Friday, 6 January 2012

End of year Exchequer Returns 2011

An Saoi: You can read the Government's gloss on 2011's awful tax figures here (Slides 5-7). The tax yield has indeed risen but only after

• the reclassification of the Health Levy as a tax within the USC
• substantial cuts in various tax credits
• the introduction of various new levies

After the massive changes introduced the figures still were €873M short of target. We are told that €261M in Corporation Tax arrived “late” and the Dept. of Finance have decided to “adjust” the figures accordingly. Now late payment of tax is regularly occurs, but this is the first time any Government has decided to make such adjustment. I understand the reason for the late payment was a delay in transferring the tax due from a UK account, because of course the multi-national involved does not trust the Irish banking system. While it may account for its sales in Ireland it sure as hell will ensure that its cash is not here!

Let us look at the main figures, starting with Value Added Tax. Yield is down €489M from target or 4.8% & €360M short of the 2010 figure. The VAT yield weakened throughout the year, reflecting insipid consumer activity, which will it is forecast continue into 2012. The number of credit cards and their use continues to plummet, suggesting even those who can afford to spend do are not listening to Michael Noonan's plea that they spend, rather they believe "Ireland is facing 10 years of austerity" , as Dr. Richard Tol so succinctly put it as he flees the island.

The withdrawal of income involved in the Budget changes will lead to a drop in the VAT yield, which the Government has implicitly taken into account in its tax projections for 2012 by accepting that the VAT rate increase will yield far less than would be expected. The actual affects of the Budget changes were not broken down in the Budget documents.

The degree of non payment or late payment is also not detailed though the Revenue Commissioners are promising to specifically target collection as part of its Comprehensive Expenditure Review. However the graph below shows the level of change in VAT in just five years. Click on graphics to enlarge.

Income Tax came in €327M below target for 2011, but is of course not properly comparable with previous years because of the USC. The real challenge is 2012 particularly since the yield from Income Tax actually weakened in December against the Minister's estimate at Budget time, just four weeks ago. Budget papers expected the 2012 yield to increase by €1,202M (8.7%) over the 2011 outturn and looks well nigh impossible. This surely will be clear by the end of March or April, leaving a mini-Budget inevitable.

The position of the two capital taxes, Capital Acquisitions Tax & Capital Gains Tax from 2006 to 2012 is mapped on the chart below (CGT LHS & CAT RHS). Both taxes performed reasonably well in 2011, CGT considerably exceeding its target as many people took advantage of the existing rate, before the Budget increase to 30%. The various changes introduced by the late Brian Lenihan to CAT ensured that the outturn was only marginally below the expected yield. Further changes introduced in the 2012 Budget are expected to increase the yield further. Irish CAT relief, in particular the provisions on agricultural and business transfers are extremely generous. There are huge options to increase the yield from this source without damaging economic activity.

The lack of access to cash to fund purchases whether it is property or business assets leaves the position of CGT particularly problematic.

“Stamp Duties” are now mainly made up of various levies on pensions, insurance policies etc. The historcial sources of property and financial documents are now but a small part of the yield. A breakdown of the various sources up to 2009 is available from the Revenue Commissioners here and in a written answer provided to a well-known cloth cap you can see the 2010 property figures yield. There is little or no logic to many of these ad hoc taxes, other than to fill some financial hole quickly and their efficacy needs to be reviewed urgently. In the meantime they yielded €1,391M in 2011.

Excise Duties also covers a wide range of different fees and flat rate charges and taxes on services and goods, details of which are available from this chapter of the Revenue Commissioners Annual Statistical Report and came in bang on target as the forecasting is not done by the Dept. Of Finance! The yield is the same as in 2010 and the expected increase in 2012 is just €125M, an increase of under 3% and 2012 should come in on target.

Finally Corporation Tax. This is not so much a tax any more as a voluntary contribution from multi-nationals. The yield from this source is still impressive at €3,520M in 2011, if only just over half €6,683M paid in 2006.Unfortunately much of the tax paid in the glory years of 2006 & 2007 has been repaid since as huge losses incurred in the financial service and property industries have been offset against earlier profits. The 2011 figure was €500M short on target. However they claim to have €261M already in the bank, which should help to make reaching the target of €3,770M a little easier.

Conclusion: 2011 was a bad tax year. An economy on short-time with little access to cash was always going to be that way. The issue now is 2012. It is impossible to see the Government reaching the intended target for 2012 without some form of increased economic activity. This may be clear very quickly, as early as March or April.

