Economic Incentives

Reciprocal Tariffs; My Eye – and how it might even have been 42% for Ireland

2025-04-03T14:06:00.017+01:00

The Trump administration has announced “reciprocal tariffs” on practically every country in the world, bar Russia, North Korea, and a few others, and some entities which barely register as entities. However, the tariffs are not in any way reciprocating tariffs, or even non-tariff barriers, that other countries may be placing on U.S. goods.

Instead, as the Office of the U.S. Trade Representative has summarised the:

“tariffs are calculated as the tariff rate necessary to balance bilateral trade deficits between the U.S. and each of our trading partners. This calculation assumes that persistent trade deficits are due to a combination of tariff and non-tariff factors that prevent trade from balancing. Tariffs work through direct reductions of imports.”

An approach that seeks to balance all bilateral trade, and only such trade in goods, is bizarre at best. There is no reason to target such outcomes. It is more than 200 years since David Ricardo set out The Theory of Comparative Advantage.

In our personal lives most of us run deficits with almost all economic actors we engage with, bar our employers. Why should I consider it a problem if I give my local shop money and get to take home goods in return? Now, in overall terms I may wish to ensure that I am living within my means but that’s more a concern with what I do rather than the activities of my local shop.

Regardless, the approach of the Trump administration is apparently one of eliminating bi-lateral trade imbalances. Continuing, the Office of the U.S, Trade Representative sets out, what this might mean:

Consider an environment in which the U.S. levies a tariff of rate τ_i on country i and ∆τ_i reflects the change in the tariff rate. Let ε<0 represent the elasticity of imports with respect to import prices, let φ>0 represent the passthrough from tariffs to import prices, let m_i>0 represent total imports from country i, and let x_i>0 represent total exports. Then the decrease in imports due to a change in tariffs equals ∆τ_i*ε*φ*m_i<0. Assuming that offsetting exchange rate and general equilibrium effects are small enough to be ignored, the reciprocal tariff that results in a bilateral trade balance of zero satisfies:

This formula is then used to calculated the tariffs “imposed” by other countries on the U.S. A value of –4 was chosen for ε, the elasticity of imports with respect to import prices and a value of 0.25 was chosen for φ, the passthrough from tariffs to import prices. Multiplying these gives an answer of -1, so that just gives –m_i in the denominator.

In simple terms, the "tariff" that country i is said to be imposing on the U.S. is the trade balance (x_i – m_i) divided by the negative of the level of imports, –m_i.

We can do this for the E.U. using 2024 goods trade figures from the BEA.

U.S. Goods Exports to the E.U. = $372,439m
U.S. Goods Imports from the E.U. = $609,192m

Thus the calculation becomes ($372,439m – $609,192m) / (–$372,439m) and we get an answer of .389. This then becomes the 39% tariff that the E.U. is apparently imposing on the U.S., though actual tariffs feature nowhere in the arithmetic.

Then for reasons of “generosity” the reciprocal tariff is put at half of this and, after a bit of rounding, we get the announced 20% tariff to be placed on most U.S. goods imports from the E.U. Of course, this is nothing more than a reverse-engineered methodology, with some half-baked approach devised to best fit the intended results.

Indicatively, this would have resulted in tariffs of $118 billion if imposed universally in 2024 on all U.S. goods imports from the E.U. ($609.2bn x .20 = $118.4bn).

From an Irish perspective, it is worth looking at what would have happened if the tariffs were imposed by individual E.U. Member State, rather than treating the E.U. as a whole. Again, we can use BEA data on goods trade to see this and note that a minimum tariff of 10% will be applied regardless of the outcome from the above formula.

The countries are ranked by the size of the U.S. balance of goods trade deficit with them. The goods deficit with Ireland in 2024 was the largest. Applying the formula and halving the answer gives a “reciprocal tariff” of 42% on U.S. goods imports from Ireland.

This is one of the highest rates shown, but not the highest. Even though they have significantly less trade with the U.S. higher “reciprocal tariffs” result for Slovakia and Slovenia.

If universally applied to all U.S. goods imports from Ireland at 42%. the amount of additional tariffs due in 2024 would have been $43.4 billion. Of course, Ireland’s largest export to the U.S. are pharmaceuticals and, for the time being at least, these remain exempt from the newly announced tariffs.

The total amount of additional tariffs due on U.S. imports from E.U. Member States would have been $160 billion if a “by country” approach was applied. This is because the large goods surplus the U.S. has with The Netherlands is not included when we go by country, as a minimum 10% tariff is imposed regardless of the trade balance.

Finally, it is worth considering why the US runs a trade deficit: it is mainly because, as a whole, the spending of the economy exceeds the income it generates. We can see this with the Net Lending / (Borrowing) positions of the economies sectors.

The large government deficit exceeds the net lending of the private sector (domestic business plus households) resulting in the U.S. economy as whole being a net borrower.

If I am spending more than my income I could blame the local shop and demand I be given a job there. Alternatively, I could try other means to raise my income, perhaps in something I may have a comparative advantage in. Or, I could adjust my spending to bring it in line with my income.

Or, if people are willing to lend to me, should I not just continue to enjoy the benefits of the goods I am able to buy? Not if I am the U.S. economy it seems. Will the U.S. Congress step in to stop all this? That would seem like their job. Checks and balances and all that.

Ireland’s Inequality of Market Income moves towards OECD average

2025-02-10T18:28:00.005+00:00

One of the notable features of the distribution of income in Ireland in the decade after the crash of 2008 was the unusually high level of inequality of market income. See this previous post for some discussion of definitions.

Using estimates from the OECD, the gini coefficient for the distribution of market income reached almost 0.60 in the years after 2008 and was the highest in the OECD (and also the EU). However, since then the gini coefficient for market income has declined and the latest update from the OECD shows the estimate falling below 0.50 for the first time.

The distances between the ginis are indicative of the impact of transfers on income inequality (from market income to gross income) and of taxes (from gross income to disposable income).

The impact of transfers rose considerably in the crash, as 300,000 jobs were lost and many became reliant on unemployment-related and other transfers. With the onset of the recovery, the impact of transfer reduced as the numbers working rose with a related fall in the numbers on unemployment supports.

Using OECD estimates for 2010, it can be seen from the difference between the gini coefficient for market income and for that for gross income, that transfers reduced the gini coefficient by 0.21 points. By 2016, this had fallen to 0.16 with a further reduction to 0.13 in 2022 which is the lowest it has been put at in the series.

On the other hand, looking at the difference between the gini coefficient for gross income and that disposable income, the impact of taxes on income inequality is estimated to have increased in the past 20 years, from 0.05 points in 2004 to 0.08 at the latest estimate.

Here is where the estimate of the gini coefficient of market income for Ireland sits relative to the 41 other members of the OECD.

It can be discerned how much of outlier an estimate close to 0.60 would be. But the latest estimate for Ireland below 0.50 moves Ireland relative position towards the middle of the OECD ranking. Ireland is now 13th of the 42 OECD member states and converging on the arithmetic average for the OECD of 0.47.

Ireland remains below the OECD average for the gini coefficient of disposable income with a 2022 estimate of 0.29 compared to an OECD average of 0.32. This means the impact of transfers and taxes in Ireland remains high in EU terms, with their combined impact the fourth highest in the OECD (and also in the EU).

The impact of transfers on the gini coefficient in Ireland is now close to the OECD average, 0.13 in Ireland versus an arithmetic average of 0.12 across the OECD. It is for the impact of taxes that Ireland continues to stand out.

In 2022, Ireland’s gini coefficient for disposable income was 0.075 points lower than that for gross income. No other country showed a reduction in inequality due to income taxes and social contributions as large as this.

Finally, given the impact of demographics, old-age dependency ratios and pensions, here is the gini coefficient for market income for those who are most likely to be in receipt of it – the working age population from 18 to 65 years.

Ireland is eighth-highest in the OECD, though the gap to the OECD average is modest. Among EU member states, only France and Greece have higher estimates but is within a couple points of five or six more.

The CSO use a slightly different definition of market income (and also report gini coefficients as percentages) and their latest estimates from the 2024 SILC (which will be used for 2023 by the OECD) point to a further recent reduction in the gini coefficient for market income.

If this reduction is reflected in due course in the OECD estimates then Ireland’s gini coefficient for market income may very well have moved to OECD average.

CT disappoints–but only relative to elevated expectations

2025-01-10T17:41:00.002+00:00

When Budget2024 was published back in October 2023, the forecast was for €24.5 billion of Corporation Tax to be collected in 2024. The recent end-year Exchequer Returns show that receipts came in at €28.1 billion, giving an overperformance of €3.6 billion or 14.7 per cent.

Note that everything here excludes any receipts linked to the CJEU ruling in the Apple State-Aid case. The overperformance relative to the Budget2024 forecasts was greater than the total amount collected in 2011. Yet, still, the final outturn was somewhat disappointing.

This was because as 2024 progressed, a strong performance early in the year gave rise to expectations that this would continue into the second half of the year. This was particularly true of June which serves as a useful bellwether to what might be collected later in the year and June 2024 was 38 per cent higher than the same month in 2023.

By the time of Budget 2025 last October, the expectation was that total CT for the 2024 would be €29.5 billion. This was not an unreasonable expectation given what was known at the time. However, the upward trajectory of the 12-month sum as shown above, which was very strong in the first half of 2024, stalled not long after the Budget.

And while the key month of November was strong, it was not by as much as the June figure might have indicated. On a monthly basis June 2024 was 38 per cent higher than the June of the previous year. Given the links between payments a similar increase might have been expected in November, but November 2024 was “just” 15 per cent higher than the same month of the previous year.

However, as we recently pointed to, even with this lower growth in November, a key reason for failing to reach the most recent 2024 CT forecast was because of a weak October.

The monthly October receipts are a pin-up to highlight the concentration and volatility of Ireland’s CT revenues, with large, and seemingly unpredictable, swings from year-to-year. And it is possible, even likely, that a single firm may be responsible for the volatility shown. If October 2024 had matched 2023, never mind the peak of 2022, then total CT receipts for 2024 year would have fairly close to the most recent Budget forecast.

As it turned out, both November and December set records for monthly receipts, with December being particularly strong. Here are the individual monthly receipts for November and December for the past 15 years.

There is really no reason to combine November and December, other than to show that the receipts across the two months reached almost €10 billion in 2024. We should not become immune to the scale of these numbers.

The strong December receipts may be a pointer to strong receipts next May – these are months six and eleven for companies with a June year-end. The relationship isn’t as strong as that for the June and November receipts but still a record in December 2024 points to next May being strong as well.

To conclude here is the cumulative annual chart for recent years. It is now up to 11 pretty much non-overlapping lines. There are so many lines, value labels for all of them can’t be easily accommodated so only those for even-numbered years are shown.

And there is nothing to suggest that 2025 will break the pattern and give a line that drops below the previous year.

Corporation Tax motors along - even if the state-aid payments muddy the waters

2024-12-05T11:28:00.001+00:00

Corporation Tax revenues continue to motor though with some minor bumps in the road. An issue in recent months is that the underlying changes have been clouded by the transfer of funds linked to the CJEU finding in the Apple State-Aid case. For example, at first glance October’s receipts appear to have been very strong soaring ahead of the previous peak from 2022.

However, it has been suggested that around €3 billion of October’s CT receipts were transfers from the Apple escrow account and are one-off in nature. Taking these out presents a somewhat different picture:

Now it is clear that the underlying receipts in October this year were well down on their 2022 peak. In and of itself this is not a major cause for concern. There is no overall trend in October’s receipts with volatility the main feature. Even if lower than recent years, October 2024 was significantly higher than October 2020.

October would not typically have been considered a key month for CT receipts. Large companies make the bulk of their payments in month 5 and month 11 of their financial year. October is month 11 for companies with a November year-end.

This is not a common financial year so the changes are linked to a small number of companies, probably one. A manufacturer of COVID vaccines which has seen its profit drop substantially since 2022 would fit the bill. This is a useful illustration of the concentration of Ireland’s CT revenues.

November is a key month for CT – being month 11 for companies with the much more typical December year-end. We previously looked at what might be expected in November with the June receipts (month 5) and by and large receipts were broadly in line with the expectations set out there.

Again, though, there is the muddying of the underlying picture due to the Apple transfers. In total, November’s CT receipts were an incredible €13.7 billion. Of those, it has been suggested that around €6 billion is due to the state-aid case. It would be helpful if more precise figures were provided but this does not seem to be case.

Anyway, here are the monthly receipts for November (less the state-aid money in 2024).

The picture is pretty clear: onward ever upward. Back in July, we projected that €8.2 billion would be collected in November and, though we don’t have the precise figure, it looks like the outturn was maybe €0.5 billion or so below that. Incredibly, we are at the stage where that would be considered a “small” error.

