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.

Thursday, August 3, 2017

Major revisions to the savings rate mean the household sector is a net borrower. Really?

While a lot of attention will undoubtedly by on the business sector in the Institutional Sector Accounts and links to the new GNI* developments in the household sector are also worth a sconce.  In this instance it is not about what is there but what is no longer there – a savings rate above ten per cent.

Here’s the current account of the household sector account and looking at the numbers shows almost everything as one would expect.  Aggregate earnings are up, aggregate wages are up, aggregate disposable income is up.  All in all the income flows paint a pretty positive picture of our recovering household sector.

Household Sector Current Account 2011-2016

There is little in the income flows that gives cause for concern.  In 2016, mixed income (labelled Gross Operating Surplus) grew 4.9 per cent while aggregate wages grew 5.1 per cent with a 6.5 per cent rise in wages paid by non-financial companies.  Work though property income and interest, taxes and social contributions, and transfers and we get to the 3.8 per cent rise in Gross Disposable Income which is not put at €94.4 billion for the year.  All as we would expect.

While the growth rates may be in line with expectations, and have not been significantly revised (chart here), the levels have been revised – and revised down.  This means that the gap between income and consumption has fallen and now the savings rate is much lower than previously indicated.  Much lower.

Savings Rates - Old and Revised

The revision begins from Q1 2010 and has become even more pronounced recently.  The last estimate published in April gave a household savings rate that was reassuringly above ten per cent.  In the revised figures published this week the average savings rate shown above has only been above ten percent for one quarter since 2010 and dipped as low as five per cent last year.  This is not so reassuring.

So what has changed?  The savings rate has changed because Gross Disposable Income has been revised down. For example, the 2016 figure has been revised down from €99.5 billion to €94.4 billion.  That is why five or six percentage points have been knocked off the savings rate.

Why has Gross Disposable Income been revised down? It is pretty easy to spot from the household sector current account we looked at when the last set of figures were published.  The whole post gave a very coherent view of what we think is happening in the household sector.  Such coherence is absent now.

Anyway, the big change is in the very first line – Gross Domestic Product.  The value added produced by the household sector has been significantly revised down.  In the April figures this was put at €29.5 billion for 2016; in the current figures it is €25.8 billion.  Gross Disposable Income for 2016 has been revised down by €5 billion and nearly €4 billion of this is explained by a downward revision in the value added produced by the household sector.  It is much the same for the other years.  It is not clear why this revision was applied.  Maybe a chunk of activity has been reclassified from the household/self employed sector to the non-financial corporate sector which may explain part of that mystery.

Anyway, we can see the implications of this reduction in the savings rate in the capital account.

Household Capital Account 2011 2016

The recent rise in household gross capital formation means that household investment expenditure is now greater than household savings so the household sector is a net borrower – and as shown by the last line has been since 2014.  Between current consumption and capital investment Irish household’s spending exceeds their gross disposable income. So much for deleveraging.

Here are the current and previous estimates of household net lending.

Household Net Lending

Is the current estimate a flashing red light that have been largely absent as the Irish economy continues its rapid recovery?  Not particularly.  But maybe with the trend we should look at it as amber.  The trend is down but it is still a long, long way from the heady days of 2006 and 2007 when the household sector was a net borrower to the tune of €20 billion a year – and that was just for consumption and investment in new capital goods, the borrowing for second-hand houses was on top of that.

The revisions to the data are very significant.  Previous is was estimated that between 2010 and 2016 the household sector was a net lender to the tune of €27.4 billion.  Working through the financial account we were able to see how these funds were used to increase household deposits and, most notably, reduce household debts.

Now it is estimated that over the same six years the household sector was a net lender of just €6.9 billion.  Again this €20 billion revision corresponds the changed estimates of value added produced by the household sector which has been revised down by €20 billion.

The issue is that during a period when the household sector is now estimated to have been a net lender of €7 billion household deposits increased by €10 billion and household debts were reduced by €50 billion.  How did we do this with so little funds available from income?

Can asset sales, debt writedowns or other revaluations explain it?  The apparent coherence shown using the figures from April is no more.  Later in the year the CSO will publish updated financial accounts that will be consistent with these non-financial accounts and we will see what story emerges from those. 

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