Friday, November 17, 2017

New breakdown of Non-Financial Corporates in the Sector Accounts

An earlier post went into the gory details of the household sector.  Here we do something similar for the non-financial corporate sector and assess what can be learned from a new breakdown of this sector provided by the CSO.

There is lots going on in the current account of the non-financial corporate (NFC) sector but it is hard to tell what the underlying patterns are.  Here is the NFC current account since for the past five years from the 2016 institutional sector accounts.

NFC Sector Current Account 2012-2016

The big changes happened in 2015 when gross value added jumped by more than 50 per cent to reach €180 billion with an increase of a near similar scale showing for gross operating surplus.  We know this was the result of activities of foreign-owned MNCs and it probably wouldn’t be much of any issue if the pollution was limited to the estimates of GDP but we can see that after profit and interest distributions that gross national income in 2015 still jumped by almost €30 billion. 

So more than half of the increase in gross profits of the NFC sector in 2015 was attributed to Irish residents.  There was a bit of fumbling around when the figures first came out but now we have a fairly good handle on what happened.

Now the CSO are giving a further useful breakdown that allows us to see what happened by trying to isolate some of the distortions.  Figures have been provided for two sub-components of the NFC sector:

  • large foreign-owned NFCs
  • other NFCs

As the CSO say in the background notes:

Non-financial corporations are sub-divided into Large foreign-owned MNEs (S.11a) and the Other (S.11b) in these accounts. Large foreign-owned MNEs are those companies surveyed by the CSO's Large Cases Unit. This division is not prescribed in ESA2010 but is an additional level of detail provided because of the nature of the Irish economy. This sub-division is a step towards a full separation of domestic and foreign-owned corporations, and allows a more informed perspective on the purely domestic economy.

In the release they further say:

These 50 largest foreign MNEs (out of approximately 114,000 enterprises in S.11) are presented as a proxy for all the MNEs in this release. A more comprehensive account of foreign-owned enterprises is currently under development.

So what do we see if we split the current account into these 50 foreign-owned MNCs and the rest? Lots.  Here are their current accounts for the last three years.

NFC Sector Current Account 2012-2016 Divided

A wider table that also includes the overall totals is available here.  Breakdowns aren’t provided for all of the constituent parts of the current account but most of the important ones are included.  The panel on the right hand side is a huge step in giving us a view of the underlying trends in Ireland’s business sector.  Over the past three years we see that gross value added has been increasing (+7.3% in 2016), compensation of employees is growing (+6.3%) and gross operating surplus is rising (+8.3%). 

There may be a little bit of an issue with redomiciled PLCs or some other issue in the distribution of income account as gross national income recorded an increase of 17.9% in 2016 but all in all the new breakdown is very useful.  Corporation Tax payments from these companies rose a further 13.2% in 2016 to reach €3.55 billion (and up €1.3 billion on 2014).  Thus, the right panel presents a story of a business sector growing strongly. 

And that means that most, but not all, of the problems are corralled in the large, foreign-owned NFC subsector.  This is a small group of companies but ones which have a disproportionate, and distortionary, effect on Ireland’s national accounts.

The €50 billion jumps in gross value added and gross operating surplus that occurred in 2015 are obvious.  As stated above the problems really kick in after the distribution of income.

As these are foreign-owned companies we would expect their direct contribution to Irish gross national income to be minimal.  Their contribution would have been paid out to other sectors: buying goods and services in their intermediate consumption from domestic suppliers and wages paid to the household sector.  In fact by the time we get to gross national income all we would expect to be left is whatever is needed to cover their Irish Corporation Tax bill.  We would expect any remaining profits to be either distributed or attributed to the foreign shareholders.

But that is not the case.  The gross national income of the large, foreign-owned NFCs far exceeds their Corporation Tax payments and at the bottom we would expect their gross disposable income to be close to nil.  We can see that it was €3.1 billion in 2014, jumped hugely in 2015 and rose again in 2016 to stand at €31.2 billion.  This is counted as our income. It is not.

As an quick aside here are the Corporation Tax payments attributed to the subcategories of NFC and also to Financial Corporates over the past four years.

Corporation Tax by NFC and FC 2013-2016

Compared to 2014, Corporation Tax payments for 2016 are shown to be €2.9 billion or 57.6 per cent higher.  All the categories shown paid more but the small relative growth was for these large, foreign-owned NFCs which paid 53 per cent more Corporation Tax in 2016 compared to 2014.  For other NFCs the increase was 59.7 per cent and it was 60.4 per cent for financial corporations.  It should be noted though that these tax amounts are inclusive of the R&D tax credit (which as a payable tax credit related to capital spending (as research and development is now treated) is counted as an investment grant received).

Anyway, back to this huge level shift in GNI from foreign-owned NFCs in 2015.  The reason is because nearly €25 billion of profits of foreign-owned companies weren’t counted as a factor outflow.  There are two possible reasons:

  • The first is different treatment of certain items in the national accounts (where gross operating profit is estimated) and in the balance of payments (where factor outflows are derived).  We previously considered some issues around the treatment of spending on R&D service imports.
  • The second, and most significant, is that profit outflows are based on net operating surplus and there is now a huge amount of gross operating surplus that is consumed by depreciation.

We can see some things that point to the second issue in the capital account.

NFC Sector Capital Account 2012-2016 Divided

Unfortunately, both the capital accounts of both sub-groups are bit of a mess.  For the large, foreign-owned group the acquisition and depreciation of intangibles is throwing the numbers awry while for other NFCs it is likely that the acquisition and depreciation of aircraft are muddying the waters (not forgetting that gross savings is inflated by the net income of redomiciled PLCs).

For the group of large foreign-owned NFCs we can see the large changes that occurred in the depreciation charge.  Consumption of fixed capital for these 50 companies was €5.5 billion in 2014 and this surged to €29.4 billion in 2015 with a further increase to €32.8 billion in 2016.

In the National Income and Expenditure Accounts the CSO provided details of a modified measure of national income, GNI* and one of the adjustments made is for the depreciation on certain foreign-owned intellectual property assets.  This depreciation  went from €0.8 billion in 2014, to €25.0 billion in 2015 to €27.8 billion in 2016.  This is what has driven the changes in the consumption of fixed capital for the large, foreign-owned NFCs shown in the table above.

Although these companies have large amounts of gross savings their expenditure on gross capital formation is volatile and can exceed the level of gross savings.  The financial transactions account for the subcategories might throw some additional light in the thing but although great strides forward have been made we haven’t got that far – yet. For the large, foreign-owned NFCs we can surmise that some of these are running large surpluses to repay loans they assumed in the process of acquiring large amounts of intangible assets. 

At the same time other companies are borrowing to acquire intangibles so it is hard to tell what is happening.  So, in 2015 there was net lending available to repay debt (net lending of €10.7 billion) while in 2016 additional borrowing for intangibles swamped the repayments that some companies were making (resulting in net borrowing of €16.5 billion).