Even with the softening of October’s receipts and November seemingly coming in a little below what might have been expected, 2024 is on track to be another record year for CT. With a month to go, the €26 billion collected so far (excluding the money linked to the Apple case), is already well up on what was seen in last couple of years.

Indeed, the near €8 billion collected in November alone is almost double the €4.2 billion that was collected in the entire year in 2013.

A few months ago, it seemed 2024 was on track to get close to €30 billion. This won’t be achieved. December is not typically a major month for CT, but the monthly receipts in recent years have been not far off €2 billion.

If December 2024, brings in €2 billion then 2024 will see CT revenues of €28 billion or thereabouts. The amounts are enormous.

Perhaps we will get away without having to extend the scale of the vertical axis on the chart of the rolling 12-month sum of CT receipts.

We might get away with it in December, but if the trends are anything to go by another revision to the scale will be necessary sometime in 2025.

Decline in FTB purchases of existing dwellings

2024-10-25T12:17:00.006+01:00

Recent months have seen a decline in the volume of purchases of existing dwellings by first-time buyers (FTBs). The volume of FTB purchases of new units has continued to edge up but the fall for existing units has pulled the total down slightly, which can be seen below.

In the 12 months to the end of August, 17,066 stamp duty filings flagged as FTB market transactions were made with the Revenue Commissioners. At the start of 2024, this 12-month total was running at 17,500, so it has fallen just over 400 as we the year has progressed.

On a 12-month basis, FTB purchases of existing dwellings were running at 12,250 this time last year. The latest figures from the CSO show that there were 11,408 FTB purchases of existing dwellings in the 12 months to August, a decline of 850 units or seven per cent.

FTB purchases of new dwellings were 5,658 in the 12 months to August, up over 400 on what it was at the start of the year. This is a new high in the CSO series though this monthly data is only available since 2010 and the current levels are well down on what would have been seen in the early 2000s.

While there has been a recent fall in total FTB purchases, at seven per cent, it is still pretty modest, and purchases of new dwellings continue to edge up. Since Census 2022 in April of that year, there have been a little over 41,000 FTB market purchases. With non-market transactions, self-builds and bequests the number of first-time owners will be somewhat higher again.

Savings, savings, everywhere...

2024-10-11T17:48:00.004+01:00

Collectively, we find ourselves in the historically unusual position of having a surplus of income over expenditure. And what is even more unusual is that this is true for both the household and government sectors at the same time.

Historically, the country has had only three periods of significant surpluses on the current account of the balance of payments.

The first was during World War II when rationing and trade restrictions curtailed spending. The current account returned to deficit when the war ended. The second period of surpluses was during the early part of the 1990s when the start of the Celtic Tiger resulted in strong income growth. These surpluses were much smaller than the previous episode and disappeared when spending growth caught up and exceeded income growth by the early 2000s.

The third example of sustained current account surpluses is now, driven by a combination of strong income growth, including corporation tax revenues, and also, for a time, restrictions on spending. Latest estimates put the 2023 surplus at around 3 per cent of national income in 2023, close to where it was pre-COVID.

To get some insight into the source of these surpluses we can look at the outturns from the CSO for Savings minus Investment, [S - I], of the household and government sectors. [S – I] from the national accounts is equivalent to the balance on the current account of the balance of payments in the international accounts. Here they are in nominal annual terms (four-quarter sums) for the household and government sectors since 2000.

As can be seen above for the last two years or so this has been positive for both sectors. In the 12 months to the end of June, the government sector had an [S – I] of €10.8 billion while it was €6.8 billion for the household sector.

The trough of late 2007/early 2008 when the household sector was spending far more than its income (mainly due to buying new houses) can be compared to the current level. Both are around €16 billion – though in opposite directions.

When household stopped borrowing to buy all those houses, government borrowing increased significant in 2008 and 2009 as tax revenues, which were been spent as soon as they came in, were reliant on property-based taxes. The deficit on the public finances was closed over the following decade with the green bars above ticking modestly into positive territory by the end of 2018.

Of course, there has been a lot of growth and a significant bout of inflation since 2008/09 so a nominal comparison isn’t very informative. We can put the above nominal figures as a share of GNI* (with a linear interpolation used to get the four-quarter sums and Budget-day forecasts used for 2024).

This shows what we would expect. The hole that was opened up prior to 2008 was much deeper than the heights of recent years. But the current position is still significant: in combined terms the household and government sectors have an excess of income over expenditure (both current and capital) that is equivalent to around five per cent of national income.

This is roughly where it was pre-COVID (2019) but the composition has somewhat changed. Back then, the excess was driven almost entirely by the household sector whereas now there is a contribution from the government sector (with the government’s position benefitting from soaring Corporation Tax revenues).

Compared to the first half of 2019, nominal aggregate disposable income of the household sector was about 43 per cent higher in 2024. Nominal consumption expenditure was around 41 per cent higher. This gives a slightly higher savings rate in 2024 compared to 2019, 17 per cent versus 15 per cent.

The change since 2019 is that more of that saving is going to capital formation rather than going on the financial balance sheet. In nominal terms, household investment is running at around €16 billion a year, compared to €6 billion in 2019.

A good share of this increase is just price effects. The volume of new housing purchased by the household sector is up about 10 per cent on what it was in 2019 but prices of new housing units are up around 20 per cent. The value of purchases of new housing by the household sector rose from €3.3 billion in 2019 to €4.4 billion in 2023. That makes only a minor contribution to the increase shown above.

A much larger share of the increase in household investment is likely due to renovations and improvements of existing dwellings. We can see this from the breakdown of investment provided in the quarterly national accounts – though in this instance we are looking at an economy-wide measure than one specific to the household sector. The government and corporate sectors will undertake some improvements but the household sector will be the main driver of changes.

In nominal terms spending on renovations and improvements rose from under €3 billion in 2019 to close to €8 billion now. Again, there will be a price effect but the QNAs also show a steep volume increase, with volume close to doubling since 2019 and at there highest ever levels. The key activities here are renovations, extensions and retro-fitting. This seems to be the one spot on which there is additional spending. If more new housing was available spending there would likely increase as well.

To conclude, we’ll look at the finer detail of the household sector from the Institutional Sector Accounts. First, the current account:

The bottom line is that slightly higher savings rate compared to what it was in the equivalent period of 2019 (the first six months of the year). The data are nominal and we note that the CPI during the first half of 2024 was three per cent higher than a year previously and up almost 20 per cent compared to what it was in 2019.

The largest relative changes are for interest flows with both incoming and outgoing interest up just over 100 per cent. The fastest increase in wages received was from the government sector, plus nine per cent, compared to around seven per cent for other sectors.

We can see how the saving is used from the capital account.

All told, the household sector was a net lender of €7.8 billion in the first half of 2024. The largest destination of these funds are household deposit accounts.

Latest figures from the Central Bank show that household deposits with entities regulated by it are growing by around €700 million a month, and at almost €160 billion are up €50 billion on where they were at the end of 2019.

The Apple state aid case is over. Some thoughts.

2024-09-27T13:48:00.005+01:00

The Apple State-Aid saga reached a surprisingly abrupt conclusion a few weeks ago. While not a huge surprise that the EU’s highest court, the CJEU, took a position closer to the Commission’s original finding of State-Aid – the opinion of the Advocate General indicated this was the direction the court may go - the decisiveness of the court’s ruling was surprising.

Rather than kick the case back to the lower court and give guidance to its deliberations, the EU’s top court issued a “final judgement in the matter”. And this final judgement “confirms the European Commission’s 2016 decision: Ireland granted Apple unlawful aid which Ireland is required to recover“. There is no avenue to appeal this decision.

Here we will pull together a collection of thoughts on the case:

Three entities and two circles
The activities of the Irish branch
The profit generated from procurement, sales and distribution activities
Would you accept a 12.5 per cent margin on costs?
All changed, changed utterly
The residual claimant: the head office
The tax provisions of Apple Inc. and deferred tax
The U.S. triggers the payment of the deferred tax
The ECJ cuts Apple’s U.S. tax bill
It’s not stateless income, it’s ours
An instrumentality of the parent
What if LVMH tried this court-approved profit shifting?
What next?

1. Three entities and two circles

At its heart, the Apple case involves three entities.

Apple Inc., the group’s overall parent and two components within Apple Sales International, a subsidiary within the Apple group,
ASI’s head office, which was located in the United States, and
ASI’s sole branch, which was in Ireland.

The crux of the case is how these three entities can be covered by two non-overlapping entities. How one draws these circles plays a key role in how their tax outcomes are assessed. Given the hierarchy of the entities there are two possible approaches.

The first is to do it by location. Apple Inc. and ASI’s head office are both in the United States, with ASI’s branch being located in Ireland so we could draw the circles like this:

This was the approach preferred by Ireland through both the Revenue Commissioners and the legal case put forward, the EU’s lower court, and by Apple, at least for Irish tax purposes. These means viewing the activities of the Irish branch on a standalone basis.

The second approach is to do it by distinct legal entity with the two components of ASI viewed jointly.

This is the approach preferred by the Commission and now, decisively, by the EU’s top court. It is also the approach that had approval, at least implicitly, from the U.S. tax authorities.

Where one draws these circles ultimately decides on where one’s position on the case will lie. The circles determine which activities and functions are taken into account when determining the profit of the Irish branch which is key to the case.

2. The activities of the Irish branch

The activities of the Irish branch are not in dispute. As described in the latest judgement this was:

ASI’s Irish branch is responsible for, inter alia, carrying out procurement, sales and distribution activities associated with the sale of Apple-branded products to related entities and third-party customers in the regions covering Europe, the Middle East, India and Africa (EMEIA) and the Asia-Pacific (APAC).

These are important, but relatively mundane functions, for a technology company such as Apple. The relevant provision of the Irish tax code for taxing a branch of a non-resident company is Section 25(2)(a):

25 (2) For the purposes of corporation tax, the chargeable profits of a company not resident in the State but carrying on a trade in the State through a branch or agency shall be—
(a) any trading income arising directly or indirectly through or from the branch or agency, and any income from property or rights used by, or held by or for, the branch or agency, but this paragraph shall not include distributions received from companies resident in the State, and

And this is the crux of the case. How much profit did the Irish branch of ASI make? When Apple came to Ireland first in 1980 this wasn’t an issue as Apple was able to avail of the zero effective tax under Ireland’s Export Profit Tax Relief. The amount of profit didn’t matter as any number multiplied by zero is going to give zero.

3. The profit generated from procurement sales and distribution activities

The amount of profit earned by the Irish branch did matter when Apple was required to move to the 10 per cent Corporate Tax rate for “manufacturing” in 1991. The latest judgment summarises what happened then, noting that the company that became Apple Sales International, ASI, was then known as Apple Computer Accessories Ltd, ACAL:

15      By letter of 2 January 1991, the Apple Group’s tax advisors informed the Irish tax authorities of the existence of ACAL, the Irish branch of which was described as being responsible for sourcing from Irish manufacturers products intended for export.
16      On 16 January 1991, the Apple Group’s representatives sent a letter to the Irish tax authorities summarising the terms of the agreement which had been concluded during a meeting between that group and those authorities on 3 January 1991 as regards the determination of ACAL’s chargeable profit. According to that letter, the calculation of the branch’s profit was to be based on a margin of 12.5% of branch operating costs, excluding material for resale.
17      By letter of 29 January 1991, the Irish tax authorities confirmed the terms of the agreement as expressed in the letter of 16 January 1991.

So, ASI’s Irish branch was to have a profit margin of 12.5 per cent of its operating costs. That might look modest now when viewed through the lens of a global behemoth making over $2 billion of pre-tax profit a week but by the mid-1990s Apple was on the verge of bankruptcy. In both 1996 and 1997, Apple recorded operating losses of over $1 billion. These wouldn’t be cumulatively offset by operating profits until the middle of 2005.

In 2007, the base on which the profit of the Irish branch was amended but the margin remained unchanged. The previous year Apple as a whole had an operating income of $2.4 billion. Paragraph 320 of the ECJ judgement gives us their view of the Irish branches willingness to provide the above described services at a profit margin of 12.5 per cent:

320 In the present case, the Commission did not err when it found, in recital 221 of the decision at issue, that Ireland had renounced tax revenue from ASI and AOE since the contested tax rulings endorse methods for allocating profits which produce an outcome that separate and standalone undertakings operating under normal market conditions would not have accepted. Those tax rulings reduce the chargeable profits of ASI and AOE for the purposes of applying section 25 of the TCA 97 and, therefore, the amount of corporation tax which they are required to pay in Ireland, as compared to other companies taxed in Ireland whose chargeable profits reflect prices determined on the market in line with the arm’s length principle.

The court found that Section 25 of the Taxes Consolidated Act was not applied correctly because, in their view, the outcome that resulted would not have been accepted by independent entities operating under normal market conditions, i.e., the 12.5 per cent profit margin was a violation of the arm’s length principle.

