Tuesday, April 14, 2015

What happens when 69 repossession cases come before the courts? Some notes from a Cork sitting.

Yesterday the Cork County Register held a session for civil possessions cases.  There were 69 cases heard (there were 68 on the legal diary with one additional case).  Of these, one was for a commercial premises, one was for farmland and one was a civil dispute over ownership of an asset that did not involve a loan contract. 

Thus there were 66 cases involving residential properties and lenders (mainly but not exclusively banks).  It cannot be determined how many of the properties are PPRs, BTLs or are vacant though this detail is given in some instances.  The 69 cases were completed in just over two hours so the session moves quite quickly and it can be bewildering for the borrowers who are present. 

When a case is called the applicant (i.e. the legal representative acting on behalf of the lender) states which action they wish to take.  There are three possibilities (where the number in brackets is the frequency among the 66 cases involving residential properties):

  • Seek an adjournment to a later date (33)
  • Proceed to seek the possession order  (32)
  • Strike out the proceedings (1)

There were four reasons given by the applicants (the lenders) when seeking an adjournment:

  • Have agreed or are negotiating an Alternative Repayment Arrangement (ARA) with the borrower (21)
  • This is the first listing of the case so a Practice Direction Adjournment (PDA) is mandatory (5)
  • The sale of the property is beginning or on-going (4)
  • Notice of the proceedings has not been served on the respondent (3)

In all cases where the applicant requested an adjournment these were granted.  Most were to sittings in July or October later this year though in one case a ‘general adjournment’ was granted to no specified date unless the applicant wishes the case to be relisted.

In almost two-thirds of cases where an adjournment was sought by the lender it was because an alternative repayment arrangement had been entered into and time is being given to see if the borrower can adhere to that or because negotiations to put in place an alternative repayment arrangement are on-going.  Almost no details of these cases were discussed and they were concluded in less than a minute in most instances.

In fact, in most cases the respondent (the borrower) did not attend the session.

  • Borrower present and/or represented (22)
  • Borrower not present or represented: (44)

In two-thirds of the cases listed the borrower was neither present nor represented at the session.

The most common outcome among the 66 cases was for borrower to be absent and for the applicant to seek an adjournment on the grounds of an ARA being put in place.  This happened in 17 cases.  In 3 cases the adjournment on the grounds of an ARA was granted with the borrower being present or represented in court. And in one case the applicant wasn’t represented in court.

There were 32 cases in which the applicant wished to proceed to obtain the granting of the possession order.  In 15 of the cases the borrower was neither present nor represented.  Of the 32 cases that proceeded, an order for repossession was granted in 16 instances.  These are summarised in the following table. Click to enlarge.

Orders Granted

In 14 of the cases where an order for possession was granted the borrower was absent.  In the two cases where the borrowers were represented (though absent) the orders were consented to.  In all cases where an order was granted a stay on their execution was granted for between two and six months with longer stays on those which were believed to be occupied.  This is nominally to give people time to find alternative accommodation but the time can also be used to reach agreement on an alternative repayment arrangement if one is possible.  Not all orders granted for possession result in the property being repossessed.  It is also the case that there was no discussion of what would happen with a shortfall, if any remained, after the value of the property was offset against the mortgage.

In all cases with orders granted the representative from the applicant made a request for costs and a €300 contribution was granted.  In the 14 cases where details were discussed the average amount of arrears was €51,500 and on most no repayment had been received for over three years with two instances of no repayment having been received in six years.

No borrower who was present or represented had an order for possession granted against them.  Their cases were adjourned by the County Registrar for one reason or another.  In these cases the County Registrar was excellent.  She listened patiently to the respondents, never interrupted and was helpful and understanding.  The pace of the proceedings can be bewildering but when a borrower was present the pace slowed right down.  The County Registrar allowed the borrowers the space to say what they wanted to but, in the main, kept the exchanges to the salient points.

All cases where the applicant sought to proceed with the order for possession and the borrower was present were adjourned.  In one such case no payments had been made since April 2009 with €76,400 of arrears accrued and the County Registrar emphasised the importance of making some repayments.  There were two other cases adjourned where the borrower was present and had not made any repayment since 2011 and these had €54,000 and €140,000 of arrears respectively.  In most cases where the borrower was present and the applicant wished to proceed with the case few details of the mortgage were confirmed.  There is a table here.