While we don’t have the financial transactions account we do, though, have the financial balance sheets of the two sub-groups.

NFC Sector Financial Balance Sheet Divided

Plenty of big numbers there.  Unfortunately the loans liability category is suppressed.  However, we do have total financial liabilities.  We can see that for the group of 50 large, foreign-owned NFCs this jumped from €198 billion at the end of 2014 to €516 billion at the end of 2015.  A year later and it was €519 billion.  This is vaguely supportive of the idea of some large loans being repaid while other, relatively smaller, loans are being taken out as part of the onshoring of intangibles.

The balance sheet of the Other NFCs category tells us nothing about the domestic business sector.  The numbers are huge.  By the end of 2016 these companies has €1.2 trillion of financial assets and €1.5 trillion of financial liabilities.  There’s still a bit of stripping out to do here.

None of this is straightforward but this latest release is another step along the way.  GNI* is a promising measure that will likely improve in subsequent rounds.  The current account of the balance of payments is still a bit of a mystery but maybe we know where we’d like to end up.  For the sector accounts we’d definitely like a foreign/domestic split for the NFCs.  The split provided here gives some reasonable growth measures for output in the current account but there’s still room for improvement on the income, capital and balance sheet side of things.

Some snapshots of the aggregate improvements in the household sector accounts

The last post went a bit heavy on the detail in the household sector accounts.  Here we try and pull out a few snapshots from the accounts that give visual pointers to the aggregate improvements over the past few years.  All the data here is nominal and is for the household sector combined with non-profit institutions serving household but the impact of these on the aggregates is relatively minor and they have almost no impact on the trends.

We’ll start with income and consumption and we have series for these that are showing steady growth for the past few years (with the series also having been extended back to 1995).

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Which combined give the following gross savings rate:

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Since 1995 this has averaged 8 per cent so the 2016 level is about a percentage point below that.

The increase in income has largely been driven by a rise in the compensation of employees received by the household sector which, in nominal aggregate terms, is back to the pre-crisis peak.

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Though tax and social contributions are now higher than they were pre-crisis:

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And, of course, rents are increasing.  The aggregate amount of actual rentals paid for housing exceeded €4 billion for the first time in 2016.

Household Sector Actual Rentals for Housing

It is from a very low base (compared to pre-crisis levels at any rate) but household sector capital formation is beginning to pick up:

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After a number of years where household spending (consumption plus capital formation) was less than total household income, the household sector has returned to being a net borrower in the past few years though no where near the levels that were seen pre-crisis.

Household Sector Net Lending

This pattern is reflected in household financial transactions with household transactions increasing both assets and liabilities up to 2008 and reducing them since.

Household Sector Financial Transactions

By and large net financial transactions from the financial transactions account and net (borrowing)/lending from the capital account track each other:

Household Sector Net Lending Net Financial Transactions

Here is the impact of these transactions on household deposits and loan liabilities:

Household Sector Deposits and Loans

After peaking at €203 billion in 2008, household loan liabilities have been steadily declining since then and had reduced to €143 billion by the end of 2016.  Household deposits have been relatively stable for the past decade but what is noticeable is that the level of household deposits almost matches the level of household loans for the fist time since 2002 – though these aggregate data tell is nothing about the distribution of these assets and liabilities.

Add in the impact of other financial assets and liabilities and we get the overall balance sheet position:

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The divergence of financial assets (rising) and financial liabilities (falling) since 2008 is clear. This has meant that the household net financial asset position has been increasing and stood at €210 billion at the end of 2016.  This compares to €130 billion at the end of 2006.

Finally, here is a measure of debt to income:

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This ratio of total financial liabilities to total disposable income has fallen from 220 per cent in 2011 to 160 per cent in 2016 and is now back near levels last seen in 2004.  The progress is understandably slow but we’re getting there.

Digging into the detail of the household sector accounts

The CSO have published the Institutional Sector Accounts, Non-Financial and Financial, for 2016.  These are very useful datasets and the sectors included have been further broken down.  For the household sector we now have separate account for households and non-profit institutions serving households while the non-financial corporate sector has been usefully split out in large, foreign-owned NFCs and other NFCs.  We will come back to these.  Here we will focus on developments in the household sector. 

First, here is the current account in all its gory glory.  Most of the figures come from the CSO release but some of the breakdowns are only available from Eurostat so will be updated for 2016 in due course.  Some of these breakdowns have been crudely adjusted to fit the revised total published by the CSO but the broad changes are correct.  Only figures with published outturns for 2016 are given an annual change in the final column. Click to enlarge and also get rid of the fuzziness it seems.

Household Sector Current Account 2012-2016a

An more palatable abridged version with only updated figures is reproduced here.  Gross disposable income is estimated to have grown by 3.9 per cent in 2016 to reach €92.6 billion with consumption expenditure rising a touch more at 4.1 per cent.  Both of these growth rates are largely unchanged from the preliminary estimates.  This means that the gross savings rate for 2016 was little changed from what it was in 2015 with the final row of the table showing figures of around 7 per cent for both years.

However, while the growth rates of income and consumption may be little changed, the level of gross savings of the household sector has been significantly revised down from the preliminary estimates.  The Q4 ISAs put it at €11,714 million and we can see above that it is now put at €6,386 million.

We examined these revisions here and note that the relate to the line right at the very top of the household current account: gross value added.  The level of output of the household sector, and in particular the self-employed, has been significantly revised down.  This means the estimate of the gross household savings rate for 2016 has gone from 11.5 per cent in the preliminary figures to 6.9 per cent now.  The savings rates have been revised down for all years since 2010.  There is no “right” savings rate but for 2016 these revisions seems to be a shift from one that seems a little high to one that seems a little low.  This has implications for forecasts of consumption growth relative to forecasts of income growth.

Anyway, that minor quibble aside the household current account is continuing to show solid improvement. We might have a new level but the output of households and the self-employed grew, in nominal terms, by 5.2 per cent in 2016 (though the extent that this is due to increases in imputed rentals for homeowners remains to be seen).  Compensation of employees received by the household sector grew by 5.4 per cent though there were declines in property income received. All in all gross national income of the household sector grew 4.9 per cent.

Taxes paid on income and wealth grew by 3.2 per cent while social contribution paid to the government (mainly PRSI and pension contributions by public sector employees) grew by 5.8%.  The lower growth of taxes on income reflects the impact of policy measures (primarily on USC) with PRSI growing in line with the increase in compensation of employees.  Social benefits received remained flat with €22.8 billion paid out by the government sector. 

Combine all these changes and we get to the 3.9 per cent increase is gross disposable income.  In line with this consumption grew by 4.1 per cent.  Consumption items growing by more than 10 per cent were the purchases of vehicles (+16%) and actual rents for housing (+13%).

All told, the household sector was left with gross savings of €6.4 billion in 2016 after all current items are accounted for.  We next turn to the capital account.