Combining figures from the US Senate Investigation and the Commission’s State-Aid Decision we can get see the outcomes that resulted for the Irish branch:

We can see that the turnover of the branch was around €500 million in each year from 2010 to 2012. It is likely that some of this is excluded from the base used to calculate the profit of the branch but can see that the branch had a profit that averaged €42 million per annum from 2009 to 2012. Irish Corporation Tax was levied on these profits giving the effective rates in the final column.

4. Would you accept a 12.5 per cent margin on costs for supplying these services?

One way to look at this is whether you as an independent operator would enter a contract to provide procurement, sales and distribution services to Apple on a similar basis. Would I accept a 12.5 per cent profit margin on my costs and an average profit of €40 million per annum? Sign me up!

Apparently though, per the Commission and the ECJ, I should be concerned with what the head office of ASI did or did not do - and completely uninterested in what Apple Inc. did or did not do.

When the Commission examined this they concluded that “all profit from sales activities, other than the interest income obtained by ASI and AOE under normal market circumstances, should have been allocated to the Irish branches of ASI and AOE.”

Through a cost-sharing agreement with Apple Inc., ASI had a license to sell Apple products in all markets outside the Americas. In rough terms, these regions accounted for 50 per cent of Apple’s sales over the period covered by the state-aid finding, essentially Apple’s financial years from 2004 to 2014.

In that period Apple had a cumulative operating profits of nearly $240 billion. Half of that is $120 billion. If we convert to euro we would get around €105 billion, which when multiplied by 12.5 per cent gives the €13 billion headline-grabbing tax amount.

OK, so if I was willing to sign up to provide procurement, sales and distribution services for Apple’s sales outside the Americas for a profit of €40 million per annum, would I sign up for 50 per cent of Apple’s global profits? I guess that depends on when you put the offer in front of me. It would not have been so attractive in the 1990s when Apple was recording operating losses in excess of one billion dollars a year – with my share of that being half a billion a year.

Sure, by 2006, Apple had generated annual operating profits of $2.4 billion but as recent as 2003 it had recorded an operating loss, albeit a small one. There was an operating loss of close to $350 million in 2001. Would I take a guaranteed 12.5 per cent margin on my support services provider or take a punt on a full profit-share of a subsidiary in a volatile company in a volatile sector?

This isn’t really as clear cut as the Commission and ECJ might have us think. There are no black and white answers when it comes to such choices, which in turn translates into plenty of grey areas when it comes to applying the arms-length principle.

The cost-plus approach guaranteed that there would always be profit in Ireland. So, when Apple itself was generating annual losses of more than $1 billion in the mid-1990s, the Irish branch was reporting positive profits and paying Irish Corporation Tax. Even by 2006, with operating losses not long in the rear-view mirror, the 12.5 per cent cost-plus margin might well have seemed pretty attractive.

5. All changed, changed utterly

Of course, we all know what happened. On the 9th of January 2007, Steve Jobs revealed the iPhone with the product going on sale in June of that year. European sales began in November 2007.

This utterly changed the landscape. By 2009, Apple was generating an operating profit of $1 billion a month; by 2012 it was $1 billion a week. Here is the performance of Apple Inc. for the period covering the State Aid case: the financial years from 2004 to 2014. Click to enlarge.

Within ASI, the annual profit before tax went from $1 billion in 2006 to $25 billion in 2014.

The Commission, and now the ECJ, have found that if the Irish branch was a “separate and standalone undertakings operating under normal market conditions” it would not have entered into an arrangement to provide procurement, sales and distribution services to Apple unless it was paid the $1 billion of operating profit of ASI in 2006 and pretty much 100 per cent of ASI’s profit thereafter, summing to over €100 billion across the period in question.

The only part of ASI’s profit not attributed to the Irish branch was the relatively minor portion due to interest earned on ASI’s main bank accounts – as the board of directors at the head office had given direction on how these was to be managed.

Though this was pretty much the only actions linked to profits found in the minutes of the board meetings of ASI. Per the US Senate Investigation of May 2013 we learned that “Of ASI’s 33 board meetings from May 2006 to March 2012, all 33 took place in California.”

It was the board of ASI who entered the cost-sharing agreement with Apple Inc. that gave the rights to ASI to see Apple products in all markets outside the Americas. A cost-sharing agreement is a risky undertaking. As part of the agreement, the board of ASI agreed to cover a proportion of Apple Inc.’s research and development costs. The US Senate investigation gave the details of these payments for a number of years:

Paying these amounts to be left with whatever interest might be earned on the company’s bank accounts does not seem like something someone operating under normal market conditions would accept.

6. The residual claimant: the head office

Under the approach envisaged by Apple, the residual claimant of the profits of ASI would accrue to the head office – with the Irish branch remunerated on a fixed basis for the functions it carried out. The head office was located in the United States. As we have noted before, this was commented on by Senator Carl Levin in his opening statement to the May 2013 US Senate Hearing:

“Prior to 2012, ASI, like AOI, had no employees and carried out its operations through the action of a U.S.-based board of directors, most of whom were Apple Inc. employees in California. Of ASI’s 33 board meetings from May 2006 to March 2012, all 33 took place in California.

In short, these companies’ decision-makers, board meetings, assets, asset managers, and key accounting records are all in the United States. Their activities are entirely controlled by Apple Inc. in the United States.”

The question then arises as to why didn’t the U.S. levy tax on the profits of the U.S.-based head office of ASI. That is slightly the wrong question. The U.S. did tax the profits of ASI – the U.S. had a worldwide tax system that levied U.S. tax on the worldwide profits of U.S. MNCs. The key question is why didn’t the US collect the tax that was due.

This goes back to the old chestnut of deferral and repatriation. Under the old U.S. corporate tax regime, U.S. MNCs could delay the payment of some of their U.S. corporate income taxes until the profits were repatriated back to the U.S. This meant until the profits were transferred to a U.S. registered entity with the MNC group. And ASI, of course, was an Irish-registered company.

7. The tax provisions of Apple Inc. and deferred tax liabilities

Over the period 2004 to 2014, Apple Inc. recorded a cumulative pre-tax profit of $243 billion. Of this $89 billion was described as “domestic income”, that is earned with the U.S. for U.S. tax purposes with the remaining $154 billion described as “foreign income”. We know that the bulk of this foreign income was generated by ASI and is described as “foreign” even though it accrued to the U.S. head office of ASI.

Apple’s tax affairs have generated significant interest, in particular, the very low tax rates reported on its foreign income. Over the same period, Apple made a provision for foreign, i.e. non-U.S., corporate income taxes of $4.9 billion. With that $154 billion of income, that gives an effective foreign tax rate of just 3.2 per cent, with this falling as low as 1.2 per cent in 2010.

What can occasionally get missed, is that Apple’s domestic tax rate is also noteworthy. Again, looking at the same period, Apple’s annual reports show that it had a provision for domestic, i.e. U.S. federal and state, taxes of $58.7 billion. With a domestic income of $89 billion, this gives an effective domestic tax rate of 65.9 per cent, with this reaching as high as 78.2 per cent in 2010.

How could Apple have a domestic tax rate of nearly 80 per cent when the rate of the federal corporation income tax was 35 per cent during this period with state and local taxes adding no more than another three or four per cent?

The reason is because Apple’s provision for U.S. taxes included a provision for tax on the income earned by ASI. This is “foreign” income but U.S. tax is due on it and would be paid if Apple transferred the profits to a U.S. incorporated entity within the company. Of course, Apple had no need to do this but were indicating to shareholders that not all of the profit generated would be available for distribution as dividends.

We can see this if we look at the tax items in the earlier table of Apple Inc.’s performance over the period 2004 to 2014. Cumulatively over the period, Apple had tax provisions of $63.5 billion but made cash tax payments of $43.5 billion. The reason for the difference is set out in the accounts.

The Company’s effective tax rates for all years differ from the statutory federal income tax rate of 35% due primarily to certain undistributed foreign earnings, a substantial portion of which was generated by subsidiaries organized in Ireland, for which no U.S. taxes are provided because such earnings are intended to be indefinitely reinvested outside the U.S. As of September 27, 2014, the Company had deferred tax assets arising from deductible temporary differences, tax losses and tax credits of $5.1 billion and deferred tax liabilities of $20.3 billion.

The Company’s consolidated financial statements provide for any related tax liability on undistributed earnings that the Company does not intend to be indefinitely reinvested outside the U.S. Substantially all of the Company’s undistributed international earnings intended to be indefinitely reinvested in operations outside the U.S. were generated by subsidiaries organized in Ireland, which has a statutory tax rate of 12.5%. 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.

As stated above, Apple did not provide for U.S. taxes on $70 billion of its foreign income but did so for the remainder. This resulted in a deferred tax liability of $20 billion, which is the U.S. tax due, net of credits for any foreign taxes paid. It was always clear that the profits of ASI were subject to U.S. tax but the U.S. had a very weak system for actually collecting it.

8. The U.S. triggers the payment of the deferred tax liabilities

With the passing of the Tax Cuts and Jobs Act (TCJA), the U.S. set about collecting tax on the accumulated foreign profits of its MNCs. In its case, Apple noted the following in its 2018 annual report:

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on previously deferred foreign income.

As of September 30, 2017, the Company had a U.S. deferred tax liability of $36.4 billion for deferred foreign income. During 2018, the Company replaced $36.1 billion of its U.S. deferred tax liability with a deemed repatriation tax payable of $37.3 billion , which was based on the Company’s cumulative post-1986 deferred foreign income.

After 2014, Apple increased its deferred tax liability on its “foreign” earnings by around $5 billion a year and this gave the $36.4 billion amount for the end of the 2017 financial year referred to above. The TCJA introduced a deemed repatriation tax where the profit of U.S. MNCs on which the payment of the U.S. tax due was deferred was deemed to be repatriated to a U.S.-registered entity.

In line with the name of the Act this was at a significantly lower rate than if the 35 per cent federal rate had been paid when the profit had been earned, rather than deferred. For Apple, the effective rate of the deemed repatriation tax was around 15 per cent. This means that there was around $21 billion of U.S. tax due on the $154 billion of foreign income earned by Apple in the period from 2004 to 2014. This is a gross liability of around $23 billion minus tax credits for tax paid abroad of around €2 billion.

It was not by design but the amount of the deferred tax liability Apple had in 2017 and the amount due under the deemed repatriation tax was pretty similar. This would not have been the case if Apple had provided for the U.S. due on a lower or higher share of its foreign income.

9. The ECJ cuts Apple’s U.S. tax bill

Related to this is a note Apple released on the date the ECJ’s ruling was delivered. In the note, Apple said:

On September 10, 2024, the ECJ announced that it had set aside the 2020 judgment of the General Court and confirmed the Commission’s 2016 State Aid Decision. As a result, the Company expects to record a one-time income tax charge in its fourth fiscal quarter ending September 28, 2024, of up to approximately $10 billion, which will increase the Company’s effective tax rate for the quarter.

What is interesting here is that Apple indicates that the State Aid finding will add around $10 billion to its tax bill rather than the headline amount which would be around $15 billion. This is because the payment of this tax to Ireland will reduce the amount of tax Apple has to pay to the U.S.

As this tax is due under the deemed repatriation tax, the foreign tax credits that Apple can claim are based on the ratio of the federal corporate income tax rate that applied at the time the profit was earned (35 per cent) and the effective rate of the deemed repatriation tax (15 per cent). In the case of Apple, they will be able to claim a tax credit for around one-third of the foreign tax paid. So, if Apple pays $15 billion of tax to Ireland, they will claim a U.S. tax credit of $5 billion, thereby giving the net $10 billion increase in their taxes.

The EU’s State Aid finding will have reduced U.S. tax revenues by $5 billion.

10. It’s not stateless income, it’s ours

The likelihood of this was discussed shortly after the Commission launched its State Aid investigation. Here is former U.S. Assistant Treasury Secretary Bob Stack during an appearance before the U.S. Senate Finance Committee in 2016:

Mr Warner (D): I wanted to ask as well, I know Senator Wyden raised the question of the European Union state aid cases and the overall impact because of potential targetting of American companies and what that impact is for American taxpayers.
Mr. Stack could you kind of walk through that just of terms if a taxpayer was sitting in front of you, how does it affect me ultimately or how could it potentially affect that taxpayer.
Mr Stack: Sure Senator. When a US company pays a tax in a foreign jurisdiction and then they bring money home they get a credit for the tax paid in a foreign jurisdiction up to a certain limit.
Now, in the normal case that means you are actually doing some business in Germany, let's say, and you had some tax and you brought it home and you got your credit. In this fact pattern, the EU is coming along and they're saying "Oh we think when you cut your deal with Ireland or Luxembourg or the Netherlands that in fact you, the company, should have been paying more tax to those jurisdictions."
Now if we were to determine that those payments are in fact taxes and we were to determine that they are creditable under our rules, now when that money comes home from those companies in addition to the credit they got for the tax they originally paid in those jurisdictions they get an extra credit. And that credit to this taxpayer you asked me about means in effect the US Treasury got less money and in effect made a direct transfer to the European jurisdiction that is getting the ruling from the Commission.
So if these turn out to be creditable taxes it is the US taxpayer that are footing the bill for these EU investigations.

