-owned NFCs and redomiciled PLCs there was still €65.5 billion of gross savings in 2021.

As noted above, one way to add to national wealth is through capital formation.  And the table gives the gross fixed capital formation of each sector.  As it turns out, a lot of the €90 billion gross savings of the foreign-owned NFC sector, in aggregate terms at least, was used for capital formation.  The sector undertook €74 billion of capital formation in 2021.  This left a surplus of savings over investment for foreign-owned NFCs of €16 billion.

All told, the savings minus investment of the Total Economy in 2021 was €60.7 billion in 2021.  Although we have reached it using the Sector Accounts this is the equivalent of the balance on the Current Account of the Balance of Payments

With GDP of €426.3 billion, a current account surplus of €60.7 billion is equivalent to 14.2 per cent of GDP.  Now, we clearly know neither figure reflects the underlying position of the Irish economy.  As the previous table shows the current account includes €16.2 billion from foreign-owned non-financial corporates and €9.5 billion from redomiciled PLCs.

But even stripping those out that still leaves a surplus of savings over investment of €36.3 billion.  This is the €65.5 billion of gross savings of the domestic sectors less the €29.2 billion of capital formation they undertook.  The most notable contributions to this are the elevated savings of the household sector and the surplus of the domestic non-financial corporate sector. 

The level of the savings in the household sector has been observed since the start of the pandemic.  It is not clear why the domestic NFC sector is running such a surplus but the CSO do point out that the investment rate (to GVA) of domestic NFCs is about eight percentage points below the EU average.  It this was at the EU average it would add close to €5 billion to the capital formation of domestic NFCs (and reduce their contribution to the current account by a commensurate amount).

Here is a look at the contribution of the domestic sectors the the current account since 2013.  The chart shows the aggregate [S-I] position of the domestic sectors as well as the latest estimates of the modified current account (which is a related measure).

Savings minus Investment by Sector and the Modified Current Account 2013-2021

Whether we used the sector approach of [S-I] or the asset approach of CA* it shows a significant underlying surplus of savings over investment.  The magnitude of this is something in the order of €30 billion (and as noted that is after the domestic sectors undertook €29.2 billion of capital formation).

So, while there mightn’t be €166 billion to add to national wealth.  It looks like there is something around €60 billion to do so.  So what to do with it.  Well, we could eschew wealth and use it for consumption.  If it is to be added to the national balance sheet it could be used for capital formation such as new housing for households.  But it looks like a lot of is going on the financial balance sheet, particularly household deposits.  Perhaps there is reason for such caution but a bump in spending (current or capital) wouldn’t go amiss either.

Tuesday, October 11, 2022

Corporation Tax in the Q2 2022 Institutional Sector Accounts

Ireland’s surging revenues from Corporation Tax are evident in the Institutional Sector Accounts which are now available for the second quarter of 2022.  Here is the four-quarter sum of Taxes on Income or Wealth (D.5.) paid by the non-financial corporate sector since 2004.

Taxes Paid by NFCs 2000-2022

Obviously, we are interested in what has been happening in recent years and, in particular, the near-vertical increase seen in recent quarters.  Looking at the series there are three level changes that can be identified over the past decade: 2015, 2018 and 2022.

This is more evident if we look at the annual change of the four-quarter sum.  The three peaks correspond to the years listed above and are instances when the annual increase was 40 per cent of higher.

Taxes Paid by NFCs Annual Change 2012-2022

Of course, what is striking about the latest increase is that it is a 50 per cent increase on what was already an elevated level.  We could go back through some of the factors behind the 2015 and 2018 jumps but here will we focus on the most recent increase – though as the most recent it is the one we know least about.  It will be the first half of 2024 before the Revenue Commissioners report aggregate data for the CT returns filed with them for financial years ending during 2022.

One thing we can look at from the Institutional Sector Accounts is the indicative effective tax rate using Net Operating Surplus (NOS).  Some differences aside, NOS in the national accounting equivalent of Earnings Before Interest and Taxation (EBIT) from financial accounting.  There may also be some timing differences that distort things from time-to-time but these should wash out.

Here is the ETR on the Net Operative Surplus of Non-Financial Corporates since the start of 2014.  To help with some of those timing issues both the numerator and denominator are taken as a four-quarter moving sum.

ETR on NFC NOS 2000-2022

What we see is that, bar the odd fluctuation, the ETR on NOS has been generally fairly stable over the past decade or so.  And this is a period when there have been some tumultuous changes in Ireland’s national accounts (2015 and all that).

There a small step-up evident in late 2018.  It is possible this is due to rule changes related to the claiming of capital allowances for intangible assets introduced in Budget 2018. But that is something for another day.

It can also be seen in the chart that the ETR is below the 12.5 per cent headline rate for Ireland’s Corporation Tax.  A key reason for this is likely to be differences in the treatment of the depreciation of aircraft. 

For tax purposes in Ireland, aircraft can be amortised over an eight-year period while in the national accounts a wide-body aircraft is depreciated over 25 years, which better reflects the actual lifespan of the asset.  In both cases the gross, or pre-depreciation, profits will be the same.  Due to the longer depreciation period, the net profit in the national accounts will be higher and this reduces the effective rate.  Tax accounts for aircraft leasing will have more depreciation (or at least will have more depreciation quicker) which will reduce net profits and lead to a higher ETR, probably close to the 12.5 per cent rate.  Again, this is something for another day and is not really our interest here. 

Our interest is in the ETR in the chart for the past two or three quarters which is the highest for the period shown.  At 9.6 per cent, the ETR for Q2 2022 is around two percentage points higher than the average from 2014 to 2021 (7.3 per cent).  The average in 2019 and 2020 (post the 2018 step-up) was 8.0 per cent.

Is there something that could be pointed to that could have caused this recent rise in the ETR?  There is nothing that particularly stands out.  There doesn’t appear to have been any rule or rate changes that could be pointed as contenders as explanations.

One issue could be the preliminary nature of the 2022 figures for NFCs in the latest institutional sector accounts.  The CSO will have a fair handle on gross profits - from trade data and other sources.  They can obviously see how much Corporation Tax is being paid from the monthly Exchequer statements – but the detail behind those payments may not yet be available to them.