Household Sector Capital Accounts 2012-2016

In 2016 gross capital formation of the household sector was just under €8 billion which exceeds the gross savings that arose in the current account which means (after accounting for relatively minor amounts of capital taxes and transfers) that the household sector was a net borrower in 2016 of €1.4 billion.  This roughly means that household expenditure for current and capital purposes exceeded the income available to meet such expenditure.

We can see that this different significantly from 2012 when the household sector was a net lender to the tune of €4.8 billion.  The €6 billion change is roughly divided between a €3 billion reduction in gross savings from the current account and a €3 billion rise in gross capital formation in the capital account.  In order to cover its current and capital expenditure in 2016 the household sector was a net borrower.

We can try to get some insight into this shift from net lending to borrowing by looking at the financial transaction account.

Household Sector Financial Transaction Accounts 2012-2016

For most of the items the outcome of transactions over the past five years is what we would largely expect.  As the second last row shows over the past five years net financial transactions have increased household financial net worth by almost €16 billion.

In net terms, households have added nearly €11 billion to their deposits while net loan transaction (drawdowns minus repayments) have reduced loan liabilities by €27 billion.  We have continued to contribute a net two to three billion a year to insurance and pension reserves.

The standout figure is the minus €36 billion for equity transactions, of which €34 billion relates to unlisted shares.  It is these transactions that are hanging the financial account together.  In the final row of the table we can see that there are some differences between net financial transactions in the financial transaction account and net(borrowing)/lending in the capital account.  However, over then years these sum to less than €10 billion and are within the realms that they could be explained by re-valuations, write-offs or sales of non-financial assets to other sectors.

But without the minus €36 billion of equity transactions the plus €11 billion of net deposit transactions and minus €26 billion of net loan transactions would be hard to explain.  But how much of an explanation is it? What exactly was the €34 billion of unlisted shares that we sold (assuming that the minus figure for financial assets refers to their sale)?

Anyway, we can see how these transactions have impacted household net financial worth by looking at the financial balance sheet.  Click to enlarge.

Household Sector Financial Balance Sheet 2012-2016

The last line shows that the net financial worth of the household sector has increased by €76 billion over the past five years, rising from €133.8 billion at the end of 2012 to €209.9 billion at the end of 2016.  The final column shows that this is €60 billion more can be explained by net financial transactions (which as we saw were plus €16 billion).

Looking at the liability side of the balance sheet shows a fairly close comparison between changes in the stock of financial liabilities and net liability transactions.  Loan liabilities over the past five years fell by just over €30 billion so the minus €27 billion of transactions doesn’t leave much to be explained by re-valuations or write-offs.

But there seems to be lots going on on the financial asset side of the balance sheet.  The €10 billion rise in deposits closely matches the plus €11 billion of transactions.  However, insurance and pension reserves rose by €35.6 billion on the back of plus €12.8 billion of transactions.  The remaining €22.9 billion is due to revaluations which we can presume is linked is rising share and debt asset prices.

And again we turn to direct holdings of equity.  Over the last five years the value of the stock of equity assets held by the household sector has been largely unchanged: €46.4 billion in 2012 versus €46.8 billion in 2016.  Of course, we have just seen that there has also been minus €36 billion of transactions with assets in this category with almost all of this relating to unlisted shares..

The detailed table shows that the value of listed held by households rose from €9.9 billion in 2012 to €14.1 billion in 2016.  On the other hand the value of unlisted shares fell from €36.5 billion to €32.8 billion but a drop of just under €4 billion pales in comparison to the minus €34 billion of transactions.  We are left with a related question.  First, we didn’t know what the household sector was selling, now we have to wonder how the household sector sold €34 billion of an asset it had €36.5 billion to begin with and still be left with nearly €33 billion at the end.  That’s a pretty strong revaluation effect!

But this is nothing new for this category.  Since 2003 the net financial transactions of the household sector in unlisted shares sum to almost €60 billion yet in spite of these negative transactions the value has always been between €33 billion and €42 billion.  The top of that range was recorded in 2005 while 2016 gave rise to the bottom of the range.  It seems we’re creating the value almost as quick as we’re realising the value.

When the revisions of to household income and the savings rate were first published in the Q1 2017 ISAs we said the coherence that appeared in the last annual accounts was no more – what large net lending explaining most of the deleveraging by the household sector.  The 2016 annual accounts once again present a coherent story and though the household sector may now be a net borrower the continued reduction in debt liabilities (and accumulation of deposits) is balanced by negative transactions in unlisted equity.  We obviously don’t know the distribution of these transactions but they do add up in aggregate.

Anyway, after all that digging what are we left with?  We have a household sector that is showing improvement across the current, capital and financial accounts.  It is a hard slog but we are slowly working through the excess that built up in the run-up to 2008.  We will look at these improvements visually in the next post.

Tuesday, October 3, 2017

The current account: where do we stand?

Here are the estimates of the current account of the Balance of Payments as currently provided by the CSO:

BoP Current Account Unadjusted

As we have explained before the recent changes of the current account are telling us close to nothing about the underlying external position of the economy.  Making the * adjustments used to determine GNI* doesn’t offer much and only gets us to this:

Bop Current Account Star Adjustments

The modified current account adjusts for the net income of redomiciled PLCs (which ultimately doesn’t accrue to Irish residents) and the depreciation of foreign-owned aircraft for leasing and intangible assets (which accrues to non-residents through the repayment of debt rather than income).  These adjustments may have given us a better level indicator of national income, GNI*, but still left us with a current account that offered little insight.

In our previous effort, we made a further adjustment for the acquisition of these aircraft for leasing and intangible assets.  That is because these items are imported but the purchases are not funded from domestic sources so any deficit that results from these is not reflective of the underlying position of the economy.  Any such deficits are funded by intra-company lending.  Using figures for the investment in these assets gets us to:

Bop Current Account Acquisition Adjustments

This is undoubtedly an improvement and the orange line reflects what we might expect an underlying current account to do.  It deteriorates up to 2008, then shows some improvement and returns to balance in 2014.  However, it is what happened then that suggested all was not what it seemed to be.  Yes, we probably would have expected the underlying current account to continue improving in 2015 and 2016 but the improvements here seemed too large and by 2016 the orange line is showing a surplus of €13 billion.

The issue seems to be related to imports of R&D services and we tried to explore the implications of this for GNI* here.  The issue is whether expenditure on R&D activity should be treated as intermediate consumption (thus reducing profits) or a capital item (investment).  The move to new national accounting standards sees R&D spending treated as a capital item but certain issues remain in the introduction of a consistent treatment across the national accounts and the balance of payments.

Although R&D spending is treated as a capital item in the national accounts it is still treated as intermediate consumption for balance of payments purposes.  The previous post runs through this in more detail but when a consistent treatment is taken it is likely the outflows of profits will increase by the amount of spending on R&D service imports (as almost all of this is undertaken by foreign-owned MNCs.)