A further year of economic stagnation lies ahead and Economist Meg of Roubini Global Economics thinks we are in serious trouble and I agree. However we got ourselves into this problem and it is up to ourselves to dig ourselves out of it.
The additional taxes required to bring the figure up to €36,250M as required by the Government would need to be carefully selected if they are not to seriously reduce existing taxes. Blunt tools such as a VAT rate increase, raising duties on tobacco products & alcohol are unlikely to raise additional taxes as they are likely to lead to lower consumption where they cannot be avoided or increased traffic North or smuggling.

Expediting the withdrawal of the property tax breaks which played a major part in getting us into our current difficulties could yield in excess of €1,000M. These would include a “use it or lose it” amendment, ending all of these capital allowance schemes with effect 31st December 2011 and allowing no further carry forward of unused capital allowances or losses created by them after that date. Also the deductibility of interest against all rental income should be ended with effect from 31st December 2011. The withdrawal of tax expenditures would be the most effective way of collecting the money and have the least effect on private consumption.

Enforcement of existing legislation and the collection of taxes as they fall due is also crucial. The Revenue will be particularly badly hit over the next few months by retirements because of the organisation's age structure. Additional Revenue staff not just replacements for those leaving are required to ensure compliance. Sadly this will not be happening. Indeed, one Commissioner is leaving.

A little bit of joined up thinking is required, but it is as seriously lacking in our current Government as in the one that it replaced. God help us.


An Saoi said...

Newsflash! I gather the expected yield from the Revenue's pursuit of SW pensions is likely to add at least €100M to the tax coffers in 2012 with perhaps a further once off yield of €100M from reviewing back years to collect the larger arrears cases.

I understand that the Minister for Social Protection ensured that the transfer of information was expedited earlier into her appointment, after years of foot dragging by her predecessors who were unwilling to take on the pensioner lobby.

Such an additional yield at this time of the year means that the Revenue Commissioners are quite a way towards their target of additional tax collected as set out in its comprehensive expenditure review.

eamonnmoran said...

"Finally Corporation Tax. This is not so much a tax any more as a voluntary contribution from multi-nationals. The yield from this source is still impressive at €3,520M in 2011" I am not sure if your use of the word impressive is supposed to be sarcastic? Since according to Jim Stewert in Trinity the effective rate is a mere 4%. This is in stark contrast to Michael Noonan's estimate. In a reply to a question From Pearce Doherty Mr noonan claimed it was somewhere between 11.9% and 13%. He sed information from reports rather actual Revenue collection Data.

An Saoi said...

Eamon, yes I am aware of Jim's calculations which were a response to a paper prepared by an in-house Revenue economist.

Almost no CT is paid by Irish owned companies and almost all of it is paid by a handful of multi-nationals in the ICT & pharma sectors. There are also huge levels of losses forward. Joan Burton had raised this issue in oppositon and indeed the points covered in last Saturday's Irish Times were effectively the same as raised by her earlier this year. The yield from CT is very high when one takes into account a) those losses, b) the payment is net of repayments arising from losses c) the tax paid is based on net profits of €28,000M.

The difference between the Revenue economist's figures (quoted by Mr. Noonan) and Jim Stewart's figures, is the treatment of royalty and similar payments. For a reasonably detailed treatment of such transactions have a look at Jesse Drucker's pieces on Bloomberg.

I am sure that the Revenue will also supply you with the paper prepared by their economist, if you contact their press office and you can see the basis of his comments. I am not aware that it is generally available.

Donagh said...

You'll find it here:

Or by downloading it from this link:

eamonnmoran said...

Thanks An Saoi
I think I understand where you are coming from now.
You are saying that the level of net profit is 28 billion. And since the amount collected is 3.520 billion this represents a rate of nearly 13%. Where did you getthe 28Billion figure from?
I think you are also saying that Jim Stewarts calculations include Royalty plus other payments which account for the difference in 4% and nearly 13%. Does this mean there is approximately 50-60 billion worth of Royalty payments going through Ireland but not taxed?

An Saoi said...

Eamon, €28,000M is based on the profits left in Ireland. I have taken into account additional tax @ 25% on passive income but also estimated the cost of the R & D tax credit at €125M.

Normally the company owning the right to exploit the patent or copyright within a certain market will not be resident in Ireland. The Irish trading company will be left with an agreed margin which reflects its risk or participation.

For example a piece of software may be developed by company A, using its R&D staff based in a number of countries. The copyright will be owned by whoever paid for the work, let us say A Inc., the US parent. It will then sell the rights to a subsidiary, in this case and Irish registered company, but one which is managed and controlled from let us say Bermuda. It then issues a sub licence to the Irish trading company, which actually markets the product or service. The Irish resident and trading company pays a royalty to the IRNR company in Bermuda. Now the Irish operation has not created the original software and if anything the Irish State coffers are benefiting from taxes which should rightly be paid in either the country where the product or service was actually sold or alternatively taxed in the US where the owner of the original licence is resident.