He later added:

Mr Stack: We were faced with a choice as to whether speak up now before multi-billion dollar judgements are rendered against our companies or wait until the decisions have been handed down so we have been raising this issue today.

From my personal observation of these cases and study it appears to me that the Commission is attempting to tax income that really under international standards doesn't belong to any member and, I agree with you, my perception is that they are trying to tax the income that they perceive as untaxed because it has been deferred for US tax and they see it as something that is there for the taking because our system has let it set offshore without being taxed. So that's my perception of the substantive state of those cases. They have ways to go; I could be wrong. But that's the way I see them today.

A similar point was made by another former U.S. Treasury official, Pam Olson, at the 2015 OECD Conference on International Tax:

“The ‘stateless income’ that is so often referred to is in fact the un-repatriated profits of U.S. companies. ... The reality is stateless income isn’t stateless at all — it’s ours, and we have merely delayed taxing it until it’s repatriated. It is nothing for the rest of the world to be obsessed over.

But obsessed over it we are. And now Ireland will collect tax on it. But there have been suggestions that the U.S. should not have left things go this far and should already have collected the tax on these profits. Again, we go back to Sen. Carl Levin at the U.S. Senate hearing.

11. An instrumentality of the parent

Sen. Levin also draws circles and like the Revenue Commissioners in Ireland he does so on a geographic basis. His view is probably best represented by taking the quote in full.

Sen. Levin (D): Apple is exploiting an absurdity, one that we have not seen other companies use. The absurdity need not continue. Although the United States generally looks to where an entity is incorporated to determine its tax residency, it is possible to penetrate an entity’s corporate structure for tax purposes, and collect U.S. taxes on its income, if the entity is controlled by its U.S. parent to such a degree that the shell entity is nothing more than an “instrumentality” of its parent, a sham that should be treated as the parent itself rather than as a separate legal entity. AOI, AOE and ASI all sure seem to fit that description.
Take AOI. AOI has no owner but Apple. AOI has no physical presence at any address. In thirty years of existence, AOI has never had any employees. AOI’s general ledger, its major accounting record, is maintained at Apple’s U.S. shared service center in Austin, Texas. AOI’s finances are managed by Braeburn Capital, an Apple Inc. subsidiary in Nevada. Its assets are held in a bank account in New York.
AOI’s board minutes show that its board of directors consists of two Apple Inc. employees who live in California and one Irish employee of Apple Distribution International, an Irish company that AOI itself owns. Over the last six years, from May 2006 through the end of 2012, AOI held 33 board meetings, 32 of which took place in Cupertino, California. AOI’s lone Irish-resident director participated in just 7 of those meetings, six by telephone, and in none of the 18 board meetings between September 2006 and August 2012.
ASI’s circumstances are similar. Prior to 2012, ASI, like AOI, had no employees and carried out its operations through the action of a U.S.-based board of directors, most of whom were Apple Inc. employees in California. Of ASI’s 33 board meetings from May 2006 to March 2012, all 33 took place in Cupertino.
In short, these companies’ decision makers, board meetings, assets, asset managers, and key accounting records are all in the United States. Their activities are entirely controlled by Apple Inc. in the United States. Apple’s tax director acknowledged to the Subcommittee staff that it was his opinion that AOI is functionally managed and controlled in the United States. The circumstances with ASI and AOE appear to be similar.
Our legal system has a preference to respect the corporate form. But the facts here present this issue: Are these offshore corporations so totally controlled by Apple Inc. that their identity as separate companies is a sham and a mere instrumentality of the parent, and if so, whether Apple’s claim that AOI and ASI owe no U.S. taxes is a sham as well?

Although, Sen. Levin sets outs this view that the head office of ASI be considered an instrumentality of Apple Inc., there has never been an indication that the U.S. authorities considered exploring this course of action.

12. What if LVMH tried this court-approved profit shifting?

In paragraph 8 of its June 2014 letter to Ireland announcing that there would be a formal State Aid investigation into the tax treatment of Apple in Ireland, the European Commission stated the following about companies shifting profits to low-tax jurisdictions:

(8) Multinational corporations pay taxes in jurisdictions which have different tax rates. The after-tax profit recorded at the corporate group level is the sum of the after-tax profits in each county in which it is subject to taxation. Therefore, rather than maximise the profit declared in each country, multinational corporations have a financial incentive when allocating profit to the different companies of the corporate group to allocate as much profit as possible to low-tax jurisdictions and as little profit as possible to high-tax jurisdictions. This could, for example, be achieved by exaggerating the price of goods sold by a subsidiary established in a low-tax jurisdiction to a subsidiary established in a high-tax jurisdiction. In this manner, the higher-taxed subsidiary would declare higher costs and therefore lower profits when compared to market conditions. This excess profit would be recorded in the lower-tax jurisdiction and taxed at a lower rate than if the transaction had been priced at market conditions.

Ireland is a low-tax jurisdiction for companies and one might expect the accusation to be that companies report too high a share of their profits in Ireland. However, the crux of the State Aid case was the opposite – that Apple had reported insufficient profits in Ireland.

The Commission’s finding, as upheld by the ECJ, that Apple’s profits in Ireland should be over €100 billion higher. In essence, the finding is that this huge amount of profit should be shifted from ASI’s head office in the U.S. to ASI’s branch in Ireland. Let’s consider what a European company trying to do this might look like.

Consider the example of the French luxury goods conglomerate LVMH named after the Louis Vitton, Moët, and Hennessy brands. In recent years LVMH has been generated pre-tax profits of around €20 billion a year.

Let’s say LVMH establishes an Irish-registered subsidiary and creates an arrangement so that the rights to use its brands in markets outside the EU are transferred to this subsidiary (where we assume 60 per cent of LVMH’s sales are made). The subsidiary can get external producers to make products in LVMH’s range and sell them in markets outside the EU. Due to the value of the brand rights held by the subsidiary the goods are sold at a very significant mark-up above cost.

The board of the subsidiary is made up mainly of the executives of LVMH itself. The board meetings are held and all management functions are undertaken at LVMH’s headquarters in Paris with all the key decisions taken by the executives of LVMH. In accordance with Article 8(2) of the Ireland-France tax treaty this company will not be tax resident in Ireland.

A company shall be regarded as a resident of France if it is managed and controlled in France.

The key decisions taken by the LVMH executive include the choice of external producers to use, the promotion and advertising of the brands, the locations to sell from and the prices to charge. These decisions apply across all the markets LVMH serves and are not recorded in the minutes of the board meeting of the Irish subsidiary. All relatively benign so far.

But let’s now add that the subsidiary has a branch in Ireland with the branch tasked with important support functions for the sale of LVMH products outside the EU. The brand rights are not transferred to the Irish branch and remain with the subsidiary’s head office in Paris.

The branch provides procurement, sales and distribution services for LVMH’s non-EU sales. The Irish branch is the only location where the subsidiary has employees and is the only location within the subsidiary where activities linked to the sale of LVMH products are undertaken.

What should be profit of the Irish branch be?

Under the approach previously applied by the Revenue Commissioners the profit of the Irish branch would be established based on the risks, functions and assets of the Irish branch. The Irish branch does hold significant assets. The most valuable asset, the brands’ intellectual property is held by the head office. The Irish branch does not carry significant risk. This is faced by the executives of LVMH and the decisions they have to make. The functions of the Irish branch are important but routine support functions. A profit based on a mark-up of costs would not appear unreasonable with the residual profits accruing to the subsidiary’s head office where the main decisions influencing the profits generated are made.

But that was the old approach. The new approach must be in line with the judgement of the ECJ in the Apple case. The above is not in line with the judgement. We must consider two elements of the judgment.

That the functions performed by the executives of Apple Inc. have no bearing on the division of profits between the head office and branch of ASI, and
That in the absence of evidence, such as board minutes, establishing that decisions were taken and implemented by the head offices of ASI, the profits of ASI should be allocated to its Irish branch.

In our LVMH story it means, that while the decisions of the LVMH executives might dictate the activities of the Irish branch, they have no role in determining the profits of the Irish branch and second, if these decisions taken by the LVMH executives are not recorded in the board minutes of its subsidiary, and the subsidiary’s head office in Paris shows no other functional or operational capacity then all of the profits of the subsidiary should be recorded as profits of its Irish branch.

And there we have it. We have shifted 60 per cent of LVMH’s profit from France to Ireland and all in line with the ECJ’s ruling in the Apple case. There was no need to relocate IP. No need for elaborate transfer pricing reports. Just repeat the fact pattern of the Apple case and rely on the CJEU judgment. Hmmm, that does not seem like a direction we would like things to go.

13. What next? Maybe not much under Section 25 but what about 291A?

Section 25

There are potentially significant consequences from the CJEU ruling. The first is how Section 25 of the Taxes Consolidated Act is to be applied. It is now law that the taxation of branches in Ireland of non-resident companies requires the activities of the entire company to be assessed. It was by assessing the entire company that the court ruled that the profits attributed to ASI’s Irish branch were under-reported.

Up to now, the Revenue Commissioners will have applied Section 25 to branches operating in Ireland by assessing only the activities of the Irish branch. This approach is not in line with the court’s interpretation of how Section 25 should be applied and will need to be discontinued.

As this is now the law of the land, the Revenue Commissioners may to apply it retrospectively in instances where they know that following the approach set out by the CJEU would lead to a different outcome. It is not the Revenue Commissioners’ job to make law it is their job to implement it.

Were there other non-resident companies with Irish branches that involve similar fact patterns to those seen in the Apple case? It is almost certainly the case that there were. Probably many.

If the Revenue Commissioners are aware of these, or have reason to believe that the position could be similar, do they need to go back and review the tax outcomes that arose and ensure that they are in line with the CJEU judgement? Yes.

Will this result in significant changes or additional tax liabilities? Probably not. The reason is the four-year statute of limitations on the Revenue Commissioners re-opening tax returns, bar instances of criminality, fraud or tax evasion. Those do not apply as the error the CJEU have ruled on was made by the Revenue Commissioners not the companies.

The passage of time has seen structures similar to that used by Apple, and other structures used by US MNCs such as the “double irish” phased out. Most of the IP at the heart of such structures was relocated in 2019 and 2020 so that the outcomes before that, which would likely fall foul of the CJEU’s ruling, are now mainly outside the four-year statute of limitations imposed on the Revenue Commissioners.

That doesn’t mean some of these cases may not be revisited. Under state-aid law, the Commission can require that any state-aid conferred on a company must be collected from a date ten years before the Commission announces a formal investigation. If the Commission was to announce an investigation now the relevant period would extend back to September 2014, when we know many of these structures were still in place.

There are no indications that the Commission intends to announce such investigations in other companies and, as time goes on, the window for which such investigations will apply becomes smaller and smaller.

Section 291A

We know what Apple did next. In 2015, Apple relocated the IP at the centre of the state aid case from the ASI head office in California to a company that became Irish resident. This company bought the license from ASI for something in the region of €225 billion. This valuation seems plausible given the annual profits been generated at the time.

Under Section 291A of the Taxes Consolidated Act, a company acquiring intangible assets can offset the capital outlay of purchasing the asset against its income using capital allowances. The TCA sets out how the capital allowances can be claimed. Getting a deduction for capital expenditure is a standard feature of all tax regimes and is not at issue here. What may be at issue is sub-section 7 of Section 291A:

(7) This section shall not apply to capital expenditure incurred by a company—
(a) for which any relief or deduction under the Tax Acts may be given or allowed other than by virtue of this section,
(b) to the extent that the expenditure incurred on the provision of a specified intangible asset exceeds the amount which would have been paid or payable for the asset in a transaction between independent persons acting at arm’s length, or
(c) that is not made wholly and exclusively for bona fide commercial reasons and that was incurred as part of a scheme or arrangement of which the main purpose or one of the main purposes is the avoidance of, or reduction in, liability to tax.

This all seems fairly benign. Paragraph (a) sets out that a deduction for the capital expenditure incurred can only be taken once. Paragraph (b) requires that amount of the deduction not exceed the arm’s length value. Paragraph (c) is the one of interest and sets out that there will be no deduction if the transaction was part of a scheme intended to reduce a company’s tax liability.

This may now have to be looked at in light of the CJEU ruling. Under the old approach previously applied by the Revenue Commissioners, the profit linked to the licenses held by the ASI head office was not subject to tax in Ireland. The court have now ruled that these profits should be subject to tax in Ireland. For 2014, this was about €20 billion of profit and €2.5 billion of tax.

