Long run Irish fiscal data

From NUIG’s Dr Aidan Kane, a (really) long run data set covering Irish fiscal data from 1690 to 1800. This work has been decades in the making and is the first of a series of releases connecting Ireland’s fiscal history to its modern, post establishment of the CSO era. Dr Kane’s new website, Duanaire, has the details.

To get a sense of the level of resolution of the data, take a look at the chart below. Congrats to Dr Kane and let’s hope this resource is used by researchers into the future.

Inversions, deferral and the US tax code

An earlier post  linked to today’s FT piece on inversions and other tax strategies.  The following is an amended comment to that post.

Ebay’s 8-K SEC filing made yesterday for Q1 2014 has some interesting outcomes that are related to some of the issues covered by the FT. The form is available here but all you really need is:

Non-GAAP earnings increased 11%, to $899 million or $0.70 per diluted share, over the prior year, driven by strong top line growth. A first quarter GAAP loss of ($2.3) billion or ($1.82) per diluted share, was due to a discrete tax charge of approximately $3.0 billion.

From the income statement it can be seen that Ebay’s effective tax rate for Q1 2014 was:

($3,199mn/$873mn) x 100 = 366%

The  $3 billion discrete tax charge was primarily because Ebay now intends to repatriate to the US around $9 billion of profits that were previously held ‘offshore’. EBay probably used versions of the ‘double-irish’ tax strategy to trigger a deferral of the US corporate income tax liability using subsidiaries in Luxembourg and/or Switzerland.

Tax payments such as this $3 billion will never appear in US BEA data on direct investment abroad by US MNCs as the tax payment is made by the US parent not the foreign subsidiary. The US BEA data only gives the corporate income tax paid by the subsidiaries outside the US. Under the current international tax regime most of the corporate income tax owed by these companies is owed on risks, assets and functions that are in the US (though the US offers extensive deferral provisions).  Effective tax rates based on this BEA data are a poor indicator of the actual tax rates as the US tax liability is not included.

This Ebay example is what is supposed to happen with tax deferral provisions such as the ’same-country exemption’ (which allows ‘double-irish’ type structures to work). Ebay could invest the money abroad free of making a US tax payment.   Alternatively it could choose to repatriate the profits to the US and the US corporate income tax payment up to the 35 per cent federal rate becomes due. This seems to be a case of this happening.

Apple with around $150 billion of retained earnings are going to return money to shareholders through a massive share buy-back but instead of repatriating offshore profits to do it are going to issue bonds to borrow the funds. If Apple does this outside the US it can ‘invest’ its retained earnings by repaying the bonds and the deferred US tax will not be paid.

Pfizer with $70 billion of retained earnings are going to use the money to buy AstraZeneca. This is fine from a US perspective and is what the deferral provisions are designed for – giving US companies interest-free loans to allow them to increase their non-US presence. The inversion to the UK that will come with the acquisition is not what the US wants and completely removes not only the retained earnings but the entire company from the US system.

The FT piece somewhat conflates the impact of inversions and the use of ‘double-irish’ type tax structures.  If a company inverts and re-headquarters to Ireland or the UK or any country it no can longer avail of the key benefits of a ‘double-irish’ scheme.  It can have the same corporate structure but the purpose of the ‘double-irish’ is to defer US corporate income tax by utilising the “same-country exemption” in Subpart F of the US tax code.  Under the “same-country exemption” passive income payments between two companies in the same country are not subject to the general anti-deferral provisions of Subpart F.

If a US company re-headquarters it is no longer a US company and therefore no longer subject to US corporate income tax on its global profits.  The “same-country exemption” becomes irrelevant as it only applies to US companies. 

The piece says the ‘double-irish’ “allows royalties paid by the Irish manufacturing subsidiary to end up in a company that is not taxable under either Irish or US rules.”  That is not correct.  The royalties are taxable under US rules but the ‘double-irish’  creates a deferral of the actual payment using US tax provisions until the profit is repatriated to the US.  In the case of Ebay we can see this repatriation and the triggering of the tax payment happening.

The US is more likely to act against the inversions than the deferral provisions. But even getting consensus on that may be difficult as Republicans will argue the inversions highlight problems with the US tax code and that it is the overall code which should be changed not the addition of roadblocks against inversions – the biggest of which seem to be to the UK not Ireland.