It’s all becoming messy now but if we make a further adjustment for imports of R&D services this is what we get:

Bop Current Account R and D Adjustment

That looks about right.  The balance has been adjusted down for all years but this difference increases for 2015 and 2016 when R&D service imports really ramped up.  The green line reflects what we would think an underlying current account balance would look like and has steady improvement to a small surplus in 2016 unlike the rapid increases of the earlier attempt.

So let’s put this underlying measure relative to GNI* to see what we get (though we have some issues over how R&D service imports are influencing that).

Bop Current Account Underlying to GNI star 

As the label shows it is quite the journey from the official estimate of the current account to this derived underlying measure.  There may be some issues here and there but it seems to fit the bill.  The current account deficit that began to open in 2004 and 2005 and looks like it returned to something close to balance last year after a number of years of sustained improvements.  We’ll take that.  For now.

Here is a table showing the adjustments made. Click to enlarge.

Bop Current Account Adjustments Table

And to conclude here is something which may or may not change the underlying position – R&D exports.  All the focus has been on onshoring of IP but it seems like there is also IP going in the other direction with a surge in IP exports in recent years (albeit at a scale much much smaller than what has been happening in the other direction).

Bop Current Account R and D Exports

Monday, October 2, 2017

Effective Tax Rates in the C&AG Report-Companies

Comparing effective tax rates across countries may be difficult but comparing them across companies using the same system should be insightful.  And we get significant added value from the C&AG report chapter on Corporation Tax Receipts in the analysis provided of the “Top 100” companies.

The C&AG place companies in the “Top 100” using their Taxable Income and Tax Due figures for 2015.  The table below gives the outturns for these, and the steps between them, in the aggregate Corporation Tax computation published by the Revenue Commissioners.

Revenue CT Comp 2011 to 2015

For 2015, we can see that €65.1 billion of Taxable Income resulted in €6.2 billion of tax due or 9.6 per cent of Taxable Income.  There is lots going on before we even get to Taxable Income (capital allowances, loss relief and trade charges) which is where most previous attention has focused.  The C&AG report gives some insight into what happens lower down the calculation. 

The table shows that before any reliefs or credits are applied the 12.5 per cent and 25 per cent Corporation Tax rates gave rise to €8.4 billion of gross tax (12.9 per cent of taxable income) with the reliefs and credits leading to the €6.2 billion tax due figure.

Of the two ranking used by the C&AG the ranking by Taxable Income is probably the most informative as it gives the position before the application of credits and reliefs.  The distribution of effective tax rates (tax due as a percentage of taxable income) for the top 100 companies by taxable income is given in this useful chart:

C and AG ETR by Taxable Income

The overall rate for the top 100 is put at 9.3 per cent but there is significant variability within the group.  Reassuringly, depending in your perspective, 79 of the 100 companies had effective rates (using the tax due as a proportion of taxable income approach) of between 10 and 15 per cent with 57 companies having rates of 12.5 per cent or above (likely reflecting the 25 per cent CT rate on non-trading income).  At the other end, though, 13 companies have effective rates of less than one per cent with eight being zero or negative which unsurprisingly is where attention was drawn.

How can this be?  Well, the C&AG report (and the table above) tell us:

Of the 13 taxpayers with an effective rate of less than 1% for 2015, they had availed either of double taxation relief to offset Irish corporation tax or of the research and development tax credit or of both these reliefs. The other 43 taxpayers with an effective rate of less than 12.5% had also availed of various reliefs.

There are no loopholes here.  Double tax relief and the R&D credit are central parts of the Irish Corporation Tax regime.

Ireland uses a worldwide system so profits earned abroad are included in an Irish-resident entity’s taxable income.  There as €7.5 billion of “foreign income” included in Ireland’s Corporation Tax base in 2015.  To allow for the tax paid on that in the source country Ireland grants a credit to avoid double taxation.  Total relief for tax incurred abroad amounted to €1,195 million in 2015 (double tax relief was €947 million and the additional foreign tax credit was €238 million).

We don’t get a break down of companies using double tax relief but any Irish-resident companies whose taxable income is derived from activities outside of Ireland will have an effective tax rate close to zero as the relief available for tax paid abroad will almost always fully offset the tax due at 12.5 per cent in Ireland.  If they do have Irish-source income it will be taxes at 12.5 per cent unless they use the second major relief which is the R&D tax credit.

In 2015, claims under the R&D tax credit amounted to €708 million (of which €349 million was used and €359 million was the payment to firms of excess R&D credit).

If double tax relief can be viewed as relief for tax incurred abroad, the R&D credit can be considered relief for (a particular) an expense incurred in Ireland.  Claims that the zero per cent rates reflect tax avoidance are a little wide of the mark given that to achieve them the company must either pay tax abroad or spend money in Ireland.

Of course, what the R&D credit does is subsidise that expense and whether that is justified is an important policy question which was addressed by this 2016 evaluation published by the Department of Finance while Ireland’s approach can be compared to that used internationally in this  OECD review of R&D incentives published a few weeks ago. 

Spending 100 to get back 37.5 (12.5 from the standard deduction of the expense and 25 via the credit) does not make sense unless the company expects the R&D activity to lead to increased profitability in the future.  In the absence of the credit companies will undertake some R&D and the 2016 evaluation found a 40 per cent deadweight from the scheme.  That is, while 60 per cent of the associated R&D activity from the result of the scheme, 40 per cent would have taken place anyway and these companies benefitted from partial public funding of R&D they would have fully funded privately anyway. 

On the repayable component of the scheme (i.e. instances where the tax credit is less than a companies computed tax bill) which were the subject of a recent set of parliamentary questions the evaluation finds:

Analysis of the firm characteristics of the R&D tax credit show that it is mainly older, larger and non-Irish firms who derive financial benefit from the scheme, although it is typically Irish firms who benefit more from the repayable credit element of the scheme.

Should we be concerned with the zero per cent effective rates shown in the C&AG report? Not unless we think companies are paying tax elsewhere or incurring R&D expenditure to avoid Irish taxes. Between them these two elements, which were highlighted by the C&AG account for €1.9 billion of the €2.2 billion between gross tax and tax due.

Granting relief for tax paid abroad is something we should do unless we move to a territorial system in line with most other countries in which case the foreign income of Irish-resident companies would not be counted as part of taxable income while granted relief for R&D expenditure is a deliberate policy choice designed to encourage such activity which we can change if we wish.

If anything, when looking at these useful figures the focus should be on the other end of the range published by the C&AG but “79 of top 100 companies have tax rate of 10% or above” is not what the headline writers are looking for.  And, as stated earlier, most of the action happens above the starting point of taxable income used by the C&AG.