As alluded to above, companies are currently paying Corporation Tax linked to profits made in 2022.  Companies make preliminary Corporation Tax payments in months six and eleven of their financial year – by which time it is expected that they will have 90 per cent of their expected Corporation Tax liability paid.  Companies then file their full Corporation Tax return in month nine following the end of their financial year and accompany that filing with any outstanding amount due.

So a large company with a year-end of December 31st will make its first preliminary Corporation Tax payment in June (45 per cent), make its second preliminary payment in November (90 per cent) and file its full Corporation Tax return the following September.

A similar schedule has been set out for alternative year-ends. For example, if a company has a year end of September 30th, its first preliminary payment will be due in March, its second in August with its full return to be filed by the following June.  This could be significant has 2022 has seen unusually large CT revenues reported for March and August.

Corporation Tax Cumulative Annual 2014-2022

Of course, the Exchequer Returns also give no reason for an increase in the ETR.  One possible explanation is that the CSO have underestimated profits and that these will be revised up in subsequent releases which will, in turn, reduce the ETR.  It’s certainly possible but the CSO have been keeping an ever-closer eye on some of the key MNCs operating in Ireland via its Large Cases Unit (LCU).

An alternative explanation is that the gross profit figure is fine but that the net profit, i.e. post depreciation, will be revised.  Companies pay Corporation Tax on their net profit.  In recent years, there have been huge claims for capital allowances for intangible assets.  However, these allowances, at least as related to the original acquisition of the intangible asset, will be exhausted.

This means a company could face a much higher tax bill even if its gross profit is unchanged.  This is because it has run out of capital allowances to use as an offset against the gross profit.  If this was to happen, the companies net profit would increase and it would have to pay more tax.

It is possible that this is the reason for some of the 2022 increase in Corporation Tax.  Of course, absent the full returns of the companies it is just supposition.  It is not clear how the tax treatment of capital allowances for intangible assets aligns with the consumption of fixed capital for those assets in the national accounts.  Both are versions of depreciation and, as set out above for aircraft, they do not have to coincide.

The Institutional Sector Accounts show no decline in the consumption of fixed capital for NFCs.  Here are the quarterly CFC figures for the NFC sector since 2012. 

Consumption of Fixed Capital of NFCs 2014-2022

The step changes linked to the onshoring of intangible assets (Q1 2015, Q1 2020 and others) are clearly visible.  The increases over the past two and a half years are more gradual and more like those that would be linked to the ongoing, and regular, increase in the stock of tangible assets (buildings, plant and machinery) owned by the sector.

Could some of the 2022 increase in CT be linked to the exhaustion of capital allowances? It could be. It certainly is something that could happen over the coming years.  But it will a while before we have evidence of that. 

How it will be treated in the national accounts will also be worth keeping an eye on.  As noted, the exhaustion of the capital allowances will not impact gross profits – so GDP won’t be directly impacted. It is net profits that will change – so the impact may be on GNP.  Higher net profits accruing to foreign-owned companies would push down on GNP.  This would reduce the gap between GNP and GNI*.

Another possibility is that the intangible assets are relocated when the capital allowances run out.  This would have a direct impact on GDP – pretty much the reverse of what we have seen with the onshoring in recent years, most notably the event in 2015.

Friday, October 7, 2022

The Household Sector in 2022: Continued Savings

The CSO have published the Q2 2022 update of the institutional sector accounts.  They continue to show a strong performance for the household sector – at least in aggregate terms.  A previous discussion of estimates for distributional sector accounts is here.

It should also be noted that the figures are presented in nominal terms, i.e., not inflation adjusted. Here is the current account showing income, consumption and savings for the first half of the past five years.  Percentage changes relative to 2019 (pre-COVID) are also shown.

Household Sector Current Account 2018-2022 H1

The bottom line is that the household savings rate remains elevated.  The savings rate was 13 per cent for the first half of 2019; it was 24 per cent for the equivalent period of 2022.  This is the result of strong income growth (aggregate compensation of employees is up over 20 per cent since 2019) and modest consumption expenditure growth (up five per cent over the same period).

In the first six months of 2019, households received €50.0 billion of employee compensation.  This increased to €60.6 billion in the first half of 2022.  There was an increase in pay from all sectors but the largest, and fastest increase was from non-financial corporates.  Companies to the first half of 2019, businesses paid out €7.4 billion more on their employees, an increase of 23.1 per cent.

The increase in income has resulted in an increase in income taxes paid.  These are up 36 per cent compared to 2019.  Social insurance contributions are also up with contributions to private pension schemes up nearly 40 per cent (from €3.5 billion in the first half of 2019 to €4.8 billion this year).

The last few years has seen significant changes in social benefits received from the government sector.  These were €11.8 billion in the first half of 2019 and rose to €15.1 billion in 2020 (due the lockdowns and the Pandemic Unemployment Payment).  They rose to €15.9 billion in 2021 before falling back to €13.3 billion in the first half of this year.

All told, there was a near 20 per cent rise in the gross disposable income of the household sector in the first half of 2022 compared to the same period of 2019.  As noted, the increase in consumption expenditure has been more muted with only a five per cent rise over the same period.

The household sector had €7.4 billion of gross savings in the first half of 2019.  Although 2022 saw a slightly lower level than both 2020 and 2021, at €16.1 billion it remains significantly higher than pre-COVID levels with the savings rate continuing to exceed 20 per cent.

The capital account (below) shows that these savings are not being used for capital formation (investment spending) though the household sector did have just over €1 billion of net capital formation in the first half of 2022.  This compares to negative net capital formation in the equivalent periods of the preceding three years (as depreciation – consumption of fixed capital – exceeded gross capital formation).

Household Sector Capital Account 2018-2022 H1

One notable item in the capital account is the €3 billion of investment grants received in 2022.  This is linked to the Mica Redress Scheme which was approved by Government earlier in the year.

The household sector remained a significant net lender in 2022.  Other figures suggest that most of this is going on increased deposits (though the €3 billion from the Mica Scheme will go on the financial balance sheet as an “other receivable”.  There will also have been a reduction in loans liabilities.  What is needed is an increase in capital formation – new houses.

Thursday, July 21, 2022

Downward Historical Revisions and a Large 2021 Increase in the Modified Current Account

The current account of the balance of payments is an important macro-economic indicator. For a variety of reasons Ireland’s headline current account outturns are pretty useless as an indicator of the underlying position of the economy. To that end, the CSO have been publishing a modified current account for a number of years.  The latest estimates were published last week.

