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Sunday, October 29, 2017

More than half Irish indigenous exports go to 4 Anglo-Saxon countries

Ryanair’s annual revenues in the 12 months to March 2017 were at €6.65bn. According to Enterprise Ireland indigenous tradeable exports in 2016 to Europe-excluding UK, Africa, Middle East, Russia, Central Asia and India, were valued at €6.95bn. UK exports were at €7.75bn and to US/Canada were at €3.74bn.

In 1973 when we joined the EEC about 55% of total exports went to the UK. Today the same ratio of indigenous exports go to 4 Anglo-Saxon countries: UK, US, Canada and Australia.

Even though there are more direct jobs in indigenous exporting firms, 201,100 at end 2016, compared with 199,900 in IDA Ireland foreign-owned (FDI: foreign direct investment) exporting client firms, it’s striking that the onset of Brexit has not focused attention on the narrow base of indigenous firms.

The main attention of policymakers has been on getting ready-made jobs from US firms and these firms are also the target of the big Irish professional firms.

Both the FDI and indigenous sectors are not engaged in significant innovation.

Ireland’s individual material standard of living is similar to Italy’s while in contrast, Denmark is a high-wage knowledge economy.

See more here on indigenous trade; the small number of exporting firms; lack of language skills etc. and how Denmark, which in the 1950s was also highly dependent on agricultural exports, evolved to be a high-wage knowledge economy:

Irish Exports: Eurozone top market but poor for local firms

Thursday, October 26, 2017

Irish myth of ultra-low French effective corporate tax rate

Source: US Congressional Budget Office
Click image for bigger size 

Since the Irish international economic rescue year of 2010 when Nicolas Sarkozy, then French president, suggested that the low Irish headline corporate tax rate of 12.5% should be raised, it has been commonly believed in Ireland that the French were hypocrites because they had even a lower effective rate than Ireland's, based on actual tax paid as a ratio of reported taxable income.

The 'Paying Taxes' annual report that is produced by PwC, the Big 4 accounting firm, for the World Bank, showed in that year that France had an 8.2% effective rate compared with Ireland's 11.9%.

Both these rates were misleading.

The 2016 national average effective rates of corporate taxes of 0.4% for France and 12.4% for Ireland, cited in the September 2017 Comptroller and Auditor General (C&AG) of Ireland's report, do not reflect the reality for multinational firms. The claims made are very misleading and the French data are false.

In March 2017 six months before the C&AG's report on corporate taxes, the Congressional Budget Office (CBO) of the United States issued a report on research it carried out on corporate taxes of the 19 member countries of the G20 (Group of Twenty) ─ see chart on top: these are the leading rich and emerging economies of the world.

Based on 2012 data, the CBO says the average French effective corporate tax rate was 20%. 

The C&AG report refers to the 2017 ‘Paying Taxes’ annual report produced by PwC and the World Bank. Its model company is a small firm with 60 employees which sells all its output of flower pots in its domestic market. The C&AG report says:

 “France had the second highest statutory rate at 38% but the lowest effective rate at just 0.4%.”

However, France has a headline rate of 15% for small firms and the PwC/World Bank report for 2014 showed that the model company's effective rate for France, based on taxes paid, was 7.4%. The plunge to 0.4% in 2016 reflects a 6% wages tax credit with a limit of up to 2.5 times the national minimum wage. This tax credit took effect in 2015.

The French 15% rate applies to small to medium companies (SMEs) with a turnover of less than €7.63m and applies to the first €38,120 of profit ─ from 2019 the rate will apply to all SMEs.

The OECD survey of the French economy in 2013 did highlight how large listed companies in the main index of the Paris Stock Exchange, took advantage of particular tax breaks:

France’s high statutory tax rate is coupled with low revenues, measured either as a share of GDP or total tax revenues because of the large number of loopholes and tax breaks. As the Conseil des Prélèvements Obligatoires (French Tax and Social Charges Board, 2009) points out, the result is an effective tax rate paid on realised profits of only 8% for companies included in the CAC40 (the main index of the Paris stock exchange) and 22% for SMEs (firms with up to 249 employees). More generally, the report finds that the effective tax rate diminishes as company size increases. The three major tax expenditures include: i) the tax consolidation regime, whereby the profits and losses of individual companies belonging to the same group may be consolidated (CPO, 2010), ii) the deductibility of interest payments on debt financing, and iii) the tax credit on investment in research and development. The way global corporations consolidate their profits depends on tax rates in other countries, so having a high nominal tax rate naturally encourages businesses to pay taxes elsewhere. If interest income is taxed at the household level, interest deductibility can be justified to avoid double taxation. The government’s decision to cap the deductibility of interest payments on borrowing goes in the direction of double taxation but at the same time will reduce the differential cost of debt and equity financing.