With its restructure, Apple formally moved the licenses to Ireland and the company that acquired them claimed a deduction under Section 291A. This meant that in 2015, this company had a tax bill of nil on the profit linked to the licenses.

So, we now have a situation where ASI owes €2.5 billion of tax to Ireland for 2014 on the licenses it held as the CJEU has ruled that the associated profit is to be attributed to the Irish branch of ASI to one where a company that became Irish resident buys the same licenses from ASI and claims a deduction under S291A of the TCA, thereby reducing its tax bill on those same profits to nil in 2015. Isn’t this something that S291A(7)(c) was designed to prohibit?

It is hard to know where this will go, if anywhere. Under the old approach applied by the Revenue Commissioners there is no issue here. The profits were not located here in 2014 and were not subject to tax here. When the company that bought the licenses relocated here in 2015 it was perfectly reasonable that it would be entitled to a deduction on the capital expenditure it had incurred. But that was under an approach taken that has now been deemed by the CJEU not to comply with the law.

If Apple had a tax liability of €2.5 billion on those profits in 2014 there is no way the Revenue would have allowed a deduction reducing that tax liability to nil in 2015. And through the lens of the CJEU ruling that is precisely what has happened. Given the four-year statute of limitations on the Revenue Commissioners it may not be something they have to revisit.

The Commission, however, can look back as far as they want with any state aid to be repaid going back ten years from the time a formal investigation is initiated. Back in 2017, outgoing Competition Commissioner, Margrethe Vestager, indicated that they were interested in Apple’s 2015 restructure:

"I have been asking for an update on the arrangement made by Apple, the recent way they have been organized, in order to get the feeling whether or not this is in accordance with our European rules but that remains to be seen," Vestager told a news briefing at an international tech summit in Lisbon.
"We are looking into this of course without any kind of prejudice, just to get the information," she said.

No formal investigation was initiated and given the resounding vindication of the Commission’s position by the CJEU, the Commission may not want to open up another front targeting possible state aid given by Ireland to Apple. Getting another €25-30 billion of Corporation Tax for Ireland may not be a priority and they may take the win at the CJEU and move on.

What will be interesting to see is if there is any reaction in the U.S. As discussed above, the ruling means a $5 billion reduction in Apple’s U.S. tax payments. Will this prompt a reaction by say, the IRS? This may also be unlikely because, although ASI’s head office was in the U.S., ASI itself was not a U.S. tax resident and the head office was not deemed a permanent establishment in the U.S., and this means that the IRS cannot lean on the U.S/Ireland tax treaty to support any position it might make. And do the IRS really want to be out arguing that an entity was operating in the U.S. but was outside the domestic U.S. tax base?

All told, it may be that the consequences from the CJEU ruling to Apple itself may be limited to the €13 billion. But what it means for the taxation of MNCs and the application of transfer pricing guidelines will certainly reverberate for some time.

Continued elevation (with more to come) but also volatility in recent Corporation Tax revenues

2024-09-09T12:39:00.006+01:00

The elevated levels of Corporation Tax became even more elevated in the recently-published Exchequer returns for August. On a rolling 12-month basis, the amount of Corporation Tax collected is now touching €28 billion – with the chart showing the 12-month sum needing the vertical axis to extended yet again (and probably not for the last time).

Incredibly, this means that the chart showing the cumulative totals by calendar year still works.

A chart showing 11 separate series should not work but, almost without exception since 2014, the cumulative year-to-date total for any given month has exceeded the equivalent amount for all earlier years. And when it briefly didn’t in October last year it was noted here that it was due to volatility and the pattern quickly resumed.

We can see the 2024 line scorching ahead of 2023 with record annual receipts again likely to be collected. The biggest month for CT is yet to come in (November) but the €16.3 billion already collected in 2024 is ahead of the full year total for every year up to 2021.

We will come to some of the reasons shortly but initially we can note that the annual growth in the 12-month sum is potentially beginning to spike again.

The last decade has seen three periods of significant growth (2015, 2018/19 and 2021/22). Whether 2024/25 joins them remains to be seen – and it will be from a much higher base. Growth in 2026 is almost fully baked in at this stage (Pillar 2 etc.)

Although other taxes are performing strongly, they are not growing as rapidly as CT, thus the share of Exchequer Tax revenue due to CT has also reached new heights. CT contributed just under 30 per cent of total Exchequer Tax in the 12 months to the end of August.

Volatility

We can see the impact of volatility if we just look at the monthly receipts for August. Up to 2020, August was not a significant month for CT revenues but this has changed in recent years.

August 2024 was up over 100 per cent on August 2023 but it’s actually not that much higher than August 2022 - if we have now reached the stage where €1 billion of additional tax in one month is not that much. It is a 20-foot container full of €50 notes!

As we have frequently pointed out, companies pay the bulk of their Corporation Tax in two installments, during their financial year (month six and month 11), with a final balancing payment due nine months after their year end. It can be instructive to combine the payments from months 6 and 11 for various different year ends.

Companies with a September year-end, will pay most of their Corporation Tax in March and August (months 6 and 11 of their financial year). Combining these months shows that timing, AKA volatility, may be, in part, responsible for the surge seen when August is looked at in isolation.

On a combined basis, we can see that the combined receipts for March and August are up on last year – but that this increase is close to 25 per cent rather than exceeding 100 per cent in the case of August alone.

The is likely to be some firm-specific circumstances that has seen the spread of payments between March and August vary in recent years – but as can be seen their combined sum is not as volatile. In 2023, a greater share of the payments seemed to be made in March whereas this year a greater share of the payments were made in August. For the year as a whole it largely washes out – that container of €50 notes excepted.

Therefore, we cannot read too much for the rest of the year into the 100 per cent growth seen in August. But we already have a pointer to what will happen in November, the most important month for CT – it will go gangbusters -again.

The Definition Market Income and the Decline in its Inequality

2024-07-31T17:14:00.007+01:00

An earlier post looked at the recent decline in the inequality of market income in Ireland. The latest updates of SILC estimates from Eurostat show that this has been maintained. Eurostat now have 2023 SILC estimates for most EU Member States – though for income it should be noted that the reference period for income in the SILC is the previous calendar year. Thus, Eurostat’s 2023 figures for income inequality are the result of household incomes in 2022.

We start with Eurostat’s S80/S20 quintile share ratio for what it terms Gross Market Income. By this measure Ireland continues to have the highest inequality in the EU15 (the UK figure that is slightly higher than the 2023 outturn for Ireland is from 2018 – with no subsequent figures available from Eurostat due to Brexit etc.).

Given the vertical scale required to include the estimates for Ireland, it is pretty much impossible to see what has happened in other countries, though the legend reflects the ranking of the latest estimates. Ireland has a peak value of 95 (for 2013) while the highest value for the other countries shown is 20 (the UK in 2012).

To get a better picture of where things stand now here are the 2023 estimates for all 27 EU Member States.

At 12.8, Ireland has the highest quintile share ratio for Gross Market Income in the EU. If the EU was considered a single entity, the aggregate outcome would be 9.3, pushed up by the relatively high value for large countries such as Germany and France. The arithmetic mean across the EU27 countries is 8.5.

As with all indicators, definitions matter, and the definition of Gross Market Income used by Eurostat may be a bit wider than we might expect. Here are the income components from the SILC that are included by Eurostat in Gross Market Income:

Nothing stands out until we get to the bottom. Eurostat’s measure of Gross Market Income includes all old-age and survivor’s benefits. Typically, we might expect only income from occupational and private pensions to be included as market income. Eurostat include all pension income including means-tests and non-contributory payments from national welfare systems in what they call Gross Market Income.

This differs from agencies such as the CSO and OECD who only include income from occupational and private pensions in their definitions of market income. The CSO’s national definition of market income can be found here, with the OECD approach set out in this document (see page six). And while they have similar treatments for occupational and private pensions their definitions of market income do differ slightly in other regards.

There is nothing wrong with Eurostat’s approach – it’s just a case of being conscious of what is included. Indeed, absent the inclusion of all pension income, calculating a quintile share ratio for market income would not be very useful as the estimates would be large and likely volatile. For most countries, given old-age population ratios, there would likely be a large share of the bottom quintile with no market income if the only pension income included was from occupational and private pensions.

To illustrate this, here is the CSO’s latest Lorenz curve for market income using the national definition:

The horizontal axis is the percentile of the population ranked from lowest income to highest income. The Lorenz curve for market income remains at zero up until the 13th percentile of the population – one-eighth of the population are in households with no market income. The income share only reaches two percent by the 20th percentile. The share of the top quintile is 48 percent. Thus, using the national definition of market income, the S80/S20 ratio is around 24. If would have been much higher – and possibly indeterminate – for the period 2010 to 2012.

With other EU countries having higher old-age dependency ratios it is possible that using the CSO (or OECD) definition these countries could have even higher outcomes than 24 for their S80/S20 ratios for market income (excluding old-age transfers). Given the small amount of market income in the bottom quintile under this definition these quintile share ratio estimates could also be very volatile and not very useful.

As we have seen above, when all pension transfers are included as with Eurostat’s definition the quintile share ratio of gross market income for Ireland comes in, not at 24, but at around half that at 12.8, with most countries showing far less volatile outcomes than Ireland.

Unlike the quintile share ratio which uses parts of the distribution, an inequality indicator that takes into account the full population distribution is the gini coefficient. Unfortunately, Eurostat don’t publish a gini coefficient for their definition of gross market income.

The closest is one they publish for disposable income before social transfers (pensions excluded from social transfers). The main difference between this and gross market income is that income taxes and social insurance contributions are deducted. Like gross market income all pensions are included. Here are the latest outturns from Eurostat.

Given what we have seen above for the quintile share ratio and it is not surprising to see Ireland has one of the highest outturns for this indicator. It is likely the impact of Ireland’s progressive tax system that pulls the Irish figure down from the top spot but it is still the fifth highest.

Eurostat have a related gini coefficient for disposable income before social transfers (pensions included in social transfers). In this instance pensions are excluded from income. From Eurostat, this is the measure that is perhaps closest to market income but it still has differences: income taxes and social contributions are deducted while income from private and occupational pensions are not included.

Here we see Ireland has a very different relative position. Excluding all pensions, Ireland has a relatively low level of disposable income inequality and indeed has the lowest in the EU15. However, if taxes weren’t deducted as they are here, it is likely that Ireland’s relative position would be significantly higher if we wish to look at market income.

All in all, it may that the range of indicators provided by Eurostat, while useful, may not fully hit the mark if we wish to focus on the distribution of market income. Eurostat’s quintile share ratio for gross market income is useful but the income definition used is possible broader than we might like.

There is no single indicator or particular definition that is supreme but the one that may be most useful here is the gini coefficient for market income produced by the OECD. Their latest estimates (2021 for most countries) place Ireland as having the eighth highest inequality of market income in the OECD (and fifth among EU Member States in the OECD).

It can also be seen how close many of the estimates are. If would not take a huge reduction to bring Ireland’s estimate down to the level of Austria (0.51 versus 0.49) which would move Ireland to 16th, or pretty much mid-ranking in the OECD.

However, given the above discussion we know that pensions and the old-age dependency ratio can have a significant impact on population-wide measures of income inequality. As Ireland has a relatively low old-age dependency ratio we might expect the inequality of market income to be lower here. However, the relatively low old-age dependency ratio is offset by a relatively high child-dependency ratio – thus the working-age share of the population is broadly in line with peers.

That no single indicator is supreme can be further developed by considering different age cohorts of the population. The OECD only give a single indicator for the inequality of market income – the gini coefficient. However, they do give it by different age groups.

For market income it might be instructive to look at inequality among the working-age population, i.e., those aged 18 to 65 years. This strips out the effect of pensions and the old-age dependency ratio.

What we see is a picture that isn’t much changed. In the latest figures, Ireland has the seventh-highest inequality of market income in the OECD with the gap to the middle largely the same – though it can be noted that Ireland is the highest among EU Member States in the OECD.

Whether Ireland actually will move towards the middle remains to be seen. In the last decade the OECD’s population-wide gini coefficient for market income in Ireland has gone from close to 0.60 to around 0.50, but all of that fall was pre-COVID. Since 2020, the gini coefficient for market income has not been falling.

With the latest OECD data not extending beyond 2021 there are still some COVID impacts to wash out of their estimates. The CSO’s estimates extend one year beyond those of the OECD – to income reference year 2022.

The CSO figures point to the gini coefficient for market income (reference year 2022) now being back to where it was pre-COVID (2019). The estimates from SILC 2024 which will reflect household incomes in 2023 will give us a better indication of where things stand post-COVID.

CT receipts go gangbusters - again

2024-07-03T17:36:00.001+01:00

Can we really keep saying that? We might have expected an increase in June but the outturn was exceptionally strong. For a single month, the €5.9 billion collected in June is second only to the €6.3 billion collected last November.

As shown below, June 2024 was by far the largest June on record.