Historical Revisions

The first thing we note is that the historical series has been revised down.  This is something that may have been expected given it was thought that something may be mucking up the current account and the impact of the statistical discrepancy.  Anyway, here are the revisions.

Modified Current Account 2022 Revisions

For 2022, the estimate of CA* has been revised down from €24 billion to €13 billion.  This is still a significant surplus and equivalent to around 6.5 per cent of GNI* in 2020.

Large Increase in 2021

The second thing we note from the latest estimates is the large increase for 2021.  The 2021 estimate of CA* is a surplus of €26 billion or 11.1 per cent of GNI*.  In a very timely manner, the CSO have published institutional sector accounts that are consistent with the recent National and International Accounts.  Using these we can get a sectoral breakdown of the modified current account.

Modified Current Account by Sector 2022

The primary drivers of Ireland’s underlying position in the current account of the balance of payments are the household and government sectors.  This remains true to the large increase showing for 2021.

Household savings remained elevated in 2021 while the government deficit closed significantly - due mainly to surging revenues.  Typically taxes would not feature in a discussion of the current account.  They might impact sectoral positions but are generally internal transfers.

Corporation Tax and the Current Account 

Ireland is unusual in having a large share of Corporation Tax paid by foreign-owned companies.  Some of these have set up operations in Ireland to service the domestic market but the largest source of Corporation Tax are foreign-owned FDI companies with operations in Ireland to manufacture for or service markets abroad.

About three-fifths of Corporation Tax is based by US MNCs.  This tax is paid from the profits made on export sales and boosts Ireland’s current account.  The money is not counted as a factor outflow to foreign shareholders but goes to the government as corporate income tax payments.  Strong rises in other taxes such as Income Tax and VAT also helped improve the government’s position.  That the household sector maintained its savings at such an elevated level points to a strength in the position of that sector – albeit in aggregate terms.

The Corporate Sectors in 2021

At this stage we can’t delve too deep into developments in the corporate sectors.  That will come later in the year when a split by foreign and domestic ownership is made available.  For the moment we can see that this is where most of the revisions arise.  The “not sectorised” component of the current account for 2020 went from +€6.4 billion in the 2021 estimate to +€2.4 billion in the latest estimate. 

While the impact of the non-financial corporate sector in 2020 (though technically a residual to make the sectoral balances consistent with CA*) went from +€9.5 billion in last year’s estimates to €1.0 billion in the latest figures.  It is these two changes that led to the downward revision in CA* for 2020 shown in the opening chart.

The contribution of the NFC sector also seems to have played a role in the large 2021 increase in CA* – see the large red block in the column for 2021 in the second chart.  But, as noted above, probably best to wait until the foreign/domestic split of that is made available later in the year before drawing any conclusions on that. 

Who Should be Spending More?

Looking at the household and government sectors shows that the improvement in 2021 was more than just a measurement anomaly.  With the quarterly figures now available we can extend this to Q1 2022.  Here it is as a four-quarter moving sum.

HH Gov Savings minus Investment

One conclusion that could be drawn from this is that the government is (not yet) saving any of its corporate tax largesse – but the household sector is. Could we get households to spend more and the government to save a small bit?  And the increase in household spending can be greater than any saving done by the government.  We don’t need a +€20 billion outturn as currently shown in the above chart.

Events, Dear Boy, Events

If it’s extra spending we’re looking for then it may already be happening – but due to outside circumstances rather than a conscious decision to spend more. Here is national net monthly fuel imports. 

Fuel Imports Net 2005-2022

Pre-COVID these were running at around €400 million a month.  The latest figures go to May 2022 and show net imports of around €1 billion a month.  Import spending at that rate won’t be long in putting a dent in national net lending. But seems unlikely to be large enough to wipe it out.

Thursday, July 14, 2022

Continued Calm in the Aggregate Corporation Tax Calculation–apart from Capital Allowances Claimed.

This time last year we noted the relative calm across most of the items in the 2019 update of the Revenue Commissioner’s aggregate Corporation Tax calculation.  The recent release of the 2020 update has seen this largely continue. 

This may not be a surprise as, elevated though they are, Exchequer Corporation Tax receipts were relatively stable across 2018 (€10.4 billion), 2019 (€10.9 billion) and 2020 (€11.8 billion).  It is also hard to discern a clear impact of the COVID-19 pandemic in the figures.

Anyway here is the calculation of Taxable Income for the most recent five years that are available.

Aggregate CT Calculation for Taxable Income 2016-2020

The bottom line is that Taxable Income for the financial years of companies that ended during 2020 aggregated to just over €110 billion, an increase of around €4 billion on 2020.  There is probably a bit more going on under the headline aggregate figures.

The starting point of Gross Trading Profits was actually lower in 2020 compared to 2019.  However, this was offset by lower figures for capital allowances used and trade losses carried forward used.  There may be a pandemic effect here via the impact on the aircraft leasing sector which would have seen a big drop in gross income in 2020.

There was a reduction in trade charges in 2020.  In this context these are typically certain royalty payments for the use of intellectual property.  The reduction may be due to the restructuring undertaken by US MNCs and the relocation of the IP either back to the US or onshored to Ireland.  We might have expected this to result in an increase in capital allowances but as noted above they actually fell.

There is however some tumult if we look at the figures for capital allowances claimed.  The figures in the above tables are for capital allowances used, that is actually offset against positive income in the year they are claimed.  In some cases firms may claim capital allowances but not have sufficient positive income to use them against.  Those unused capital losses are carried forward to subsequent periods where they may be offset against positive profits if they arise. [Technically, the unused capital allowances are carried forward as trade losses.] 

Aggregate CT Calculation Capital Allowances Used and Claimed 2013-2020

The first time we really got interested in these figures was when those for 2015 were published.  These gave insight into the 26 per cent GDP growth rate published by the CSO for that year.  In 2015, the amount of capital allowances claimed jumped from €24 billion the previous year to €51.5 billion.  There was an associated increase in the figures for capital allowances used which is also reflected in the increase in Gross Trading Profits (which are included in GDP).

The following years saw increases but nothing that really stood out – until 2020.  As can be seen, claims for capital allowances went from €86 billion in 2019 to €145 billion in 2020.  The annual increase in 2020 is bigger than the annual total for 2015.  But what is unusual now is that it is not associated with increases in the other related items.