Finally, whatever is left of Pfizer’s retained earnings of $70 billion after the AstraZeneca acquisition will likely have a large once-off impact on UK GNP if the inversion does go ahead.

Evidence on the likely impact of the patent cliff

NUIM’s Chris Van Egeraat has posted some recently presented work responding to this Department of Finance working paper (.pdf) on the patent cliff, first brought to my attention, anyway, on this blog by Frank Barry.

Chris looks carefully at the actual products coming off patent and finds only one, Nameda, which is big enough to cause a wobble. As he notes, the amount of information is pretty poor in this area, so caveats remain.

What the bankers knew on the night of the guarantee

Readers will definitely be interested in this piece by Tom Lyons on what the Ireland’s top bankers (and Indecon’s Alan Gray) knew, chiefly about the state of Anglo Irish Bank, in the run up to the crisis. There is at least one record of the events of the night as set down by Dermot Gleeson.

The (reported) state of knowledge is pretty much the same:

  • No one knew how deeply damaged Anglo’s balance sheets were, or could be;
  • Much of the focus was on restoring confidence in the system, with everyone talking in terms of liquidity rather than solvency issues, and in terms of preventing a run on the banks.
Despite this invaluable reporting by Tom Lyons one wonders why it took 2029 days to put these accounts into the public sphere. Brian Cowen was right when he argued in his GeorgeTown speech (.pdf) that “if we are to learn from the crisis it is necessary to understand why many of the actions taken seemed sensible at the time”.
Cowen goes on to write:

We had to deal with this crisis in real time. Our view at the time was that we would get one shot at calming the markets.

Tom Lyons’ piece seems to back up this account.

This piece by the FT’s Vincent Boland, featuring TCD’s Constantin Gurdgiev, The Irish Examiner’s Mick Clifford, and (ahem) myself has more reaction to the fallout from the Anglotrial.

Ending the Sean FitzPatrick Myth

16th April 2014: Sean FitzPatrick has been found not guilty of all charges relating to the Maple 10 transaction. First the judge (for some of the charges) and then the jury (for the remaining charges) examined the evidence carefully, and declared him not guilty. The Maple 10 scheme was truly outrageous, but there is no reason to second-guess the verdicts as given.

From a broader perspective, these not-guilty verdicts might encourage a deeper understanding and better public response to the Irish credit bubble and financial collapse. It is a myth that Sean FitzPatrick caused the Irish financial collapse. Sean FitzPatrick was a major character in the Irish credit bubble, but not a fundamental cause. The collapse is better explained by the extremely “light-touch” financial regulatory system which was deliberately chosen by the democratically elected government of the Irish state, and to a lesser degree by the deeply-flawed Euro currency system chosen by member states. Over the short term, the Irish public benefitted handsomely from both the flawed Euro currency system and the very flawed light-touch Irish financial regulatory system. The Irish electorate was keenly enthusiastic for both.

The Maple Ten scheme was an outrageous transaction whose sole purpose was to unwind another outrageous transaction – the accumulation of a disguised 29% ownership of Anglo Irish Bank by Sean Quinn using contracts for difference (CFD). CFD’s are only legal in some countries, are a naturally toxic trading vehicle, and evade corporate governance rules by disguising true share ownership. Ireland during the boom was a world leader in the use of CFD’s, and Sean Quinn’s disguised 29% ownership position using CFD’s was particularly outrageous.  The Irish financial regulator was simultaneously monitoring (or not monitoring) two very large and very dubious financial transactions in a relatively tiny domestic financial system. To lose track of one large, dubious financial scandal may be regarded as a misfortune, to lose track of two looks like carelessness.

During the bubble period macro-prudential risk regulation by the Irish Central Bank was also (with hindsight) very poor.

The fundamental causes of the Irish financial collapse were two flawed systems – a flawed Euro monetary system and a very flawed Irish financial regulatory system. Both of these systems were built up in broad view and with enthusiastic public support.

– – –  – –  – – – –  – – – – – – – – –

See Corbet and Twomey for a technical treatment and empirical study of CFDs, with a focus on Irish CFDs.