Effective Corporate Tax Rates in the C&AG Report–Countries

The Office of the Comptroller and Auditor General has published its Report on the Accounts of the Public Services 2016 which includes a chapter on Corporation Tax Receipts.  One issue which the chapter addresses is effective rates of Corporation Tax.  For a variety of reasons this is rarely straightforward.  Here is a chart included by the C&AG

C and AG ETRS

The chart is an effort to compare effective rates with statutory rates.  The statutory rates are taken from the OECD with the effective rates taken from the Paying Taxes 2017 report from pwc.  Two paragraphs are provided as commentary to the chart:

20.22 In 2015, Ireland had the lowest statutory rate of corporation tax of all OECD countries.1 Based on the PwC/World Bank report, Ireland’s estimated effective rate of corporation tax was 12.4%, which was just 0.1% below the statutory rate. 12 OECD countries had an effective rate of corporation tax which was lower than this; one had a rate which was equal; and 21 had an effective rate which was higher.

20.23 In 2015, the United States had the highest statutory rate of corporation tax in the OECD at 39%, coupled with the second highest effective rate of 28.1%. France had the second highest statutory rate at 38% but the lowest effective rate at just 0.4%. The OECD reported that for 2015, France’s corporation tax as a percentage of total taxation was 4.6%.

The French example should give pause for thought. Could they really have an effective corporate income tax rate of 0.4 per cent?  Well in the case of the model company used in the pwc report it would seem so but that is hardly representative of the French tax system.  And it is not clear what the final sentence is supposed to add.  The proportion of total tax in France that is raised from Corporation Tax tells us nothing about the effective rate.

Of course, what the chart is trying to address is a legitimate question: how do effective rate for corporate income tax compare across countries?  The advantage of the pwc report is that it allows such cross-country comparisons but highlighting the outcome for France shows the approach used may not give the best insights in all cases.

We can try to do something similar with Eurostat national accounts data though it gives a smaller sample size.  The following table gives taxes on income paid as a proportion of net operating surplus for the non-financial corporate sectors of the EU28, where available.  (Click to enlarge).

ETR on NOS

The averages provided are unweighted, arithmetical averages and for the ten years shown an overall average of 18.8 per cent results.  Ireland comes in at 10.4 per cent with France showing a much more plausible result of just over 30 per cent.  Three countries have a lower average than Ireland for the period shown, Estonia, Latvia and Lithuania.

For what it is worth, the reason for the high rate for Cyprus (44.7 per cent) is the inclusion in D51 of items that would not necessarily be considered a profits tax such a defence contributions based on dividends and taxes collected from offshore companies.  What would typically be considered Corporation Tax makes up around 30 per cent of the amounts included under D51 for Cyprus which would bring to effective rate rate close to the headline rate which is similar to Ireland’s. 

Maybe this just highlights the difficulty in making such comparisons but looking at aggregates is likely to give a better reflection of what is going on in general than using a hypothetical individual example.

What do we conclude? Ireland has an “effective rate” that averages just over ten per cent.  This is low by EU standards but, of course, that is deliberately so.  No country in the EU has an effective rate of 0.4 per cent.

Monday, September 25, 2017

Explaining the rapid growth in GNI*

When modified Gross National Income, or GNI*, was published by the CSO in July it was welcomed as a step forward in our understanding of the underlying performance of the Irish economy.  There is no doubt it gave a better measure of the level of the Irish economy but there was some disquiet about the growth rates it implied.  The nominal growth rates of GNI* for 2014 , 2015 and 2016 are estimated to be 8.0 per cent, 11.9 per cent and 9.4 per cent which were “too hot” for many tastes.

We poked around this and unsurprisingly the issue seems to arise in the non-financial corporate sector as shown in this table looking at Gross National Income since 2011 making the * adjustments for depreciation on certain foreign-owned assets and the net income of redomiciled PLCs to the NFC sector.

GNI star by sector

The 9.4 per cent nominal growth rate for 2016 is shown in the bottom right hand corner.  We can see that reasonably plausibly growth rates are estimated for the household, government and financial corporate sector but the 22.5 per cent growth rate for the non-financial corporate sector does not seem right.  Looking a longer series of GNI* for the NFC sector shows how rapid the recent growth has been.

GNI star for NFCs

In 2016, nominal GNI* for the NFC sector was twice what it was at the peak of the boom.  It is probably worth noting what is not in GNI*. In rough terms GNI* is got from:

  • Value of Output
    • less Intermediate Consumption
  • equals Gross Value Added
    • less Compensation of Employees
  • equals Gross Operating Surplus
    • plus net factor flows
  • equals Gross National Income
    • less net income of redomiciled PLCs
    • less depreciation on foreign-owned IP assets
    • less depreciation on aircraft for leasing
  • equals modified Gross National Income, GNI*

So GNI* should not include the profits of foreign-owned MNCs (which will be picked up by net factor flows – distributed profits and retained earnings) and also gross income attributed to Ireland through redomiciled PLCs or the depreciation of certain foreign-owned assets.  GNI* should give a good indication of the gross income of the “Irish” business sector. 

It might be instructive to pull a few measures out of the national accounts to try and see what is going on.  From the national accounts we will look item 4 from Table 1 of the NIE  which is the domestic trading profits of companies (including corporate bodies) before tax and from the Balance of Payments we will take the Current Account outflows of direct investment income on equity.

Domestic Profits v Outflows of Income

So in general terms we have the profits (after depreciation but before tax) generated by businesses in the Irish economy and the outflows of profits attributed to direct investors.  We won’t be too prescriptive about what the difference represents but in rough terms it gives us the net profits generated in Ireland that stay in Ireland and, as such, are included in GNP and GNI.  So why has this exploded recently?

The key problem is that of scale and concentration.  Issues in the statistics that would be little more than noise for most countries are amplified in the case of Ireland because of the nature of the MNC presence here.  And for the past few years the issues have all affected the figures in the table in the same direction: they have increased the growth in the difference between them which in turn has increased the growth of GNI*.

The first issue is one of data and coverage.  The Balance of Payments estimates are the result of survey data from the companies while the National Accounts figures come more from administrative date (from sources such as the Revenue Commissioners etc.).

The second issue is the treatment of depreciation.  Both of the figures above are measures of profit after depreciation but the National Accounts use the “perpetual inventory method” as the basis for the depreciation figure used whereas depreciation for Balance of Payments purposes is more closely aligned with the accounting treatment in the companies’ accounts.

Although these could impact the figures in any direction it seems for 2014 they increased the estimated outflows of profits in the Balance of Payments relative to the estimate of profits shown in the National Accounts.  This drove down the level of the difference shown above for 2014.  These data and depreciation issues unwound somewhat by 2016 and the difference moved closer to what it “should” be but this, of course, meant the growth is higher than would otherwise have been the case.

Between 2014 and 2016 the difference in the measures shown above increased by about €18 billion (from €18.3 billion to €36.6 billion).  According to the CSO around €4 billion of this was the result of issues with the data coverage and depreciation methods outlined above but there is nothing systematic about these impacts and there is no reason their impact could not have been in the other direction.

There are two issues that are systematic – the impact of taxation and the treatment of research and development expenditure.