As discussed above there was actually a slight drop in the amount of capital allowances used in 2020, as there was for Gross Trading Profits.  So we have a huge increase in capital allowances claimed but no evidence of an associated increase in profits.  It is hard to know what is behind the rise in claims for capital allowances.

The panel on the right of the table gives the figures for the consumption of fixed capital for non-financial corporates in the national accounts.  We can see that by and large the national account version of depreciation tracks the tax treatment of it.  Consumption of fixed capital jumped in 2015 and typically has been around 85 per cent of the figure for capital allowances claimed.

The figures can differ in how depreciation is treated.  Most notable the capital allowances for aircraft for leasing can be claimed over eight years whereas such aircraft will be depreciated over 25 years in the national accounts.

The difference between the figures exploded in 2020 with consumption of fixed capital in the national accounts being a little over 60 per cent of the figure for capital allowances claimed in the Corporation Tax statistics.  There may be some insight in the forthcoming annual national accounts set to be published by the CSO.

We return to the aggregate Corporation Tax calculation and look at how Gross Tax Due as derive from Taxable Income becomes Tax Due.

Aggregate CT Calculation for Tax Due 2016-2020

Again, there is really nothing of note that stands out in the 2020 figures.  The biggest impact on Tax Due comes from Double Taxation Relief and the Additional Foreign Tax Credit which reflects the tax paid in foreign jurisdictions on the worldwide income of Irish resident companies included in their Irish tax return.  A move to a territorial system would see such foreign income removed from the Irish tax base.

Elsewhere there were only small changes.  The amount of the R&D tax credit remained relative stable compared to 2019.  And the end point of Tax Due gives figures that closely match the receipts collected by the Exchequer.

There may be a bit more going on in the next releases.  In 2020, Corporation Tax jumped to €15.3 billion and is on track to be even higher in 2022.  And maybe additional data releases will give some insight into that unusual jump in capital allowances claimed in 2020.

Tuesday, July 12, 2022

Distributional National Accounts for the Household Sector

Eurostat have published distributional national accounts for the household sector.  There is a small number of countries with national estimates with centralised estimates using a common methodology applied by Eurostat are available for all Member States.

Ireland is one of the countries with national estimates and these are available for 2015 and 2016.  The aggregates come from the national accounts with the distribution based on the relevant SILC and the 2015 Household Budget Survey. 

The following table presents the 2016 estimates showing the distribution by income quintiles (fifths of the distribution, bottom 20 per cent, next 20 per cent and so on).  The ratio of the share of the top 20 per cent to the share of the bottom 20 per cent is shown in the final column (S80/S20) to give some insight into the inequality of the distribution.

Household Sector Distributional Accounts 2016

The accounts follow the typical layout of the sector accounts going from output to income to disposable income to consumption and concluding with savings.  In this instances, social transfers-in-kind (goods and services used by households but paid for by another sector, usually the government) are accounted for.  This gives Adjusted Gross Disposable Income on the income side and Actual Individual Consumption on the consumption side.

The starting point is Gross Operating Surplus which for the household sector is the value added from the provision of housing services.  Some of this will be actual rents charged by household landlords to other landlords but most of it will be the imputed rents of owner-occupier households.  This “income” nets out as consumption under CP04: Housing.  Adding the first two items gives the value added, or GDP, of the household sector.

Next is by far the most significant item on the income side: compensation of employees received.  This is wages and salaries and also any social insurance contributions made by employers for their employees.  Like self-employed income this has an unequal distribution but is not skewed to the same extent.  In 2016, the top quintile received almost ten times more employee compensation than the bottom quintile.

The next item, Gross Mixed Income, is primarily the gains (or losses) from self employment.  This has a highly unequal distribution with almost 25 times such income going to the top 20 per cent (of the income distribution) compared to the bottom 20 per cent - €31.5 billion versus €3.3 billion.

This distribution does not stand out if we look at the equivalent quintile share ratios for the other countries which have provided national estimates to Eurostat.  As these are experimental statistics some caution is probably warranted.

Eurostat Household Sector Distributional Accounts S80S20 Ratios 2016

Ireland’s quintile share ratio for employee compensation is lower than those for the Netherlands and Sweden.

Property income received (mainly interest and dividends) is also heavily skewed with the top quintile in Ireland receiving over 25 times more than the bottom quintile.  Net property income for the bottom quintile is essentially zero while it was around €2 billion for the top quintile in 2016.  As noted above, building rents, most notably for dwellings, are not included in property income as they are counted as the provision of services and come under operating surplus.

The output and income figures resulted in a Gross National Income for the household sector in Ireland of around €110 billion in 2016.  Of that, around ten times more was attributed to the top quintile relative to the bottom quintile.

To get to Gross Disposable Income taxes and social transfers must be accounted for.  In 2016, the household sector paid €21.5 billion in taxes on income and wealth (in practice this is almost all income taxes).  Of this, almost half was paid by the top 20 per cent.  There were almost €18 billion of social contributions paid.  This includes PRSI (both the employee contributions and the employer contributions in respect of employees) and contributions to occupational and private pension schemes.  Around €6 billion of the social contributions paid went to such schemes.  Social contributions are also skewed towards the top of the distribution but the difference between the fourth and top quintiles is noticeably smaller.

Social benefits received are mainly transfer payments from the government but will also include pension income from occupational and private pension schemes.  Around €4 billion of the social benefits paid to households in 2016 came from such schemes.

After these we get to the national accounts measure of Gross Disposable Income (gross in this context means that it is before the consumption of fixed capital, i.e. depreciation, is accounted for).  Ireland had a quintile share ratio of 4.0 for gross disposable income in 2016.  Of the other countries with national estimates only Czechia had a lower estimate.

As noted above, these figures also factor in social transfers-in-kind.  These are goods and services provided to households but paid for by non-profit entities or the government.  The government provision can be purchases from market producers (such as medicines) or via non-market production of the government sector itself (such as health services).

Many of the quintile share ratios for this item are less than one as the bottom quintile receives more than the top quintile.  For Ireland, in 2016, it is estimated that the bottom decile received €6.1 billion of social transfers-in-kind with €3.7 billion going to the top quintile.  This gives a quintile share ratio of 0.6 which is the lowest for the countries shows.