Survey on Income and Living Conditions

The results from the 2012 wave of the EU-SILC have been published by the CSO.

There had been some difficulties with the statistics estimated from the survey in previous years which may account for the lag in getting the 2012 data published.  The data was collected between January 2012 and January 2013.

The main results are summarised in this table.

Of the reported 2012 changes in the poverty and income inequality measures, only the change in the deprivation rate is reported as being statistically significant.

The average weekly net equivalised disposable income for the bottom decile was €118.55 in 2012.  Income decile data was not provided in the 2011 release and the 2010 figures were withdrawn.  In the 2009 release, the average weekly equivalised net disposable income for the bottom decile was €160.05.

Comparable figures for the top decile are €1,041.71 in 2009 and €958.44 in 2012.  It should be noted that possible differences in the composition of the deciles between years make such changes difficult to fully interpret.  The income shares by decile are provided in this table.

The first table here shows that average equivalised disposable income for the population fell by 10.5 per cent between 2009 (€23,326) and 2012 (€20,856).  The second table shows that the share going to the bottom decile fell by 16.7 per cent between the same years (from 3.6 per cent in 2009 to 3.0 per cent in 2012). 

There is more detail in the full publication.  The Department of Social Protection have issued this press release.

Government Finance Statistics

The CSO have published the end-2013 update of these series:

There isn’t much to surprise in the figures.  Gross debt at the end of 2013 was €203 billion (124 per cent of GDP).  Once offsetting assets of €42 billion in the same categories are accounted for net debt was €161 billion.  The assets were:

  • Cash: €23.8 billion
  • Bonds: €10.8 billion
  • Loans: €7.1 billion

Other assets not used in the net debt calculation are include shares and other equity of €29.8 billion and other financial assets (mainly accounts receivable) of €9.2 billion.

The market value of Ireland’s €203 billion of nominal debt instruments was €219 billion at the end of the year.  The estimated pension liabilities of the government are put at €98 billion, while contingent liabilities are “just” €73 billion.

The 2013 general government deficit is provisionally estimated to have been €11.8 billion (7.2 per cent of GDP) from €13.4 billion in 2012.

The ‘operating balance’ of the government sector went from a deficit of €12.5 billion in 2012 to one of €11.8 billion in 2013, an improvement of just €0.7 billion.  The improvement in the overall deficit was greater because of changes in the capital budget.

Gross fixed capital formation was further reduced from €3.1 billion in 2012 to €2.7 billion in 2013.  With consumption of fixed capital at €2.3 billion the increase in the public capital stock was just €0.4 billion.  The main change in the capital account was a €0.7 billion gain in the ‘net acquisition of unproduced assets’ which likely relates to things such as mobile phone and lottery licenses.

Revenue from taxes and social contributions rose from €49.1 billion to €51.6 billion, while investment income was up around €0.5 billion to €2.7 billion. Much of these increases were offset by an increase in interest expenditure of €1.5 billion to €7.4 billion.  Social transfers paid decreased from €29.0 billion to €28.6 billion, of which €24.0 billion were in cash.

Doublespeak of the day

According to the Irish Independent, Minister Noonan was worrying in public last night about the shortage of family homes in the Dublin area. But he also apparently said:

“We need to get property prices up another bit.”

To which the only possible response is: “why”?

If you are stuck in a malfunctioning currency union and can’t devalue, then don’t you want to get all costs down as much as possible, especially if they are going to feed into wage demands? Why interfere with the market in this particular case?

Irish Economic Association Annual Conference Programme

This year’s IEA will take place on May 8th and 9th in the CastleTroy Park Hotel, Limerick. The ESR Lecture will be given by Prof. Rachel Griffith, while Prof. Jordi Gali will give the Edgeworth Lecture. The conference is full of strong papers from a diverse set of scholars.

The full programme is here.

Registration for the conference is through the exordo site. Early registration costs 95 euros and includes dinner on the 8th. There is a much lower price for student delegates at 25 euros.

Bookings for accommodation should be made directly through the CastleTroy Park Hotel, quoting “IEA2014” for a discounted room price.

I’m looking forward to seeing you there in a few weeks.