The National Accounts measure shown in the second table is profit before tax while the Balance of Payments gives a measure of the profit attributed to direct investors after tax.  It is only natural that the absolute gap would increase as profits increase due to the impact of Corporation Tax.  This accounts for a further €1 billion of €18 billion change in the difference.  GNI has been growing because we are collecting more Corporation Tax.

The final issue is probably the most serious and results in a systematic error in the figures.  The error arises from the internationally-agreed methodologies rather than anything idiosyncratic that the CSO are doing.  The reasons are not clear but the National Accounts and Balance of Payments methodologies have different treatments for expenditure on research and development activities.

In the Balance of Payments R&D spending is treated as intermediate consumption while in the National Accounts R&D spending is considered a capital item.  The difference is between a cost that reduces profits versus a subsequent use of profits generated for investment.  As a result of this, the Balance of Payments will give a lower estimate of profits compared to that which arises in the National Accounts and if R&D spending grows the difference between them grows. 

So has R&D spending from Ireland on activities elsewhere being growing? Yip. 

Research and Development Imports

The table starts with total imports of R&D from the Balance of Payments.  This figure has been incredibly volatile recently and most of this is due to the lumpy nature of acquisitions of intellectual property products (intangible assets).  We can get the figures for these outright purchases of intangible assets in Annex 4c of the Quarterly National Accounts.  The residual approximates imports of R&D services, that is payments made from Ireland for R&D activities that take place somewhere else.  Almost all of this is undertaken by foreign-owned MNCs.

We can see that this grew by €5 billion between 2014 and 2016 and stood at €11.5 billion in 2016.  This figure is subtracted as a cost from the profit estimate used in the Balance of Payments.  In the National Accounts it is not taken as a cost but appears as a capital item much further down the accounts.  There is a substantial, and growing, difference between the National Accounts and Balance of Payments profit measures.

What does this mean for the figures? Well, go back to the schema for GNI* outlined above.  The estimate of profits generated (Gross Operating Surplus) comes from the National Accounts and the estimate of net factor flows is taken from the Balance of Payments.  So the National Accounts profits generated in Ireland are higher to the extent they don’t subtract R&D spending as a cost and the Balance of Payments outflows of profits to direct investors are lower because they do. 

This means that in 2016 around €11.5 billion of R&D investment was counted as coming from “Irish” income even though it was funded by MNC profits and any resulting profits will not benefit Irish residents outside of any tax that may be collected on them.

It is a hard circle to square.  One approach would be to estimate profit outflows for Balance of Payments purposes before accounting for R&D spending on activities elsewhere, thus making outbound profits higher.  Doing this through retained earnings would lead to an inflow of direct investment in the financial account and those monies could then be treated as been used to fund the R&D spending.  This would have no net impact on the overall Balance of Payments but would reduce the current account balance.  Outbound factor flows should reflect monies that are distributed or available for distribution but that is not the case here as the money is being used to fund R&D activities.

However, it does not seem right that imports of R&D services by foreign companies should be counted as coming from national income but that is what is implied by the current inconsistency between the National Accounts and Balance of Payments methodologies.  This holds for all countries not just Ireland but again scale and concentration amplifies the impact in the case of Ireland. Correcting this anomaly would knock a couple of percentage points of the recent growth of GNI* and would also bring down the level of GNI* (how’s that debt ratio??).  This may happen if the different treatment is as a result of paragraph 1.51(a) of the ESA2010 manual.

1.51 (a) the recognition of research and development as capital formation leading to assets of intellectual property. This change shall be recorded in a satellite account, and included in the core accounts when sufficient robustness and harmonisation of measures is observable amongst Member States;

As well as looking at the growth of GNI* we also had a poke around for an underlying current account balance.  Adding an adjustment for the acquisition of IP assets to the * star adjustments gave us this:

Adjusted Modified Current Account Annual

As we said then, this seemed plausible up to 2014 but the improvements since then did not.  Well now we know.  There are some data and depreciation issues having an effect but the biggest issue is the treatment of R&D spending by MNCs.  The figure above shows a surplus of €13 billion for 2016 but included in that was a large amount of MNC profits that were used for R&D spending.  Accounting for that would hugely erode the surplus shown above but there still would be some improvement in the current account as all years would be pushed down.   The macroeconomic position is improving, just not to the extent that the current estimates of GNI* might imply. 

We started off with an €18 billion increase in the difference between profits generated in the economy and those attributed to non-resident direct investors.  What we have seen here is that about two-thirds of that is the result of data and methodological issues, of which the most significant is the treatment of spending on R&D activities. 

That still leaves one-third of that €18 billion as a real increase.  The profits of Irish companies have increased in the past few years and Corporation Tax receipts from all classes of company have increased and these account of maybe €6 or €7 billion of the increase we have been trying to explain.  The impact all this would have on the growth rates of GNI* is hard to tell but real rates of around six per cent would seem likely. Goldilocks would be pleased.

Tuesday, September 19, 2017

How much tax do GAFA pay?

Google, Apple, Facebook, Amazon.  The debate on corporate income tax in the EU is fixated on.  Earlier this week Dutch MEP Paul Tang, and member of the European Parliament’s TAXE committee, was co-author of a short report which looked at potential tax revenue losses from Google and Facebook.

The conclusions require a complete re-working of existing tax law.  The tax losses are based on estimated customer revenue shares in EU countries and the global profitability of the companies.  That is, if a customers in a country generate 10 per cent of a company’s net sales that country should be able to tax 10 per cent of the company’s total profit.  Of course, that is not how the system works but it is indicative of the approach some would like introduced.

What this report has in common with many other reports is that it is difficult to determine how much tax the companies are currently paying.  If the argument is that something is “too low” surely we should be told what it is and what it should be.  This is rarely shown.

The table here gives the consolidated income statements for Google, Apple, Facebook and Amazon aggregated over the five financial years that ended between 2012 and 2016.

GAFA Aggregate Income Statements 2012-2016

There are a couple of different ways of measuring how much tax a company pays but that one that matters is surely cash tax payments – how much are companies actually paying over to fiscal authorities in corporate income tax payments net of any rebates or refunds received.  This is given in the second last line of the above table.  From 2012 to 2016 Google, Apple, Facebook and Amazon paid $63.4 billion of corporate income tax.

The companies made provisions to pay around $105 billion of corporate income tax over the period but due to a number of issues (mainly the deferral provisions in the US tax code but also the use of previous losses and tax credits carried forward) the actual amount paid was about one-third less.  Still $68 billion is quite a chunk of change.

Of this, the bulk was paid by Apple which is unsurprising as it generates the largest profits.  For financial years ending between 2012 and 2016 Apple made $52.9 billion of net corporate income tax payments.  Cash tax paid was equivalent to 18 per cent of income before income taxes.