Some quotes from the County Registrar from various cases included:

  • "Everyone needs to show goodwill; some repayments need to be made."
  • "Nothing is possible without engagement; engagement involves making some repayments."
  • "There needs to be a level of engagement; make interim payments."
  • "It is helpful if one makes interim payments;  it doesn't have to be all or nothing."
  • "I have little interest in making orders for possession but there has to be engagement."
  • "Some money must be paid; take it one step at a time."
  • "I am concerned to see few repayments; some repayments have to be made on a regular basis."

The County Registrar was clear and a number of times said "I don't want to be making orders for possession" and that these could be avoided by the borrower if regular payments were made.  It didn’t necessarily have to be the full payment but regular payments were taken as a clear signal of engagement by the borrower. 

In a small number of instances there were separate Family Law proceedings on-going involving joint respondents. In these cases the possession proceedings were adjourned by the County Registrar.  There was one case which was transferred to the “Judge’s List” for hearing in the Circuit Court.

So the summary of the 66 cases involving residential properties is:

  • 33 adjourned by request of applicant
  • 16 cases adjourned where applicant wished to proceed (15 to return to the County Registrar with one placed on the “Judge’s List”)
  • 16 orders for possession granted (14 against absent borrowers, two consented to)
  • One proceedings struck out

One implication of this is that there is a big difference between the stock and flow of cases.  The same cases are listed, and adjourned, repeatedly.

UPDATE: Another session was held on Wednesday 15th April at 10am.  The legal diary listing the 81 cases is here.  One of the cases did not involve bank lending.  There were 80 cases with various lenders listed as the applicant and it is assumed that all of these involved residential property.  It was hard to tell as most of the cases were immediately adjourned when called and all 81 cases were completed in less than three-quarters of an hour.

Starting with the initial action of the applicant a summary of the session is:

  • Seek an adjournment to a later date (75)
  • Proceed to seek the possession order  (2)
  • Strike out the proceedings (3)

Across the 80 cases, borrowers were present and/or represented in 13 instances.  Of the 75 adjournments sought by the applicants the reasons were:

  • Have agreed or are negotiating an Alternative Repayment Arrangement (ARA) with the borrower (7)
  • This is the first listing of the case so a Practice Direction Adjournment (PDA) is mandatory (41)
  • Notice of the proceedings has not been served on the respondent (27)

In one of the seven cases with an ARA the property, which is vacant, had actually been abandoned and was taken into possession by the lender.  This case was adjourned generally with no subsequent date fixed but should probably have been struck out.

In the two cases where the applicant wished to proceed the with the case an order for possession was granted.  These are summarised here:

Orders Granted 15-04-2015

This session was very different to the first one described above.  For more than half the cases it was their first time to appear in court since notice had been served on the respondents and a Practice Direction Adjournment is required at the first hearing.  In most instances these adjournments were to the end of July but in a few cases the borrower was present or was represented and a longer adjournment was requested.  In most of these the adjournment was to October.

It was also the case that around one-third of the cases could not proceed because notice had not been served on the respondents.  Various difficulties were outlined by the agents representing the applicants in serving notice on the respondents.  In many of these cases there were joint respondents and notice had been served on one respondent and not the other. 

In most instances the case was adjourned to July to give more time for notice to be served.  For some cases which had been listed on a number of previous occasions an application for “substitute service” to doing so in person was made (such as pinning the notice to the door of the property). As stated the 81 cases were dealt with in less than three-quarters of an hour as very little progress was made in the vast majority of them.

Friday, April 10, 2015

US MNCs and nearly $100 billion of deferred taxes

The tax strategies of MNCs, and US MNCs in particular, continues to attract a lot of attention.  This week Apple, Google and Microsoft appeared before the Economics References Committee of the Australian Senate.  The exchanges followed the well-worn path of the companies explaining (some of) what they do with the politicians aghast that they don’t do something else – even though what the politicians suggest the companies do would actually be illegal.

Apple, Google and Microsoft are hugely successful companies (at the moment at any rate) but they are US companies.  The risks, functions and assets that actually generate most of their profits are in the US.  These companies only owe corporate income taxes to other countries on the basis of the risks, functions and assets they have there not because their customers are located there.

And even still these companies are subject to the 35 per cent US federal corporate income tax on their worldwide profits – so even if they do make profits in other countries they will be liable for US tax (though they will be granted a credit for any foreign corporate income tax paid).  The key aspect of the tax strategies used by MNCs is not to avoid corporate income tax in the countries of their customers, it is to trigger a deferral of the 35 per cent US corporate income tax that they are liable for.