As for the Irish effective rate of 12.4% compared with the headline 12.5% rate for a company such as Google, the tax it declares in Ireland is after massive profit shifting.

In 2015  €12bn was transferred from Google Ireland Limited via a Dutch company to an Irish shell company in Bermuda and Google had an effective tax rate of  6.4% outside the US in 2015.

Apple avoided using the Double Irish loophole and using offshore Irish shell companies was able to report a tax rate of 1.9% on profits made outside the US in 2012.

France's standard corporate tax rate 2017 is 33.33% and this headline rate will be progressively reduced to 28% by 2020.

These are US Tax Foundation definitions:

The statutory tax rate is the rate levied on the next dollar of taxable profit. While this measure leaves a lot of information out, such as deductions and credits that reduce liability, it can have an impact on some business’s decisions by itself. One important decision it has an impact on is the location of profits. If the next dollar of profits is taxed at the statutory rate, companies have an incentive to locate their profits in countries with lower statutory tax rates. All else equal, high statutory tax rates tend to drive profit shifting.

The average effective tax rate is basically the amount of tax a corporation in a country pays divided by its income. As an all-in measure of tax burden, it considers the statutory tax rate, deductions, and any credits that reduce a corporation’s tax liability. Companies may look at the average effective tax rate when deciding which country to locate a new investment. All else equal, a company would rather put an investment in a country with a lower average effective tax rate because that investment will provide higher returns net of tax over its life.

The marginal effective tax rate is the tax corporations pay on a marginal investment, or an investment that makes just enough (in present value terms) to satisfy an investor, net of tax. This tax rate is mainly a function of the statutory tax rate and deductions corporations can tax on new investments, such as depreciation allowances. The marginal tax rate determines how much a company is willing to invest in a given country. The lower the marginal tax rate on new investment, the lower the pre-tax returns on those investments need to be to satisfy investors on an after-tax basis. As such, companies are more likely to pursue more investment projects when the marginal rate is lower.

Tuesday, October 24, 2017

Irish Health Service: On money spent it should be among world's best

If it was only spending money that mattered in delivering a key national social service, Ireland would have one of the best health services among rich countries - there is something rotten in the hybrid public-private system that 6 health ministers starting with Micheál Martin in early 2000, have been unable to fix. Stripping out inflation, total health spending per head doubled in Ireland and UK in 2000-2016 and rose 37% in Germany; 38% in Denmark and 25% in France.

Ireland in 2016 was among the richest countries on per capita spending (adjusted for price differences between countries PPS) according to the OECD: Ireland- US$5,528; Germany $5,551; Denmark $5,199; France $4,600; Sweden $5,487; Spain $3,248; UK $4192. Europe's richest countries Norway and Switzerland spent $6,647 and $7,919.

The US per capita spending in 2016 was $9,892 compared with Canada's $4,644.

The above data relate to current expenditure. On investment in capital equipment/infrastructure, for some of the boom years at 0.6% of GDP (this denominator is inflated by a third due to tax avoidance etc) we tracked Norway; it was at 0.51% in 2013; 0.46% in 2014 and 0.39% in 2015 (this was the year of Leprechaun Economics when Ireland's GDP jumped 26% - so the realistic ratio was higher), while Denmark and France were at above 0.60% in each year.

The above was a comment made in response to an Irish Times op-ed on Ireland's health service:

This is the winter our health system will finally collapse: The ineffectiveness of this year’s flu vaccines means hospitals will not be able to cope

Houses of the Oireachtas Committee on the Future of Healthcare Report, May 2017

Prof Sean Barrett of Trinity College, commented on The Irish Times' endorsement of the Oireachtas (Irish Parliament's bicameral system) report:

In September 2016 the Irish health service had 105,886 staff compared to 50,671 in June 1988 but there were 117,000 fewer hospital bed days performed compared to three decades earlier.

Central Statistics Office on health care comparisons

EU health care statistics  


Sunday, October 22, 2017

Global consumer goods companies struggle with sales

Investors have been increasingly buying consumer goods companies' stocks with no growth and at unreasonable prices. The FT's Jonathan Eley explains why they still seem like worthy investments.