Adding social transfer-in-kind to Gross Disposable Income gives Adjusted Gross Disposable Income.  As a result of the distribution of social transfers-in-kind, Ireland moves below Czechia and has the lowest quintile share ratio for Adjusted Gross Disposable Income in the set of countries shown.  This is illustrated by the graphic published by Eurostat with the results.

Eurostat Distributional National Accounts - Income and Consumption

In the left-hand panel, Ireland has the highest share of Adjusted Gross Disposable Income going to the bottom quintile (but this is only for the seven countries with national estimates).

Finally, we can look at consumption and savings.  At this point an adjustment is made for the change in pension entitlements and this is the difference between the contributions to occupational and private pension schemes and the benefits received by households from such schemes.  As set out above, the difference between these was around €2 billion in 2016.  This is considered part of the savings of the household sector so is added back in here.

The consumption figure used in the presentation is Actual Final Consumption (which is equivalent to Actual Individual Consumption).  It excludes collective consumption such as policing and street lighting etc. 

In 2016, Irish households had €113.5 billion of Actual Individual Consumption with the top quintile have 2.3 times the amount of the bottom quintile.  Although Ireland had the lowest quintile share ratio for Adjusted Gross Disposable Income it has the highest quintile share ratio for Actual Individual Consumption.  Using the quintile share ratio indicates that Ireland had the most unequal distribution of consumption for the countries shown.  This can be seen in the right-hand panel of the graphic with Ireland having the smallest share of AIC going to the bottom quintile.

As it is not income that is is driving this result we must look elsewhere for an explanation.  Savings may provide it.  Italy hasn’t produced distributional estimates for consumption so is excluded.

Eurostat Household Sector Distributional Accounts Savings Rates 2016

There certainly is a bit going on here, especially for the bottom and top quintiles.  For all the countries shown there are very large differences between the savings rates of the bottom and top income quintiles.  All bar Ireland that is.  Indeed for most countries the bottom quintile is shown to be dissaving (by having a negative savings rate).  This excess of consumption over income in the bottom decile is particularly true for the Netherlands, Slovenia and Sweden. 

Ireland has a positive savings rate for the bottom quintile and the highest among the countries shown.  And at the other end, Ireland has the lowest savings rate for the top quintile.  This means that the change in the quintile share ratio when going from income to consumption is relatively modest in Ireland, going from 2.6 to 2.3 whereas for other countries the difference is much larger.  In The Netherlands, for example, the quintile share ratio goes from 3.6 for income to 1.8 for consumption.

The only quintile in Ireland that has a negative savings rate is the second quintile.  This could be due to a higher concentration of retirees in this quintile who may have savings to draw on to fund their consumption.  But it does see Ireland going from having the highest savings rate for the bottom quintile to the lowest one for the second quintile.

Such minor anomalies aside, at a broad level, the Irish estimates seem reasonably sound.  There may be differences in definitions or exclusions from the data that are behind some of the very large variations in the savings rates shown for other countries. In relative terms, Ireland may not be as good for the distribution of income, or as bad for the distribution of consumption, as these figures suggest.

Over time it is likely that more emphasis will be put on the publication of distributional national accounts estimates like these and any such wrinkles may be ironed out.  For now, it seems the case that the opening table gives a fairly good account of what is happening across the income quintiles of the household sector in Ireland’s national accounts.  And that’s a pretty good start.

Wednesday, May 18, 2022

Ireland’s Burgeoning Current Account Surplus and the ‘Statistical Discrepancy’ in the National Accounts

The current account of the balance of payments is an important macroeconomic indicator.  As with many of Ireland’s macroeconomic statistics the underlying picture is distorted by the activities of MNCs.  The modified current account, CA*, is an attempt to overcome this and the CSO will publish the 2021 estimate over the coming weeks.

As with last year, we can look to the sector accounts to try and get a preliminary perspective on where the current account might be going.  Again, at this stage we will limit the analysis to the household and government sectors are these are the least impacted by the MNC distortions but have seen some significant pandemic-related changes in recent years.

Gross Savings minus Investment for Gov and HH 1999-2021

Over the twenty years shown, this paints a picture we are pretty familiar with.  More recently, the household sector has been running a large surplus as savings soared.  On the other hand the government has seen large deficits as spending increased in response to the pandemic.  The chart shows gross savings (income not used for consumption) minus investment (capital formation). 

The preliminary figures in the quarterly sector accounts are that for 2021 the combined household plus government sectors had a surplus of savings over investment of €14.6 billion.  This will contribute to a significant current account surplus for 2021.

For 2020, the equivalent figure for the two sectors was a surplus of €8.7 billion.  However, when the contribution of the other sectors of the economy (the corporate sectors) were added, the estimate of the modified current account for 2020 was €24.0 billion.

As was considered here after the results were published this seemed a bit excessive.  There is no doubt that Ireland is running a large current account surplus, but one this is equivalent to 11.5 per cent of national income?

We can use the 2020 Institutional Sector Accounts to get some insights into the sources of this surplus.

Gross Savings minus Investment for Domestic Sectors 2013-2020

Obviously 2020 was a tumultuous year but the increased deficit of the government sector was offset by the surplus of the household sector.  Given what was going on the changes for the domestic corporate sectors both non-financial and financial are relatively modest. 

In this chart, the category for foreign corporations/redomiciled PLCs is a residual that makes the breakout by sector consistent with the estimate of the modified current account.  Although positive, the contribution of this element to the current account fell in 2020 so doesn’t seem to tie in with efforts to explain a burgeoning current account surplus.

What may be worth looking at is the light grey segments of the bars.  This is the “not sectorised” part of the current account.  As set out here, this item arises in Ireland’s national accounts due to the discrepancy that typically exists between the income and expenditure estimates of GDP produced by the CSO.  The official estimate of Ireland’s GDP is essentially the average of the two approaches.  If the figures are close to each other this discrepancy will be small.  However, it is perhaps not a surprise that it can be large – and volatile.

The following table shows the estimates of GDP from the income and expenditure approaches for 2015 to 2020.  Start at the top of the table for the income approach (wages plus profit plus net product taxes).  And go from the bottom of the table for the expenditure approach (C + I + G + X – M).  The official GDP estimate is the midpoint of the two.