Of course, as we discussed earlier, the June receipts are also a pointer to what might happen in November. Here’s what happens if we extend the June/November relationship for the outturn we have just seen for June 2024: a fitted value for November 2024 of €8.2 billion – which alone would be equivalent to the entire amount of CT collected in 2017.

The strong June means that 2024 is now considerably higher than 2023. In the first six months of 2024 €12.2 billion of CT has been collected. On its own this would be the fourth-highest full year ever – and there are still six months to go.

It is pretty likely now that the sequence of calendar year CT receipts exceeding the previous year will be extended to 13 years (back to 2012).

The June outturn was enough to push the rolling 12-month sum up to a new high of €25.5 billion.

The next month of interest will be August when we will see how much the fruit harvest brings in.

The continuing elevated levels of Ireland's Corporate Tax receipts

2024-07-03T12:51:00.011+01:00

Ireland’s Corporation Tax revenues have been at an elevated level for some time. For the past 18 months their 12-month rolling sum has hovered around €24 billion, with little more than volatility causing it to move slightly up and down.

There is no clear recent trend, but the chart of calendar year outturns could be set for another year with an annual increase. It is 2011 since the amount of Corporation Tax collected in a year was lower than the preceding year. Here are the outturns since 2014, with the line for each subsequent year being higher than the last.

2024 did slip slightly behind 2023 in March and April, but this was made up by a strong May. The month receipts in May 2024 of €3.6 billion were the highest May on record.

May is a significant month for CT receipts but it is not generally a useful pointer for receipts for the year as a whole. May is month 11 for companies with an end-June year-end so has greater links with December of the previous year (month 6 for such companies). June is both a significant month for CT and a pointer for receipts for the year as a whole. June is month 6 for companies with an December year end, with November being month 11 for them. Large companies pay the bulk of their Corporate Tax in two preliminary payments during the year. These payments are made in month 6 and month 11 of the companies’ financial years. Here are the monthly receipts for June and November (and a fitted line) since 2009. The relationship is clear.

What will June 2024 bring? It is hard to know. As set out at the beginning the fluctuations in CT have been due to the volatility that can be expected in such a concentrated series (the top 10 payers account for more than 50 per cent of total CT receipts). The year-on-year monthly comparisons are pretty wide. Obviously, most of them have been positive in recent years, but certainly not all. There have been months where the amount collected was significantly down on the same month in the previous year. But this has typically not been those months that are important for CT – such as May, June and November (though other months such as March and August are starting to join them).

And we can see above that the range of changes has been a bit lower over the past 18 months or so. All-in-all, it probably points to June 2024 being relatively close to June 2023, maybe +/- 10 percent, which in turn points to yet another high return in November. And if there is to be a surprise, it may be on the upside.

Annual Volume of Market Purchases by FTBs Tops Out at 17,500

2024-05-17T11:35:00.002+01:00

Figures released with the CSO’s March update of the Residential Property Price Index point to the volume of market purchases by FTBs topping out at 17,500 on an annual basis.

In the 12 months to January 2024, stamp duty filings were made for 17,496 purchases by first-time buyers. For March, the equivalent annual figure dipped to 17,275, a reduction of just over 200.

This reduction is due to a fall in the number of existing dwellings purchased by FTBs. The number of new dwellings has remained in and around 5,400 on an annual basis for the last year or so.

A local peak for FTB purchases of existing dwellings was reached in October of last year with 12,242 stamp duty filings made in the year to that month. The latest figures for March show this 12-month sum declining to 11,891, a fall of around 350.

Since Census Night 2022 (April 3rd) just over 34,000 stamp duty filings have been made for market purchases by FTBs, giving a run-rate of around 330 per week. Non-market transactions, self builds and bequests will give further first-time owners.

Ireland’s largest taxpayer motors along

2024-05-03T12:46:00.002+01:00

OK, we can’t be 100 per cent sure that Microsoft Ireland Research is Ireland’s largest taxpayer but it certainly is a likely candidate for being so. The 2023 accounts are now available and like last year continue to paint a strong picture. Let’s start with the income statement:

From 2019 to 2023, turnover pretty much doubled (after previously doubling from 2017 to 2019). Operating costs haven’t increased as rapidly with operating profits increasing by around two and a half times since 2019, to reach $23.3 billion.

In recent years, the tax charged in the income statement has been around 12 per cent of operating profit plus net interest income. This continued to be case in 2023.

At $2.9 billion, Microsoft Ireland Research (MIR) is likely responsible for around ten per cent of Ireland’s Corporation Tax revenues and something a little north of two per cent of general government revenue. MIR has also seen its non-financial footprint increase here in recent years.

In 2023, Microsoft Ireland Research had an average of 1,242 employees and incurred an aggregate of $157.7 million of expenses on wages and salaries. This gives an implied average of $127,000 per person employed. In total aggregate staff costs were $234.7 million once PRSI, pension costs and share-based remuneration are factored in.

We are primarily interested in Microsoft Ireland Research because of the size of its tax charge. It does not have the highest amount of Microsoft’s employees in Ireland. That impact belongs to Microsoft Operations Ireland Limited which had an average of 2,779 persons employed in 2023 (2022: 2,386).

In 2023, MIOL incurred wages and salaries costs of $340 million at an average of $122,400 per person employed. On top of that MIOL had a tax charge of $652 million, up from $476 million in 2022.

Combined MIR and MIOL, had a tax charge of $3.5 billion in the twelve months to the year ended June 30th 2023. Add in $700 million of total staff costs and we’re at $4.2 billion.

Recent changes in the tenure status of households headed by an Irish or UK national

2024-04-25T12:38:00.013+01:00

This is a companion to the previous post which looked at changes in the homeownership rates in the 1991 and 2022 censuses. Here we look at more recent changes in the tenure status for households headed by an Irish or UK national using figures kindly provided by the CSO.

From Census 2016 to Census 2022 the number of households enumerated headed by an Irish or UK national increased by 83,293, or 5.5 percent. In 2022, these were 87 percent of the total households enumerated (and 89 percent of households where the citizenship of the reference person was provided, i.e. excluding “not stated”).

Here is the tenure status of households headed by an Irish or UK national in the last two censuses.

When looking at the changes, by far the largest absolute increase was for owner-occupiers, whose number increased by 48,522 over the period. There was a rise in the number of outright owners without a loan or mortgage and a decline in the number of owner-occupiers with a loan or mortgage.

In relative terms, the number of owner-occupiers rose by 4.4 per cent. With the total increasing by 5.5 percent, this results in a decline in the home-ownership rate for this group from 75.3 percent in 2016 to 74.8 percent in 2022. Households whose tenure status is “not stated” are excluded from the determination of the tenure rates shown in the table.

The next largest absolute increase was for social housing tenants. The number of households who are tenants of local authorities or approved housing bodies shows a rise of 20,741 over the period. This is a 14.5 percent increase and resulted in the the share of households headed by an Irish or UK national who were local authority or AHB tenants increasing from 9.6 percent to 10.5 percent.

The next largest increase was for households who occupied a dwelling free of rent. There were a further 3,643 such households in 2022, though these remained less than two percent of all households headed by an Irish or UK national. These are likely to arise due to intra-familial arrangements where the owner and occupier of the dwelling differ.

Of the possible occupancy statuses, the smallest absolute increase for households headed by an Irish or UK national was for those renting from a private landlord. There were just an additional 360 such households in Census 2022, an increase of 0.2 per cent. The share of these households declined from 13.4 percent in 2016 to 12.8 percent in 2022.

This does not tally with a property-owning democracy being replaced by a rent-paying one.

Indeed, related findings from the census indicate that we need more rental dwellings not fewer. On Census night 2022, 33 percent of 25 to 29 year-olds were enumerated at their parents’ house. The equivalent figure from 2011 was 24 percent.

If the share of 18 to 35 year-olds living with their parents had stayed at the level it was in 2011, then almost 100,000 more young adults would have left the family home. The number of households with a reference person aged under 35 declined from 367,000 in 2011 to 255,000 in 2022.

Part of this is demographics and aging, but a lot of it is due to the shortage of housing. The share of the population aged 20 to 34 has declined from 23 percent to 18 percent. However, the share of households with a reference person under 35 has declined from 22 percent to 14 percent. If the share of households had just tracked population change there would be 70,000 more households with a reference person aged under 35.

If we were to crudely apply the actual tenure status rates from Census 2011 for the under 35s, then these additional 70,000 households would be split as 35,000 private rentals, 25,000 owner-occupiers and 10,000 social rentals or occupied free of rent. However, the extra 100,000 still living at home are not the same as those living independently.

Most people when they leave the family home go initially to rental accommodation. Some of those still in the family home may be looking to buy, but most would choose to rent if reasonable options were available. Ireland needs more of all types of housing but options for renters are far more restrictive then they are for buyers.

The very large increase in the number of young adults still living at home can be addressed by providing more rental accommodation for these people to move out to. At a point in time, private renting is a legitimate form of tenure status and is no less deserving of being provided for. However, almost all commentary and pretty much all policy is aimed at owner-occupiers. Units provided for renters are considered a "home lost".

As the opening table of the post shows, since 2016 there has been an 48,500 increase in the number of households headed by an Irish or UK national who are owner-occupiers. Over the same period the number of such households who are renting privately increased by 360.

For every one additional household headed by an Irish or UK national who became a private renter, 135 became owner-occupiers.

In the inter-censal period, April 2016 to March 2022, separate CSO figures show that there were 79,500 market transactions by first-time buyers. On an annual basis these are currently running at 17,500 per 12-month period.

If we look at the homeownership rates derived from the census we can see the decline in recent decades. However, most of this decline took place in the first decade of this century.

From Census 2002 to Census 2011 the homeownership rate declined from 80 percent to 71 percent. From Census 2011 to Census 2022 the decline levelled out considerably with a further fall to 69 percent.

Part of the reason the decline is moderating is because people are staying in owner-occupied houses for longer – their parents’ houses. With more options, people could get out of the family home and set up their own one-person or two-person households – in suitable rental accommodation. They could then look to join the buying brigade down the line.

Just how upside down things have got can be see by these two recent postings on Daft.ie:

These two 2-bed apartments are a short distance from each other in the Douglas area of Cork city. The property for sale is listed at €275,000. The property for rent is listed at €2,200 per month.

At an interest rate of five percent, over 20 years, the monthly repayment on a mortgage of €240,000 would be €1,600 per month. That’s €600 a month to help cover the additional costs of being an owner-occupier, though obviously without the flexibility of being able to move easier.

If the sale and letting were to happen at the advertised prices it would give a price-to-rent ratio of just over ten. By international and recent historical standards in Ireland this is low. Remember this?

Again, something does not feel right. Then it was prices that were far too high; now it is rents.

There is lots of evidence that the squeeze is most acute in the private rental sector. As shown in an earlier post here are the housing-cost overburden rates for renters and mortgagors across the OECD.

And this only reflects those who are actually in rented accommodation.

To repeat what we saw at the start. Since Census 2016, there are an extra 83,300 households headed by an Irish or UK national. Of these, the increase can be split as:

48,500 owner-occupiers
20,700 social housing tenants
3,600 occupied free of rent, and
360 private renting

with a 10,000 increase in the number of “not stated”. If a ratio of 135:1 is the natural order of things, then fine, but it seems more than a little extreme and is just going to result in more young adults having to stay at home for longer.

The impact of “not stated” and migration on Ireland’s home ownership rate

2024-04-25T11:08:00.009+01:00

The census is a key source of reliable information on population and households in Ireland. One important indicator taken from the census is on households’ tenure status: split between different types of owners and renters. Since the publication of the census results on housing there has been considerable focus on the decline of Ireland’s homeownership rate relative to its peak in 1991.

In the 1991 Census, there were 808,385 households enumerated as owner-occupiers from a total number of permanent households of 1,019,723. That gives a homeownership rate of 79.3 per cent.

By 2022, the number of owner-occupiers had increased by almost 50 percent to reach 1,210,925. However, the total number of households had increased by 80 per cent and there were 1,836,728 permanent households enumerated in Census 2022. Thus, the homeownership rate was reduced to 65.9 per cent.

Here we will consider the impact of two factors on the change in the homeownership rate from the 1991 to 2022 Census:

Households whose tenure status is “not stated” on their census form, and
The change in the resident population due to migration

A subsequent post looks at recent changes in the tenure status of households headed by an Irish or UK national and examines how the housing squeeze is much more acute in the private rental sector, yet it is owner-occupiers that capture all the attention.

TENURE STATUS “NOT STATED”

In the 1991 Census, there were 9,396 households who were recorded with a tenure status of ‘not stated’. This was equivalent to 0.9 per cent of the total number of permanent households.

The table above is taken from the Census 1991 report on housing. It is notable that this report was one of the last to be produced and was not published until February 1997, highlighting that this was not a priority area for results and publication.