On this measure Facebook comes lowest with cash tax payments equivalent to just 7.2 per cent of income before income taxes.  The reasons for this are that Facebook built up substantial losses prior to 2012 and was able to offset these against the positive income it began to generate from 2012.  This have been exhausted and of the $1.9 billion of cash tax paid over the five years over $1.2 billion was paid in 2016 alone.  In the accounts Facebook indicate that tax payments will rise in further years as offsetting losses are no longer available to be utilised.

The lowest tax payments over the period were made by Amazon but the reason for this is pretty straightforward – Amazon had the lowest profits.  Amazon is a prodigious spender on research and development.  Of the five year period Amazon used 34 per cent of its gross margin for research and development.  This compares to a spend of 15 per cent of gross margin across the other three companies.

Do these companies pay enough tax?  That is not what we are trying to answer here.  What we can say is that between 2012 and 2016 these companies paid $68.4 billion of corporate income tax which was equivalent to 16.4 per cent of their income before income taxes.  What tends to be true of most studies of these companies is that the authors want the companies to pay more tax in certain countries which will almost certainly result in less tax being paid in others. 

Who got most of the $68 billion that the companies paid? The US, of course, because that is where most of the profits were generated.  And if the US didn’t allow deferral or have rules that allowed US-source income to be treated as “offshore” it would collect even more.  And no matter what formulas are used the EU will not simply be able to go and take that taxing right.

The annual income statements for the individual companies are reproduced below.

Google Income Statements 2012-2016

Apple Income Statements 2012-2016

Facebook Income Statements 2012-2016

Amazon Income Statements 2012-2016

Monday, September 18, 2017

US companies in the business economies of the EU–and the taxation of their profits

Data from Eurostat clearly shows the oversized presence of US companies in Ireland.  The table below gives the contribution of US companies to the business economies of the EU15 in 2014 for profits, pay, employees and investment.  The business economy is NACE B to N excluding K so it reflects the economy excluding the financial sector, sectors dominated by the public sector such as health and education, and the arts. 

Contribution of US companies to EU15 2014 2

For all the categories shown the largest contribution of US companies is in Ireland.  US companies employ 8.3 per cent of all people employed in the business economy (it is c.5 per cent of total employment) and because they pay rates are higher US companies contribute more the 13 per cent of employee remuneration.  Around one-tenth of investment in tangible goods (excluding aircraft) in Ireland is undertaken by US-owned companies.  In all of these measures the UK is next while the figures for Ireland are between three and four times greater than the mean across the EU15.

The stand-out figure is clearly for Gross Operating Surplus with US companies responsible for more than half of the Gross Operating Surplus generated in Ireland.  The next largest is Luxembourg though the relative contribution is three and a half times smaller while the mean across the EU15 is 14 times smaller than that recorded in Ireland.

We would probably prefer Net Operating Surplus (which is akin to earnings before tax and interest) but GOS gives a good approximation of the contribution of US companies to the corporate tax base in each country.  If for some reason Ireland ended up with a contribution of US companies to gross operating surplus close to the EU mean it would represent a loss of close to half the corporate tax base.

Relative to other EU countries Ireland benefits disproportionately from US companies under the headings of staff, pay and capital investment but the largest difference is for profits.  Ireland’s corporate tax revenues are generated by US companies to an extent that no other EU country comes anywhere near.

The following table gives the numbers behind the contributions of US companies in Ireland.  The total for the business economy is given as well as a breakdown by the main sectors: manufacturing, wholesale and retail, information and communication and the rest.  Remember that the financial sector is not included in any of the data used here.

Contribution of US companies to business economy in Ireland 2014

The key figures are €6.5 billion of personnel costs for 103,000 staff and €2.5 billion of investment in tangible goods.  From the €39 billion of gross operating surplus Ireland probably collected in the region of €2 billion in Corporation Tax while something around €4 billion of the total purchases of goods and services would have been made from Irish suppliers.  This gives a total of €15 billion or so.

We can see how this is broken down by the main contributing sectors in the subsequent columns.  The largest sector is manufacturing with about half of the staff, pay bill and profit totals.  Capital investment in Ireland by US manufacturing companies seemed surprisingly low in 2014.  For the years 2008 to 2012, US manufacturing companies undertook an average of over €1 billion of capital investment in Ireland.  The 2014 figure was just one-twelfth of that though capital investment by ICT companies meant the total of €2.5 billion was in and around the annual average since 2008.

The final thing we can look at is the distribution of these contributions from US companies across the EU.  In can be seen that in terms of absolute size across the EU, US companies have their largest footprint in the UK, well for the time being anyway.  Around 30 per cent of US companies profits, staff, pay and investment in the EU are in the UK.

Distribution of contribution of US companies in the EU

The stand-out figure for Ireland is again for profit.  Just over one-fifth of the gross operating surplus generated by US companies in the EU in 2014 arose in Ireland.  Current rules for allocating taxing rights means that Ireland has approximately one-fifth of the taxable income of US companies in the EU in its tax base.

Alternative proposals to allocate taxing rights are contained in the Commission’s CCCTB proposal.  This would allocate taxing rights on the basis of number of employees, pay bill, tangible capital goods and sales.  Obviously, the allocation will be done by individual company but we can see that in aggregate Ireland has about three percent of the staff measures to be included and maybe around double that for the tangible investment component (or at least for new investment in tangible capital goods in 2014).

We don’t know where these companies sell the goods and services that make up the turnover column but we can get a rough approximation of the size of national markets using ‘actual individual consumption’ from national accounts statistics.  Ireland is about one per cent of the EU market.

Again, the aggregates here don’t provide the granular detail that would go into the calculation at the level of the individual firm but if taxing rights were to be allocated on the basis of employees, pay bills, capital goods and sales, Ireland’s tax base from US companies could fall from the current level of around 20 per cent of profits generated by US companies in the EU using the arm’s length principle to something roughly one-sixth or one-seventh of that under formulary apportionment.  Again this would represent a loss of around half the existing Corporation Tax base.

Who would favour this approach?  Well, just look at France,  Italy and to a lesser extent Spain, in the above table.  France is nearly 16 per cent of the EU market and has around 10 per cent of the employment and capital investment of US companies in the EU.  How does France fare on taxing rights?  Much lower.  Only 3.4 per cent of the gross operating surplus generated by US companies in the EU in 2014 arose in France.  A similar outcome can be seen for Italy with shares of employees, pay bill, capital goods and market size that exceed its current share of the tax base.  Winners and losers.

Friday, September 8, 2017

Remarkable falls in the Live Register

There are better measures of changes in the labour market (with the QNHS being best) but it can be instructive to look at changes in the Live Register and some of the recent changes have been remarkable.

The pattern of the Live Register itself is probably pretty well understood.  Here is the seasonally adjusted total since 2007: rapid rise, level for a period, period of decline.

Live Register Total

Let’s look at the rate of change.  Here are the average monthly changes over rolling three-month periods since 2010.