Income and Expenditure Approaches to GDP

As can be seen, for 2020, the income approach gave a GDP estimate of €369.7 billion while that for the expenditure approach was higher at €376.1 billion.  This €6.4 billion difference is resolved by a €3.2 billion “statistical discrepancy” on either side.

This position was the reverse of 2019 when the estimate of the income approach exceeded the estimate from the expenditure approach.  In overall terms, the income estimate went from being €4.0 billion more than the expenditure estimate in 2020 to being €6.4 billion less than it in 2020. All told, this resulted in a €10.4 billion swing in the impact of the “statistical discrepancy” between the two years.

In most instances, given the scale of the figures involved, the statistical discrepancy is not a significant factor.  However, as we work down the accounts and get to things like the current account then it can be significant relevant to the size of those outcomes.  And if we go further again and looked at a sectoral breakdown of the current account then these changes are certainly significant.  In the previous chart, the change in the contribution of “not sectorised” to the current account from 2019 to 2010 was the €10.4 billion referred to above.

Just because something is “not sectorised” doesn’t mean that it doesn’t exist; it’s just that the figures don’t give any insight into what it actually is.  There is some reason why the 2020 growth of the expenditure estimate (6.1 per cent) was much stronger.  It could be that there was an underestimate in 2019 and this is something that the statistical discrepancy allows for.

Or maybe there was something missing from the income approach estimate for 2020 that dragged down its growth rate (3.1 per cent).  Again, this is something that the statistical discrepancy allows for.

Of course, if it was known what was causing the divergence between the figures it would just be included.  The statistical discrepancy arises because it is not known what is causing it.  Have we any reason to put more weight on the income or expenditure estimates of GDP? Not from this remove at any rate.

What it does do is give pause for thought where there are references to a current account surplus of close to one-eighth of national income.  For sure, there is a current account surplus and it does give scope for additional spending (by who?) but maybe we should be looking at average over a number of years rather than being fixated on the estimate for any one year. 

Over the six years shown in the table above, the annual average for difference between the GDP estimates from the income and expenditure approaches is less than €300 million, or pretty much nothing in the context of a GDP number that now exceeds €400 billion. 

This may give some credence to a view that there is nothing systematic going on.  However, it should be noted that the preliminary 2021 figures in the quarterly national accounts show a statistical discrepancy of a similar magnitude and direction to 2020.

Gross Savings minus Investment for Not Sectorised 2005-2021

So, what we have seen for the household and government sectors and not sectorised all point to another large CA* estimate in the forthcoming release.  Of course, these are preliminary figures and may be revised when the full National Income and Expenditure results are published.  But if measurement issues aren’t enough to dispel any complacency, don’t forget the lurking impact that corporation tax revenues are having on the current account.

Friday, May 13, 2022

The Continuing Improvement of the National Balance Sheet

Ireland’s national balance sheet has gross amounts and a volatility that is not seen in the figures for most other countries.  The gross amounts are due to the impact of MNCs and the IFSC but do largely net out.  The volatility is partly due to the roller-coaster house prices have taken in recent decades.  When worked through this is what emerges for net worth per capita.

Net Worth Per Capita 2001-20

Housing plays a role but does not fully account for the changes shown.  The per capita value of the stock of dwellings (excluding site value) went from €35k in 2001 to €67k in 2006 and then fell to €43k in 2010 before rising back to €60k in 2020.

There are some items not included in the figures published by the CSO.  Not only is the site value for dwellings excluded but the value of all land is excluded.  The CSO does not provide figures for the stock of non-produced, non-financial assets.

The inclusion of such figures would certainly change the level in the chart and also perhaps some of the changes.  Land is the most significant non-produced, non financial asset but there are others.  This useful note from the CSO sets them out.

Most non-produced, non financial assets such as land and natural resources can’t be traded across borders.  All that can change is their ownership.  But there can be trade in non-produced assets like brand names, trademarks, logos, domain names and other marketing assets.  The IP onshoring to Ireland in recent years has included significant amounts of these.

Net Acquisition of Non Produced Assets 2001-20

In 2018, net acquisitions of non-produced assets exceeded €50 billion.  These acquisitions will have reduced financial net worth through either the reduction of financial assets to pay for them or, more likely, an increase in financial liabilities if debt is used to buy them.  In per capita terms, the amount is around €10,000 per person so goes someway to explaining the reduction in total economy net worth per capita shown for 2018 in the first chart.

There is a growing list of countries who provide figures for non-produced assets to Eurostat but it remains a minority.  Czechia and France provide the most comprehensive figures but all Germany, Estonia, Croatia, The Netherlands, Austria, Slovakia, Finland and Sweden now provide figures for the value of land. 

For produced assets Ireland has a fairly comprehensive figures for fixed assets (some suppression issues aside) but no figures for inventories or valuables.  Most countries provide figures for inventories to Eurostat but only a small minority do so for valuables.

The following table shows the gross amounts that give rise to the per capita figures in the first chart.

National Balance Sheet 2001-2020 Table

The financial figures can be counted in trillions.  At the end of 2020, financial assets on the national balance sheet summed to €9.0 trillion with liabilities of €9.7 billion.  This negative net financial worth was offset by the €1.1 trillion of non-financial assets included in the figures.  That gives the total economy net worth of €464.7 billion which translates to €93,400 in per capita terms.

As set out above the inclusion of other non-financial assets such as non-produced assets like land, natural resources and brands and other things like inventories or valuables would increase the net worth figure.  In most cases this would just be a change in level and the trend in net worth per capita would be largely the same.  As discussed above the inclusion of the non-produced assets purchased from abroad would impact both changes and levels.

The figures that are provided for produced fixed assets have a breakdown by type of asset.

National Balance Sheet by Fixed Asset 2001-2020 Table

The total stock of fixed assets has increased significantly in recent years but the largest contributors to this increase are the suppressed categories of IP and transport equipment.  When last broken out individually, for 2014, their combined value was €117 billion.  For 2020 the equivalent figure is €630 billion.  Turmoil in the aircraft leasing sector may have an impact of the 2022 figure.

We can do a sectoral breakdown of financial net worth:

National Balance Sheet by Sector 2001-2020 Table

This highlights that while the gross amounts for the financial sector are enormous, running into the trillions, the net amounts are relatively modest.  Non-financial corporations have built up a large negative net worth position in recent years.  This is linked to acquisition of assets such as IP and aircraft.