The Irish role is as a conduit for tax avoidance or perhaps evasion. If you follow the CCCTB proposals most of the tax on the profits would move to the country of sale, France, Germany or the UK.

If you go to the web site of the IDA or Dept. of Enterprise & Jobs and browse the announcements you will see regular releases relating to the setting up of "European Headquarters" in Ireland. The actual structure.

The US regards a company as resident where it is registered whereas the Irish authorities look to where management and control is exercised, e.g. where are the Board meetings held.

This is the reason why many of these company structures employ an Irish Registered Non Resident company within their structure

Jim is calculating the % tax on the gross profit and around 3% is correct.

Many of these companies have become much more aggressive internationally on their worldwide tax rate as their competitors came in with lower and lower effective rates. Please see a piece I did on this site on 25th July last.

Ireland is guilty of facilitating many of the worst tax crimes for a modern version of the 30 pieces of silver. You seem to be arguing that we should be looking for 30 pieces of gold rather than looking at the morality of the transactions in the first place.

An Saoi said...

Eamon, apologies I have now lost two efforts to respond to you.

Yes, huge royalties leave Ireland. They can generally be broken down into two industries, pharma and ICT. In the case of pharma, patent royalties will flow back to the company which paid for the research, perhaps Switzerland because of its generous IP regime.

In the case of ICT, you are normally dealing with software copyright and they will use two Irish registered companies, one of which will be resident in a super tax haven. The other will be resident and trade from Ireland.

The IRNR company in the super tax haven will buy the rights to market the software within a region generally the EMEA area and will sub licence the right to the Irish trading company and it will use the money it receives to pay off the cost of the initial purchase.

This exploits a difference between US practice where a company is deemed to be resident where it is registered versus the Irish control and management view.

Reasonable profits are generally left in the Irish trading company to reflect the activities and risk. However back in July I wrote a piece here on the pressure on corporate tax managers to cut tax payments There is a serious race to the bottom.

We get our 30 pieces of silver for acting as a conduit. However the royalties leaving Ireland could in no way be deemed to be taxable in Ireland. If you follow the CCCTB view, then the profits should be taxable in the countries where the products and services are sold, or alternatively where they are developed.

I hope you are not suggesting that we should up our price to 30 pieces of gold!

In relation to €28,000M I have calculated it based on profits actually left and taxed in Ireland, adjusting for approx. €125M cost of the R & D tax credit and the 25% rate on passive income.

For example a drug selling at €100 might only cost €2 to make. However the initial development costs could have been €1,000M. None of the €1,000M will normally have been borne by the Irish operation. In such case a cost plus margin of say 7% might be reasonable for the Irish operation, leaving it with a decent profit.

The local sales operations must also be suitably remunerated in certain cases. It really is a matter of dividing the spoils.

eamonnmoran said...

HI An Saoi.
Thanks for your reply.
Just so you are aware my questions are an effort to gain some accurate information in an area that it is very difficult to get information.
In all honesty I am merely an inquisitive novice trying to get my head around it. I also read the article you linked. I agree totally with your race to the bottom analysis. I am just trying to establish the actual figures as i don't think the vast majority of even well informed people in the area of economics would know.
So am I right in assuming that you got your 28billion figure by presuming 3.520 was equal to 12.5% of the total and then allowing for the effects of R and D and passive income.
I am just wondering if there is any reason to believe that companies are finding ways to pay lower than the 12.5%
How do we know the 3.520 is not at an effective rate of 10% and the total level of profit is not 35 billion?
Is the only way we could find this out is through freedom of info through the revenue?
When Michael Noonan gave his answer why did he use reports that did not have access to revenue information? Why not get the actual figures from revenue?
In answer to your analogy of thirty pieces of silver and why we shouldn't ask for 30 pieces of gold, i will ans with another. Just cos we are hookers doesn't mean we have to be cheap hookers.
The state should be seeking ways to increase its income from Corporates especially MNC's. They are the only ones making Profits. American Corporate Profits in 2010 were the highest they have been since the 60's. If exports went up 5% in this country last year and MNC's account for 90% of our exports and 80%+ of our corporate tax why did our corporate tax take go down 10-15%? Either the effective rates went down or profits as a % of turnover went down. If it is the latter it is bucking a trend of other US Corp orates.
We need a lot more info from Revenue and the minister seems to want to keep them to himself.