In contrast, for Census 2022, the report on housing was the second to be published. In this instance there were 80,235 permanent households whose tenure status was not stated on their census form. This was equivalent to 4.4 percent of households.

One reason for the rise in “not stated” is the use in recent censuses of Reconciliation Forms for known households that did not return a census form. Compliance with the census is high but not universal. The CSO note that in 2016, just over 20,000 households were enumerated using Reconciliation Forms.

This makes the population count more accurate – which is, after all, the primary purpose of the census – but does impact other indicators taken from census data. Part of the reason for the decline in the headline homeownership rate is due to the increase in the share of households whose tenure status is not stated.

By definition, the census data cannot tell us anything about the tenure status of such households. Saying that homeownership has declined in favour of “not stated” is pretty meaningless.

Thus, it would be better to calculate such rates using only those households for whom a tenure status is known. Using the numbers above this would give a base of 1,010,327 households in 1991 and of 1,756,493 households in 2022. The amended homeownership rates become:

1991: ( 808,385 / 1,010,327 ) x 100 = 80.0%
2022: ( 1,210,925 / 1,756,493 ) x 100 = 68.9%

Among households whose tenure status is known the homeownership rate declined from 80 per cent in 1991 to 69 percent in 2022.

MIGRATION

The second factor to be considered is migration. As noted in an earlier post, the Ireland of 2022 is very different to that of 1991.

In the 1991 Census, 98.4 per cent of the population of 3.5 million was born on the islands of Ireland and Great Britain. The equivalent figures for the 2022 Census were 85.4 per cent of a population of 5.1 million. The number of people living here who were not born in Ireland or Britain went from 55,000 in 1991 to 730,000 in 2022.

Beginning with Census 2006, the CSO published a breakdown of tenure status by the nationality of the reference person of the household. They have now also kindly provided a similar breakdown for the 2022 Census by the citizenship of the reference person of the household.

For 1991, the overall homeownership rate of 80.0 per cent can be taken as that for households headed by an Irish or UK national. Other households made up such a small proportion of the population that they could not significantly move the homeownership rate.

In 2022, there were 237,560 households with a reference person who was not enumerated as an Irish or UK citizen. Of these, there were 48,221 households where the citizenship of the reference person was not stated, giving 189,339 households with a reference person with a citizenship other of Ireland and the UK. Thus, households headed by a non-Irish or non-UK citizen were 10.6 percent of households enumerated in the census (excluding not stated).

Across the world, the homeownership rate of immigrants is typically found to be lower than that of native populations. In Census 2022, the homeownership rate of the near 190,000 households headed by a non-Irish or non-UK citizen was 24.3 per cent. This will impact the overall result.

The details provided by the CSO show that the homeownership rate in Census 2022 for households headed by an Irish or UK citizen was 74.8 per cent.

Thus, while the headline homeownership rate in the census declined from 79 percent in 1991 to 66 percent in 2022 we note that:

If households whose tenure status was “not stated” on the census form are excluded the decline in homeownership is from 80 percent in 1991 to 69 percent in 2022, which better reflects the overall change in the homeownership rate in Ireland, and
If looking at households headed by an Irish or UK national the decline is from 80 percent in 1991 to 75 percent in 2022, which better reflects the change in the homeownership rate for the native population.

On the Price and Quantity of Housing

2024-04-05T11:55:00.007+01:00

Housing problems are complex but usually can be distilled back to a shortage of housing relative to demand. For those looking, it can be difficult to find somewhere to live, particularly for renters. More housing makes it easier to find somewhere to live, though sometimes this is in dispute.

Earlier in the week we had a opinion piece that focused on prospective homeowners with a broad focus on price and a limited view on supply.

On Price

The piece sets out findings of research undertaken by the Bank of England:

For every 1 per cent increase in lending rates, the researchers of Threadneedle Street found a commensurate 3 per cent decrease in house prices, and vice versa.

[.]

Another significant determiner of house prices is population growth. For every 1 per cent increase in the natural growth of households since 1990, the UK researchers found a 2 per cent increase in house prices. The same 1-to-2 per cent ratio also applies to immigration – people coming to work here.

[.]

And the third factor: wages. Each 1 per cent rise in incomes results in a 2 per cent rise in house prices.

[.]

Finally, housing supply itself. A 1 per cent increase in stock (some 20,000 houses) should theoretically reduce prices by 2 per cent.

The precise source isn’t provided but we will just taken them as given in the piece. We will use the most recent intercensal period, 2016 to 2022, to do a crude approximation of the impact of these estimates if applied to Ireland.

Central Bank data shows that the interest rates on new business mortgages averaged 3.50 per cent in 2016. For 2022, this has declined to 2.68 per cent. This gives a decline of 0.82 percentage points (which seems more relevant than the 30 per cent reduction)

The population data from the Census shows an 8.1 per cent increase over the same period. The annual data from the Employment Costs Survey shows the yearly earnings of a full-time employee rising from €45,640 in 2016 to €54,189 in 2022, an increase of 18.7 per cent.

And again using the Census, the housing stock increased from 2,003,645 in 2016 to 2,112,121 in 2022, an increase of 5.4 per cent.

Applying the Bank of England’s estimates gives the following impacts on prices:

Mortgage Rates: –0.8 x 3 = +2.4
Population: +8.1 x 2 = +16.2
Annual Earnings: +18.7 x 2 = +37.4
Housing Stock: +5.4 x –2 = –10.8

It is all very crude but the sum of those impacts is +50.6 per cent. The CSO’s residential property price index went from 107.5 in 2016 to 164.0 in 2022, a rise of 52.6 per cent. I don’t know, it’s like this supply and demand stuff works, or something.

However, the negative impact on prices of the increase in the housing stock is dismissed in the piece because prices haven’t fallen as the housing stock has increased and “are at their highest level since the Celtic Tiger.”

But the price effect of the increase in the housing stock is there! And, as done here, can be shown using the estimates provided in the piece. Using those shows that house prices in 2022 would have been 10-11 per cent higher if there had been no increase in the housing stock since 2016.

The increase in the housing stock reduced house prices relative to what they would have been if that increase hadn’t occurred. This is how supply and demand models work: relative prices, ceteris paribus etc.

The piece is right that interest rates have been a key driver of house prices in recent decades. We examined that here which showed that even though price to income ratios have increased in Ireland, indicative initial mortgage payment to income ratios are actually lower than they were in the 1970s and 1980s. This is the final chart from that post:

As was pointed out in the previous post it is with the deposit required that the most significant increases have been seen. Higher nominal house prices (due to lower interest rates) have seen the amount required for a 10 per cent deposit rise from around a quarter of the average annual household income in the 1970s and 1980s to almost a half of household income now.

Ireland does not stand out as having unusually high mortgage payment burden. Here is OECD data on the median mortgage burden as a share of disposable income for owners with mortgages (with data for all bar five OECD member countries).

For newer and possibly larger mortgage burdens we can look at the housing cost overburden rate. This is the share of households where housing costs consume more than 40 per cent of disposable income. In this instance OECD data for both owners with mortgages and private tenants are provided.

Ireland is hard to locate in Panel A because Ireland has one of the lowest housing cost overburden rates for owners with mortgages in the OECD. In Panel B it can be seen that Ireland has one of the highest housing cost overburden rates for private tenants in the OECD. Whose plight is in need of easing?

On Quantity

The piece takes a very limited view of quantity: it’s new houses for first-time buyers or nothing, and is best represented by this paragraph.

In Dublin city last year, 94 per cent of all new housing was apartments, 98 per cent of which were for rent. First-time buyers there bought just 75 new houses. In Cork city just 3.5 per cent of all new housing was sold with first-time buyers buying 17 new houses. In 2017, over 80 per cent of all new scheme houses (what the CSO calls housing estates) was sold on the market, and last year that was 52 per cent. Individual buyers have been sidelined and forgotten by successive governments.

The figures for the Dublin City local authority area are correct but they are limited. Per the CSO, there were stamp duty filings for 1,975 first-time buyer transactions in Dublin City Council’s (DCC) area in 2023. That’s a long way from 75.

The difference, of course, is explained by the most frequent type of property that is transacted: existing ones. Dublin City has a housing stock of around 250,000 units. That most of the supply for first-time buyers comes from this should not be a surprise.

We can get insight into the composition of the housing stock in DCC’s jurisdiction from the Census.

The area has 150,000 houses – 60 per cent of the stock. If 50,000 apartments are added, houses would still make up 50 per cent of the stock. 3,200 apartments were completed in the DCC area last year.

We can start to see if “individual buyers have been sidelined and forgotten” by looking at the national tenure status figures from the Census.

From Census 2016 to Census there was an increase of almost 140,000 in the number of households in Ireland. Of this increase, 63,400 were owner-occupier households.

Somewhat unusually the next largest increase was for the “not stated” category. Then comes the increase for tenants of local authorities and approved housing bodies which increased by just over 23,000. The fourth largest increase was for households renting from a private household which made up 15 per cent of the total increase in households over the period.

The supplementary data to the CSO’s residential property price index gives details of the number of transactions. Between Census 2016 and Census 2022, stamp duty filings were made for 80,000 FTB transactions. The figures show that there were 17,500 FTB transactions in 2023.

The breakdown shows that there were 5,000 FTB purchases of new properties and 12,500 FTB purchases of existing properties. For the whole of Dublin, i.e. County Dublin, there were 5,000 FTB transactions last year.

On top of purchases, there will also be first-time owners due to single or one-off houses that are built for the occupier and will not have a stamp duty transaction to record. 5,500 single houses were completed in 2023.

On Homeownership Rates

Homeownership rates are used to highlight the plight of prospective buyers.

As the proportion of new housing for sale plummets, despite increasing overall supply, our home-ownership rates follow suit, and are now below the European average at just 66 per cent. Thirty years ago, 81 per cent of households owned their own home. That is a staggering drop in a short space of time, but the Government is remarkably silent on (or oblivious to) the issue.

Ireland’s homeownership rate has declined since 1991 but the Ireland of 2022 is very different to the Ireland of 1991.

In the 1991 Census, 98.4 per cent of the population of 3.5 million was born on the islands of Ireland and Great Britain. The equivalent figures for the 2022 Census were 85.4 per cent of a population of 5.1 million. The number of people living here who were not born in Ireland or Britain went from 55,000 in 1991 to 730,000 in 2022.

It is true that the overall homeownership rate declined from 80 per cent in 1991 to 69 per cent in 2022 (when households with a tenure status of ‘not stated’ are excluded). However, what the various census results show is that this decline occurred from 20o2 to 2011, during which the rate declined from 80 per cent to 71 per cent. The homeownership rate for All Households has been relatively stable since 2011.

The above chart also shows some outturns for homeownership by nationality – specifically the homeownership rate for all households and for those headed by an Irish or UK national.

As discussed, this was essentially the entire population in 1991, when the homeownership rate was 80 per cent. The first time a breakdown of homeownership by nationality was provided was with the 2006 Census.

Thus far, no results for homeownership by nationality have been published by CSO for Census 2022. Going back to Census 2016, the homeownership rate for households headed by an Irish or UK national was 75 per cent.

Going from 80 per cent in 1991 to 75 per cent in 2016 is a decline, but not a staggering one. The significant change in Ireland has been in the proportion of the population who were born somewhere else.

In line with the experience elsewhere, immigrants have lower homeownership rates. Of the 150,000 households in Census 2016 not headed by an Irish or UK national, just 22,800 were owner-occupiers, giving a home-ownership rate for this cohort of 16 per cent. Nearly three-quarters of such households are private tenants.

Finally, on homeownership rates, it should be noted that they are based on households that actually exist. If there is not enough housing people may stay in owner-occupied households longer than they want to. We previously noted that in the recent Census, Ireland was short around 70,000 households headed by under 35s.

Between 2011 and 2022 the number of people aged between 20 and 34 declined by 11 per cent. However, the number of households headed by an under 35 declined by 30 per cent. Many of these people are living in owner-occupier households but they are not the owners; they are living with their parents.

There has not been enough analysis of the impact of current policies. Some 68 per cent of Irish 25-29 year-olds live with their parents; in Finland this is 5.7 per cent. We should be discussing that, or how a policy obsession with urban hyper-density housing and homes unsuitable for families has created unsustainable commuter sprawl under a Green Minister for Transport.

There is no doubt that there are more people living with their parents for longer, but a figure of 68 per cent is outlandish. For a start, around a quarter of the population aged 25 to 29 are non-Irish citizens (69,000 out of 296,000 in the latest Census). It seems unlikely that a large share of those are living with their parents.

The figure comes from the SILC, and the CSO have set out the differences in figures for young adults living at home in this useful note. In the 2022 Census, 33 per cent of young adults aged 25 to 29 were enumerated at their parent’s house on Census night. This is still a high figure. It is much higher than it was in 2011 (24 per cent) and far, far higher than it is in Finland.