Live Register Three Month Average Change

The Live Register has been dropping for five years but the three-month period that has the fastest absolute decline has been the last three months.  The average month fall (seasonally adjusted) across June, July and August has been 5,100.  The next best of the 4,500 recorded for the three months to September last year.

Maybe the seasonal adjustment casts some doubts so lets look at the annual changes in the actual numbers.  Here are annual changes recorded in the unadjusted total on the Live Register each month since the annual declines began around the start of 2012.

Live Register Annual ChangeThe largest annual decline in the Live Register was the month just past, August 2017.  Compared to 12 months ago the Live Register has fallen by 51,762.  Previously, the largest annual decline was the 48,162 drop seen in March of this year.  And again these are the absolute declines which might have been expected to moderate but are doing anything but.

Monday, August 7, 2017

What happened to Net National Income?

Back when we were hit in the face by the 26 per cent growth rate for 2015 we concluded the following:

The best we can do to strip out all of this madness is probably to look at net national income which excludes the provision for depreciation from all assets and accounts for net factor income from abroad.

Net National Income at Market Prices grew by 6.5 per cent in 2015 which is probably somewhere around where “the Irish economy” grew at in 2015 rather than the 26.3 per cent that “the economy in Ireland” grew by.

And that is probably still in and around where we think “the Irish economy” grew by in 2015 and maybe also for 2016.  But that is not the story that Net National Income is now giving.  Here are the nominal growth rates of Net National Income from NIE 2015 and NIE 2016:

Nat National Income Growth RatesReal growth rates are not available but it is the revisions we are interested in.  For 2015 we can see that the nominal growth of NNP has been revised up from 6.5 per cent to 10.8 per cent with a figure above ten per cent also reported for 2016.

Net National Income is GDP plus net factor income from abroad (negative in Ireland’s case) less the total economy provision for depreciation and an adjustment EU taxes and subsidies.  It differs from the new GNI* in that depreciation of all assets in taken out (rather than just for foreign-owned IP and aircraft for leasing) and no adjustment is made in NNI for the net foreign income of redomiciled PLCs. 

Still the extent to which these differences affect the growth of each may not be that large.  And that is what we see.  From 2012 to 2016 the average annual growth of nominal NNI in the table above was 7.5 per cent.  Over the same period the average growth of the new GNI* was 7.6 per cent.  There are some differences each year but they track each other pretty well.

So why was the nominal growth of NNI in 2015 revised up from 6.5 per cent to 10.8 per cent?

Looking at Table 1 of the NIE this is almost entirely due to the net trading profits of corporations.  Here are the NIE 2015 and NIE 2016 versions of Table 1.  The final column gives the “change in the change”.  Click to enlarge.

Table 1 NIE 2015 Changes

Lots of detail but the key is the change in the change in item 4 – the domestic trading profits of companies.  The 2015 increase in this has been revised up by €10.4 billion.  Further down the table it shows that net factor income from abroad in 2015 has gone from -€53.2 billion in NIE 2015 to -€56.0 billion in NIE 2017.  So we have a €10.4 billion additional increase in the before-tax profits earned in Ireland but less than €3 billion of additional net outflows.  This €7 billion probably added between three and four percentage points to the (nominal!) growth of GNI* in 2015.

The increase in net trading profits of companies seems to be made up of an increase in Gross Value Added and a reduction in the provision for depreciation though this is not certain.  The 2015 increase in the provision for depreciation for the entire economy has been revised down from €30.7 billion to €27.3 billion and though we have a breakdown of this by sector in NIE2016 a breakdown was not published with NIE2015 as Table 2 was entirely suppressed. [The CSO should be given credit for publishing lots of information – and additional breakdowns – that was either suppressed or not provided in NIE 2015].

Although the figures above show revisions for 2015 it seems similar earnings arose in 2016. Domestic trading profits of companies were down €0.5 billion but net factor outflows were €7.2 billion less.  Lots of moving parts but again it seems like the profits generated by Irish companies increased significantly in 2016.  The net foreign income of redomiciled PLCs was up €1 billion without which net factor outflows would have been down by more than €7 billion.

And we also seem to see something similar for 2014.  The domestic trading profits of companies in 2014 was revised up by €4 billion (from €52.3 billion in NIE 2015 to €56.7 billion in NIE 2016) but the level of net factor outflows was unchanged (-€29.7 billion in both NIEs).

Anyway the conclusion is much the same.  Some companies in Ireland are earning lots of extra profit and this isn’t being distributed or attributed to foreign owners or being consumed by depreciation.  Is there a systematic reason for this?  It is hard to tell.  We could try looking in the revisions but that suggests it is a combination of factors rather than down to a single factor. 

Here are the revisions between NIE 2015 and NIE 2016 of a number of key components in the national accounts (again all in nominal terms). Click to enlarge.

Revisions to NIE 2015 v 2016

The recent large revisions to the domestic trading profits of companies [item 4] can be seen at the top.  These revisions seem to be due to three factors:

  • downward revision to wages and salaries paid [item 9]
  • downward revision to the provision for depreciation [item 28]
  • upward revision to gross value added [item 51]

The first two of these will be largely GDP-neutral as they affect the composition rather than the level of GDP.  The latter will cause GDP to rise.

For 2015, there is a €14.8 billion upward revision to the trading profits of companies before tax. Of this around €1.3 billion can be attributed to a downward revision in wages and salaries and maybe something around €4 billion to a downward revision in depreciation (the provision for depreciation in the table above is a whole economy measure rather than just for companies). These could have arisen in any sector.

The remaining part of the revision is largely due to an upward revision to output.  For 2015, this seems to correspond to an upward revision of net exports of €5.5 billion but looking at Gross Value Added by sector we see that the revision is spread across a number of sectors.  There was an upward revision of around €2 billion to the GVA from industry, from distribution, transport, software and communications and from public administration and other services.  This spread does not point to anything systematic (in the revisions at any rate).

The €6.1 billion revision to GVA corresponds to the €6.2 billion revision to GDP.  Again all these are nominal.  Revisions to the deflators mean that the upward revisions to nominal GDP in 2015 did not feed through to increases in real GDP growth. In fact real GDP growth was revised down from the infamous 26.3 per cent rate to 25.6 per cent.

For 2014, we have a €4.4 billion upward revision to profits (and no revision to net factor income).  Again there is a downward revision to wages and salaries and also a downward revision to the provision for depreciation.  Around one-third of the revision to profits could be due to an upward revision in the GVA from the industry sector but in this instance it is not accompanied by an upward revision to net exports.

So what do we conclude? The nominal growth rates of net national income have been revised up and these upward revisions are largely the result of increased profits.  Why have profits being revised up? Seems to be a number of factors (lower COE, lower depreciation, higher output) all pulling in the same direction. 

Who is earning these profits? The much smaller changes to net factor income mean the profits are staying in the economy.  Part of this will be increased Corporation Tax payments staying in the economy but a large part of it is profits accruing to Irish companies.  Are domestic companies really doing as well as these figures would suggest? Maybe.

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