The government sector also has a significant negative position but did not lead to an equivalent increase in fixed assets as much of the debt was used to cover current spending. 

There has been a remarkable improvement in the net worth position of the household sector in recent years.  In the last two years shown in the above table the financial position of the household sector improved by €70 billion. 

Figures from the Central Bank suggest there was a further improvement of almost €50 billion in the financial position of the household sector in 2021.  This was achieved through a continued rise in deposits (+€16.2 billion) and also a large increase in life assurance and pension entitlements from private schemes (combined + €22.5 billion).  The contribution of debt reduction was relatively modest (€1.5 billion).

When housing assets are included (and the Central Bank include site value) the net position of the household sector is said to have improved by €140 billion in 2021, or €28,000 per capita.

The opening chart shows net worth per capita peaking in 2006 at €104,500.  The trend, and recent data from the Central Bank, suggest a new peak will be set in 2021. Hopefully it won’t go over a cliff this time.

To conclude, here are comparable figures for the EU15.  As discussed above some countries have more comprehensive figures available but there are presented here in a like-for-like basis.

EU15 Net Worth Per Capita 2001-2020

Tuesday, May 10, 2022

The next insight into Apple’s use of capital allowances

Apple revised its international structure in 2015.  Since then we have been tracking the impact of this via the annual publication of the consolidated accounts for the group of subsidiaries headed by Apple’s central international subsidiary, Apple Operations International (AOI).

There are details in the earlier posts that are not repeated here.  We will start with the consolidated income statement for the group.

AOI Income Statement 2017-2021

AOI is at the head of an international group that comprises 80 other subsidiaries.  In total, the group an average number of employees of 52,563 in 2021 based in countries all around the world.  In essence, the above shows the performance of Apple outside the US, though we know Ireland is central to the financial outcomes generated.

In its annual report Apple Inc. sets out the split of its profit due to domestic (i.e. U.S.) operates and due to operations outside the U.S.  In its latest 10K filing with the SEC, the company said:

The foreign provision for income taxes is based on foreign pretax earnings of $68.7 billion, $38.1 billion and $44.3 billion in 2021, 2020 and 2019, respectively.

It can readily be seen that these amounts are close to the figures for “Income before provision for taxes” in the AOI group income statements in the table.  In line with the overall performance of Apple the outcomes for the AOI group improved in 2021.  Apple’s overall pre-tax income rose from $67 billion in 2020 to $109 billion in 2021.  As can be seen the pre-tax profit of the AOI group went from $34 billion to $68 billion over the same period.

The income statements also show a large “Provision for income taxes”.  This had been around $6 billion up to 2020 but jumped to $11 billion in 2021.  As discussed in the earlier posts, a company making a provision for income taxes is not the same as a company paying income taxes.  And again it is worth looking at the balance sheet to highlight this.

AOI Balance Sheet 2016-2021

The line item of interest is that for “Deferred tax assets”.  These were $25.7 billion at the end of 2016 and had reduced to $7.8 billion at the end of 2021.  This indicates that a good share of the provision for income taxes on the income statement is not reducing cash on the balance sheet (via payments) but is depleting the deferred tax asset.  We will return to this but can make a quick stop with the cash-flow statement to confirm the point.

AOI Cash Flow Statement 2017-2021

The supplemental item at the bottom confirms that the actual cash payments for income taxes have been significantly lower than the provision for income taxes.  For 2021, the provision for income taxes was $11.6 billion but actual payments made during the year were $4.4 billion.

Some of this could be due to timing differences if the actual payments are made after the year end but our interest is in the link between the provision for income taxes and deferred tax assets.  Some of the earlier posts go through the process that led to the generation of these deferred tax assets; here we will just focus on their evolution.

AOI Deferred Tax Assets 2017-2021

The above table corresponds to the deferred tax assets shown on the balance sheet.  And again, go from $25.7 billion at the end of 2016 to $7.8 billion at the end of 2021.  We are particularly interested in those that arise from intra-group transactions.

We know that a now Irish-resident entity in the AOI group purchased the license to exploit Apple’s IP in international markets and the upfront expense it incurred in acquiring this is eligible as a deduction, via capital allowances, until fully exhausted.

The accounting treatment means that the tax benefit of this deduction is put as a deferred tax asset on the balance sheet and is depleted year-by-year as it is used.  In recent years this reduction has been around $3.3 billion so is likely linked to annual profit of around $26 billion.

As can be seen the value of these deferred tax assets from intra-group transactions had fallen to $4.1 billion at the end of the 2021 financial year.  The limit on how much can be claimed in any single year means we are likely to see a further reduction of around $3.3 billion in 2022 and that the capital allowances will be fully exhausted in 2023.  It will be interesting to see what will happen then.

Irish Corporation Tax Payments

A related question is how much Irish Corporation Tax is paid.  However, this cannot be determined from the information presented in the consolidated accounts of the AOI group.  There will certainly have been some Irish tax in the $4.4 billion of cash tax payments made during the 2021 financial year but there is no way of knowing how much. 

The tax reconciliation in the accounts also points to the need to be cautious in drawing conclusions from the consolidated accounts.  This reconciles the provision for taxes with the tax charge that would apply is all pre-tax income was wholly and solely taxed at the 12.5 per cent.

AOI Tax Reconcilliation 2017-2021

The item worth looking at is the “Difference in effective tax rates on overseas earnings”.  Up to recently this had been a relatively small amount (at least in the context of the massive numbers in the accounts) but it jumped to $725 million in 2020 and then even more so to $2.3 billion in 2021.

As this table is taken from the consolidated accounts of a group of companies that operates in countries right around the world it is not clear what “overseas” means.  The 12.5 per cent rate is chosen presumably because the largest share of the profit of the group is subject to tax in Ireland (albeit offset by capital allowances).  So perhaps “overseas” means outside Ireland.  The accounts don’t indicate where AOI itself is resident but there were suggestions a number of years ago that it was resident in Jersey.

It is only a guess but if we take “overseas” to mean outside Ireland then it would indicate that a large share of the provision for income taxes, and also possibly the cash tax payments, are for non-Irish taxes.  We don’t know the amount of profit involved but if, say, the “effective tax rate on overseas earnings” shown in the above table for 2021 was 25 per cent then the amount of profit would be something approaching $20 billion.