The critical aspects of their tax strategies are:

  1. A licensing agreement with a subsidiary for the rights to sell the US MNCs products or services outside the US, and
  2. A structure to engineer a deferral of the 35 per cent US corporate income tax payment that is due on the profits made from these sales.

The licensing agreement will be with a subsidiary that is based in a low or no corporate tax jurisdiction such as Bermuda and a structure will be set up so that the US corporate income tax is not paid until the profits are transferred to a US-incorporated entity within the company’s structure, if ever.

The licensing agreement is key and this is entirely under the domain of the US tax authorities.  This establishes the payment the offshore subsidiary(i.e. non-US incorporated) must make back to the US parent for the right to sell the company’s products in markets around the world.  It could be that the price would be close to the profit the subsidiary would make from these sales so most of the profit would be transferred back to the US parent and the US corporate income tax that is due would be paid at that point. 

However, if the price is substantially below the profit the offshore subsidiary makes the profit accumulates in the subsidiary and, in certain circumstances, the US corporate income tax is not paid until a decision is made to transfer the profits as a dividend back to the US parent.  The main purpose of tax strategies used by US MNCs is to ensure :

  1. A low price is set in the licensing agreement, and
  2. that the circumstances to trigger a deferral are in place.

The criteria by which these can be set are set out in US tax law.  It is US tax law that determines whether the licensing agreement is appropriate and it is provisions of US tax law such as “check the box”, the “same-country” exemption and the “look-through” rule that allow a deferral of the tax.

Using these provisions in the US tax code Apple, Google and Microsoft are successfully able to defer the payments of huge amounts of US corporate income tax.  Under existing rules unless the locations of these companies’ risks, functions and assets change this tax would not be due to anyone else.  These are US-based companies and they owe US taxes.  Of course, to be able to defer huge amounts of taxes you need huge amounts of profits and these companies are hugely successful. 

And they do not hide their success in deferring US taxes.  They show how successful these strategies are in their financial statements.  The deferred tax liabilities come in two forms. The first is what the company have actually provided for in their income statements which is recognised on their balance sheets as being owed; the second is unrecognised because they do intend to transfer the money to a US-incorporated entity within their structure.  Here are extracts from the most recent 10k filings made by Apple, Google and Microsoft to the SEC.

APPLE: $43.6 billion of deferred taxes.

As of September 27, 2014, the Company had non-current deferred tax liabilities of $20.3 billion.

As of September 27, 2014, U.S. income taxes have not been provided on a cumulative total of $69.7 billion of such earnings. The amount of unrecognized deferred tax liability related to these temporary differences is estimated to be approximately $23.3 billion.

GOOGLE: up to $18.5 billion of deferred taxes.

Deferred income taxes, net, non-current $1.9 billion

We have not provided U.S. income taxes and foreign withholding taxes on the undistributed earnings of foreign subsidiaries as of December 31, 2014 because we intend to permanently reinvest such earnings outside the U.S. If these foreign earnings were to be repatriated in the future, the related U.S. tax liability may be reduced by any foreign income taxes previously paid on these earnings. As of December 31, 2014, the cumulative amount of earnings upon which U.S. income taxes have not been provided is approximately $47.4 billion. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable.

MICROSOFT: $32.3 billion of deferred taxes.

Deferred income taxes $2.7 billion

As of June 30, 2014, we have not provided deferred U.S. income taxes or foreign withholding taxes on temporary differences of approximately $92.9 billion resulting from earnings for certain non-U.S. subsidiaries which are permanently reinvested outside the U.S. The unrecognized deferred tax liability associated with these temporary differences was approximately $29.6 billion at June 30, 2014.

This is a total of $94.4 billion of deferred income taxes for just three companies.  There is nothing hidden or untoward about this.  It is all there in the companies’ accounts.  This was achieved with licensing agreements sanctioned by the US and the deferral provisions of Subpart F of the US tax code.

There is a general deferral of the US corporate income tax due for non-US active income of US companies but most of the income in question here will be passive income (or at least has been converted to passive income) through the use of patent royalties, license fees and dividend payments.  There is a general non-deferral of the US corporate income tax due on the non-US passive income of US companies.  However, the companies can avail of the exceptions to this in Subpart F which were introduced for one reason or another.

All those shouting for a “clampdown” on tax avoidance by US MNCs should be aware that it is corporate income tax payments to the US that will be most affected – unless they can get these US MNCs to move the risks, functions and assets that generate these profits to their countries and the US is unlikely to stand for that.  It is one thing for the US to allow their companies to defer the payment of US tax; it is another thing to let another country to collect it.