Now, that 25 per cent is just an indicative number but illustrative of the rates and amount of profit needed to get the figure shown in the table.  In such a scenario $5 billion of the provision for income taxes would be due to the tax on overseas earnings.

So while the bottom line of the above table is a provision for income taxes of $11.6 billion for 2021, we know that around $3.3 billion was charged against a deferred tax asset on the balance sheet and some unknown amount, but likely running to several billion, was due to non-Irish taxes.

The likelihood is that there is a lot of Irish Corporation Tax being paid but we need more than what is shown in these accounts to be able to know how much that is.

From Apple’s 10K SEC filings we can see how much of its overall tax provision is due to non-US taxes.

Apple 10K Provision for Income Tax 2021

A quick check of the total for foreign taxes in this table shows that it is close to the provision for income taxes of the AOI group.  The table from the 10K filing shows a big jump in current foreign taxes in 2021: from $3.1 billion to $9.4 billion.  The big jump in the AOI group accounts for “Difference in effective tax rates on overseas earnings” suggests that these non-US taxes were also non-Irish taxes (assuming “overseas” means outside Ireland). 

What we can say definitively is that the deferred tax assets of the AOI group arising from intra-group transactions are being depleted and at current usage are set to be exhausted during the 2023 financial year.  What happens then will be followed with interest and we may even get a post under the heading “The final insight into Apple’s use of capital allowances”!

Friday, April 29, 2022

Ireland in the Country-By-Country Reports of US MNEs

The IRS have published the latest update of their aggregate statistics compiled from the country-by-country reports filed with it by US MNEs.  The latest figures cover 2019.  The data are useful but have some limitations. Here we will look at some of the aggregate outcomes for Ireland and compare some to other countries.

The headline figures for Ireland are:

IRS CbCR Ireland Aggregates 2019

There are 632 reporting groups in the IRS data.  In total, they reported that they had around 163,000 employees in Ireland (2018: 151,000).

Some of the financial outcomes are immense. The companies report $735 billion of revenue, $55 billion of profit and $10 billion of tax. In 2018, these were $690 billion, $50 billion and $8 billion.

This might seem to imply an effective tax rate in 2019 of 18 per cent but the figures in the above table include entities that were loss making.  This pulls down the overall profit figure while having limited impact on the tax figure. When restricted to entities with positive profits an average tax rate of 13 per cent is found.

There is also a useful breakdown by economic sector with outcomes for 2019 shown below.

IRS CbCR Ireland by Sector 2019

Manufacturing has the largest figure for employment (72,000).  There are also significant levels of employment in the sector encompassing Wholesale and retail trade, transportation and warehousing and in the Information sector.

When looking at tax payments, 2019 marks the first year when payments from the Information sector exceeded those from Manufacturing.  Between them, those two sectors they accounted for 90 per cent of the corporate tax paid by Irish entities in the CbC reports of US MNEs.  Payments in 2019 from US firms in the Manufacturing sector came to $4.1 billion and in the Information sector they were $4.6 billion.

The growth in the income tax paid (on cash basis) in the last few years has been extraordinary. 

IRS CbCR Tax Paid by Sector Ireland 2016-2019

The IRS CbCR data go back to 2016. In that year the total tax paid (on cash basis) for entities in Ireland was $4.3 billion.  The $10 billion figure for 2019 was more than double that and given what we have seen with Irish Corporation Tax receipts since then the figures in subsequent IRS updates will be even higher.

It is also worth putting the payments in Ireland in the context of the tax payments made by US MNEs in other countries.  Here are the 2019 figures for the EU27.

IRS CbCR for the EU27 Tax Payments 2019

In 2019, US MNEs paid more corporate tax in Ireland than in any other EU country.  Indeed, the payments in Ireland were the third-highest in the world, trailing only the US itself (obviously) and the UK.

In total, the US MNEs in the IRS data paid $329 billion of corporate tax in 2019.  Of that, $204 billion was paid to the US. The next largest recipient was the UK with receipts of $10.6 billion.  In third spot is Ireland at $10.0 billion.  There aren’t many things Ireland comes third in the world at, but tax receipts from US MNEs is one of them.

The nominal figures don’t give a sense of the relative importance of the tax receipts from US MNEs to each country.  Here are the receipts of the EU27 but scaled to each counties Gross National Income (GNI).

IRS CbCR for the EU27 Tax Payments to GNI 2019

Using GNI*, the corporate tax payments of US MNEs were equivalent to just over four per cent of Ireland’s national income.  This is double the level of the second-highest and eight times that of the third-highest.

We can also do a quick comparison of profits, assets, employment and effective cash tax rates in the US, Ireland and some selected jurisdictions.  The US continues to tolerate “stateless entities” so these are also included in the below table.

IRS CbCR Average Tax Rates Selected Jurisdictions 2019

The total share in the bottom panel shows that these jurisdictions cover a large share of the activities in the US MNEs in the IRS CbCR data, though it should be noted that the coverage of the table is “limited to reporting entities with positive profit before income tax”.  This is to get average cash tax rates that better reflect the tax burden on profits.

The largest amounts are understandably in the US itself with more than half of profits, tax, assets and employment recorded there. 

The selected ten jurisdictions, including Ireland, account for one-fifth of profit but only eight per cent of tax, five per cent of assets and just two per cent of employment.  The profit/employment mismatch is most evident for The Cayman Islands, Bermuda and Barbados.  These jurisdictions are also those with the lowest average cash tax rates (all below one per cent).

In aggregate, the companies and entities in this data faced an average cash tax rate of 11.8 per cent in 2018.  In Ireland, the average cash tax rate was 13.0 per cent, which was by far the highest of the selected ten jurisdictions.  Singapore was next highest at 5.6 per cent.

To conclude here is a comparison of the employment figures for the EU27 in the IRS data.  It takes the number of employees for each country and puts it as a share of that country’s population.

IRS CbCR Employees as Share of Population EU27 2019

For the Eu27 as a whole, the MNEs in the IRS data report that they has 2.65 million employees in 2029.  That is equivalent to 0.6 per cent of the population of the EU27 on January 1st of 2019 (446 million).

The national shares range from 3.3 per cent in Ireland (163,000 in population of 4.9 million) to 0.1 per cent in Latvia (1,800 in population of 1.9 million).