Thursday, April 9, 2015

US MNCs at the Australian Senate

The Economics References Committee of the Australian Senate is undertaking an inquiry on “corporate tax avoidance”.  The inquiry was initiated last October with a call for submissions and oral hearings began this week. 

On Wednesday representatives from Google, Apple and Microsoft appeared before the committee.  The transcript of the session is here.  Unsurprisingly, numerous references were made to Ireland (27 times) and Irish (14 times – half of which were to “double irish”) during the course of the hearing.  Some extracts from the hearing are below the fold.

The fiscal impact of the banking crisis: how much did Ireland pay?

A research paper from the ECB has lots of useful information on the scale of the financial assistance provided by governments to their banks from 2008 to 2013.  As can be expected, given the size of our banking collapse, Ireland features quite extensively. 

The summary position for Ireland for the period from 2008 to the end of 2013 is:

  • Ireland is 1.8 per cent of Euro area GDP (2013)
  • The Irish government provided 12.9 per cent of the total financial assistance given to banks by governments in the Euro area (€65.2 billion out of €504.7 billion)
  • The Irish government acquired 6.3 per cent of the net financial assets acquired by governments from banks in the Euro area (€21.1 billion out of €336.5 billion)
  • Ireland incurred 26.2 per cent of the total government deficit impacting measures (capital transfers and net financing costs or revenues) to support banks in the Euro area (€44.0 billion out of €168.2 billion)
  • Ireland incurred 9.4 per cent of the public debt increase to the end of 2013 resulting from measures to support the financial sector (€48.8 billion out of €514.6 billion)
  • The Irish government has incurred 26.2 per cent of the estimated public losses to the end of 2013 from providing support to financial institutions in the Euro area (€44.0 billion out of €168.2 billion)

The full details for all 19 Euro area countries (and the UK) for the six points made above are in the following table which is based on the figures provided in the ECB paper.

Bank Bailout Costs[Conflict]

Friday, April 3, 2015

What is unusual about Ireland’s non-specialised retail sales sector?

In light of this week’s industrial dispute in Dunnes Stores [why don’t they use an apostrophe?] here is a comparison of the non-specialised retail sales sectors in the EU15 (except for Greece as the data is not available).  All the data are annual averages for the five-year period from 2008 to 2012 (except Belgium which only covers 2011 and 2012 and Luxembourg which covers the period 2009-2012).  Click to enlarge.

Non-Specialised Retail Sales

Although indicative sums are noted in the top panel of the table the individual columns are not strictly additive.  Also note:

  1. Personnel costs/valued added, %
  2. Gross value added/personnel costs, %
  3. Personnel costs/number of persons employed, €
  4. Gross operating surplus/turnover, %
  5. Gross investment in tangible goods/gross operating surplus, %

There isn’t a huge amount that stands out for Ireland.  The labour share of value added here (0.72) is the same as the mean for the sample of 14 countries.  A simple productivity measure also shows Ireland to be at the EU15 mean.  The operating surplus rate here is slightly higher than the EU15 mean (4.7 per cent versus 4.2 per cent).  The investment rate (of gross operating surplus) in Ireland is above the EU mean (86 per cent versus 66 per cent) though this could be related to new entrants and expansion during the time period (2008 to 2012).

The most notable feature of the Irish data is the number of person employed in the sector (with the likelihood that the majority are employees).  Over the five years in question, an average 87,700 were employed in non-specialised retail stores (NACE Rev 2 G471).  This is around 3 per cent of the working age population (15-64 years) which compares to an EU15 mean of around 2 per cent.  Only the UK has a higher proportion of the working-age population employed in this sector than Ireland.

Of persons employed in the business economy across the EU15 (NACE sectors B to N, excluding K, and S95) around 4.7 per cent are employed in non-specialised retail stores.  In Ireland the proportion is 7.7 per cent with again only the UK having a higher rate.

As aggregate labour productivity is similar this suggests that Ireland (and the UK) have greater proportions of part-time and lower-hours staff than other EU15 countries.  If Ireland was to move to EU norms in this sector it would roughly correspond to a reduction of around one-third (c.30,000) in the number of people employed in the sector – though the hours worked by the 60,000 who remained would grow by a commensurate amount.

This would see the average personnel costs per person employed rise from €21,500 to somewhere around €30,000.  Good for those who get it but…

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