If the share of 18 to 35 year olds living with their parents had stayed at the level it was in 2011, then almost 100,000 more young adults would have left the family home. We might ask how does Finland do it.

They are not doing it through homeownership. Recent figures from Statistics Finland show that “eighty-one per cent of household-dwelling units of persons aged under 30 lived in rented dwellings.” A household-dwelling unit is formed by all persons living permanently at the same address. Separate figures show that they also tend to live alone.

Here are the population distributions for Ireland and Finland by type of household.

Over 20 per cent of Ireland’s population lives in households of three or more adults. These are the households of young adults living with their parents or young renters sharing a semi-d. In Finland less than four per cent of the population live in households with three or more adults.

On the other hand, in Finland, nearly 16 per cent of the population are people younger than 65 living alone. In Ireland, this group is six per cent of the population.

Ireland has lots of dwellings that are suitable for families. Over 85 per cent of our housing stock are houses, with 1.8 million houses in a total stock of 2.1 million dwellings. What we don’t have, if we are emulate Finland, are sufficient dwellings for households of one or two people, especially renters.

The Recent Decline in the Inequality of Market Income in Ireland

2024-03-26T10:32:00.012+00:00

One feature of how the inequality of disposable income is determined in Ireland has been the recent decline the in the inequality of market income. Market income is typically defined as including wages, rents, dividends, interest and typically certain pension income such as from private and occupational pensions.

Here is the OECD’s estimate of the gini coefficient for market income in Ireland since 2012 (chart crime incoming):

In the OECD’s dataset, the figure for the latest year, 2021, corresponds to the household survey undertaken for SILC2022. The reference year for income in the SILC is now the previous calendar year and this is the year the OECD use in their database. The 2022 outturn for Ireland will be based on the survey done for SILC2023. It should also be noted that in SILC2023 the CSO revised their SILC results for 2020 to 2022 (due to the population findings of the Census) though the impact of the revision on the main measures of income inequality was modest.

The recent reduction in Ireland of the inequality of market means Ireland no longer has the highest gini coefficient for market income in the OECD. The latest estimates show that France, Italy, Finland and the U.S. among others have higher gini coefficients for market income, with Ireland eighth highest.

It should also be noted that although the inequality of market income has been declining in Ireland for the past decade it has been lower previously – with lower gini coefficients estimated for the late 1990s/early 2000s.

The chart below has the recent outturns for Ireland and a selected set of OECD countries, showing Ireland losing its outlier status (and is also a chart having the vertical axis more appropriately start at zero).

We can start to get some insight into the nature of the fall in the inequality of market income in Ireland by looking at income shares. These can be determined using the information in the ESRI’s PILSReP Database.

Here are the quintile shares in the SILCs for selected years since 2013:

It can be seen that the market income share of the top 20 percent declined from 57 percent in 2013 to 50 percent in 2021. The offsetting share increase can be seen for the bottom three quintiles. The share of market income going to the bottom 60 percent increased from 16.5 percent in 2013 to 23.4 percent in 2019.

We can get more granular detail on this change by looking at the Lorenz curves – a plot of cumulative shares by the cumulative population. Here are the Lorenz curves for the distribution of market income in the 2013 and 2021 SILCs (again using figures from the ESRI’s PILSReP spreadsheet):

The most significant change happened at the bottom where there was a large reduction in the number of zeroes (i.e. non-recipients of market income). In the 2013 distribution of market income, a cumulative share of one percent was not reached until the 33rd percentile. By 2021, this was reached by the 24th percentile (with the 33rd percentile having a cumulative share of 4.1 percent).

The 2013 Lorenz curve remained at zero until the 22nd percentile; the 2021 distribution was zero until the 13th percentile. The recovery and expansion of employment significantly reduced the number of zeroes in the distribution of market income.

The associated reduction in unemployment also means that the impact of transfers on income inequality has also fallen. We can see this if we return to OECD data and look at their gini coefficients for market income, gross income (market income plus transfers) and disposable income (gross income minus taxes and social contributions).

For 2012, the OECD put the impact of transfers on Ireland’s gini coefficient at 0.20 points, reducing the gini coefficient from 0.58 for market income to 0.38 for gross income. The impact of taxes further reduced the gini coefficient by 0.07 points, giving the gini coefficient of 0.31 for disposable income.

For 2021, the impact of transfers reduced to 0.15 points (due to there being fewer recipients of unemployment related transfers). Transfers reduced the gini coefficient for market income from 0.51 to 0.36 for gross income. The impact of taxes was largely unchanged again reducing the gini coefficient by 0.07 points, giving the gini coefficient for disposable income of 0.29.

Thus, while there was a reduction of .07 in the gini coefficient for market income, this translated into a reduction of “only” 0.02 in the gini coefficient for disposable income, due to the reduced impact of transfers.

We can use the OECD to examine the impact of transfers and taxes on income inequality in all OECD member states in 2021 (or the latest available year in the dataset).

For 2021, the combined impact in Ireland of transfers and taxes on income inequality was the fourth highest among OECD countries. For transfers, Ireland was eighth highest, with transfers in Finland, France, Greece, Belgium, Austria, Poland, Italy and Czechia all having a bigger impact on inequality.

For taxes and social contributions, Ireland continues to stand out, with the 0.07 point reduction in Ireland having the largest impact on income inequality in the OECD.

Eurostat also provide measures of market income inequality. One of these is an S80/S20 quintile share ratio for gross market income. The outturns of this quintile share ratio for Ireland have shown a remarkable reduction in recent years; falling from almost 100 in 2013 to around 15 now.

The huge swings in this measure, at least for Ireland, indicate that it is sensitive to small changes at the bottom of the distribution. It was the relatively high number of zeroes in the distribution of market income in Ireland that gave rise to the exceptionally high outturns up to 2013 for this measure.

One can imagine the top 20 per cent/bottom 20 percent ratio being something like 50/0.5 in 2013 (giving an answer of c.100) and this moving to something like 50/3.5 in recent years (giving an answer of c.15).

This is a relatively small change in the share of the bottom 20 percent (from 0.5 percent to 3.5 percent) but it has a marked impact on the outturn for the quintile share ratio. And even with this reduction, Ireland remains the highest in the EU for this measure.

We could calculate a similar quintile share ratio using the shares of market income from the ESRI estimates in the table provided earlier. But the answer would be very very different, i.e. over 100 for recent years (50.3/0.4 = 127, for 2022), rather than the 15 shown in the Eurostat results for 2022.

The reason for the difference is due to the income definitions used. The CSO (and the OECD) only include private and occupational pensions in their measure of market income. For their measure of gross market income, Eurostat include all old-age transfer payments. This includes state pension benefits such as means-tested and non-contributory pension benefits and all survivors pension benefits. This is based on the concept of pension income being a part of lifetime earnings. Outside of private and occupation pensions, the CSO (and the OECD) count pension income as a social transfer, i.e., not part of market income.

Ireland’s gross market income quintile share ratio is high because of the relatively high number of non-recipients of market income and the relatively low number of pensioners. It has been found that excluding zeroes, Ireland “lies around mid-table in terms of market income inequality” in the EU.

It is also the case the estimates of market income inequality have tracked the estimates of quasi-jobless households (households with very-low work intensity where less than one-fifth of the available time is worked). For a considerable period, Ireland had the highest share in the EU for population aged under 60 living in households with very-low work intensity. This has not been the case since 2018. The lower level of quasi-jobless households is linked to the lower level of market income inequality – both are estimated using the SILC.

Eurostat also provide a number of gini coefficients. All of these are after income taxes and social contributions have been deducted but then vary in the amount of social transfers that are included. Eurostat provide three gini-coefficients:

Disposable income before all social transfers
Disposable income including pension transfers
Disposable income including all transfers

The final one is just the standard disposable income while the first is akin to market income after taxes. Here are the estimated gini coefficients across the EU15 for disposable income before all social transfers:

By this measure of market income inequality, Ireland has had, in recent years, one of the lowest levels in the EU15. This is after taxes and social contributions have been deducted and again we note that in Ireland these have the biggest impact on the gini coefficient across both the OECD and EU.

Taxes alone are unlikely to account for Ireland’s relative position here, which is at odds to what we have seen for other measures of market income inequality, such as the quintile share ratio. The difference in results suggests the definitions used are important. The quintile share ratio is determined using gross market income.

As discussed above this includes all pension income. The previous chart excludes all pension income. This would suggest that pension income has a significant impact on Ireland’s relative position using the quintile share ratio for gross market income.

We can see this if we look at the gini coefficient after adding in pension income.

So, after taxes and before all transfers, Ireland has a relatively low gini coefficient across the EU15. Once pensions are added in, Ireland has one of the highest gini coefficients in the EU15 (with the higher UK estimate in the above chart going back to 2018 when the UK last provided data to Eurostat). Eurostat quintile share ratio for gross market income includes all pension income which may go some way to explaining Ireland’s relatively high outturn for that measure (due to Ireland having a lower old-age dependency ratio).

This highlights that the impact of pensions is key to the transition from the distribution of market income across the population to that of disposable income. We don’t get much insight into this from the OECD’s income inequality estimates.

However, we can examine it if we look at the three gini coefficients provided by Eurostat at the same time. Here they are for Ireland since 2012:

In line with earlier results we see a decline in the gini coefficients from Eurostat for those income measures most closer aligned with market income. The gini coefficient for disposable income before all transfers declined from 53.5 in 2012 (Eurostat uses the 0-100 scale) to 47.0 in 2022. The gini coefficient for disposable income including pension transfers declined from 46.1 in 2012 to 38.6 in 2022.

The difference between those gini coefficients reflects the impact of pension transfers on income inequality. We can see that this has increased over the past decade, from an impact of 7.4 in 2012 t0 one of 8.5 in 2022. This is likely explained by the increasing share of pensioners in the Irish population.

The final gini coefficient is that for disposable income. This has also declined, albeit more modestly, from 30.4 in 2012 to 27.9 in 2022. The different to this gini gives the impact on income inequality of all transfers other than pensions. We can see that this has declined from 15.7 in 2012 to 10.6 in 2022. Again, this is likely driven by the reduction in unemployment and the reduced need for unemployment-related income supports.

We can compare the impact of pensions and other transfers across the EU in 2022.

In line with the OECD estimates, the estimates from Eurostat show that Ireland does not stand out for the impact of transfers on income inequality. In 2022, the impact of transfers on income inequality in Ireland was the ninth highest in the EU27.

However, what the Eurostat estimates allow us to see is the composition of that impact which can be broken down into that due to pensions and that due to transfers other than pensions.

And using this we can see that the impact of pensions on income inequality in Ireland is the lowest in the EU27, due likely to the low share of pensioners in Ireland’s population and also possibly the flat-rated benefits under the State pension schemes. And, on the other the impact on income inequality of transfers other than pensions in Ireland is the highest in the EU27. This will mainly reflect the impact of working-age transfer payments.

And, all of this is just how we get to the bottom line: disposable income. This is the income people have available to spend. The rest are somewhat notional figures. So, to conclude here are the gini coefficients for disposable income across the EU15.

In terms of the EU15, Ireland has moved from upper-middle to lower-middle for the inequality of disposable income.

Ireland’s growing population of young adults

2024-01-09T14:48:00.006+00:00

Using the results of Census 2022, the CSO estimated that Ireland’s population in April 2023 of young adults aged 25 to 34 was 645,000. If we go back five years to 2018, using Census 2016 as the benchmark, the CSO estimate that the population then of young adults aged 20 to 29 (the same cohort) was 575,000.

Between 2018 and 2023 the population of this cohort grew by 60,000, or a little over 10 per cent.

Using the CSO’s estimates of the population by single year of age we can get the population of this group back to 1998 (when the youngest, now 25, would have been born). After 1998, migration is the main driver of changes in the population of this cohort.

We can see that from 1998, the population of the cohort increased, likely as the parents of children moved to Ireland with them. There was then a fall after the 2008 crash. For the last ten years the size of the group has been increasing but this time, because the group is older, it is likely due to the autonomous decisions of young adults in their twenties.

We can see this pattern if we look at the estimated annual change in the population of this cohort.

In the years immediately preceding the pandemic, the size of this group was growing by an average of 10,000 per year. Since then there has been volatility in the series due to COVID and, more recently, the war in Ukraine.

Of course, these changes are the net outcome of inward and outward migration. We don’t have published estimates of migration by single year of age but the CSO do provide migration flows by age group. Here is what they show for people aged 15 to 24 and for those aged 25 to 44.

In both cases, we that the estimated net flows in the past ten years have generally been positive. Over the period since 1987 there is, though, a noticeable change in the age profile of migration.

In the late 80s and early 90s, migration, which was mainly emigration, was larger in the younger age category. In 1989, negative net migration of 15 to 24 year olds was more than twice as large as that of 25 to 44 year olds. By the turn of the millennium there was very little emigration of 25 to 44 years olds, while immigration of this group had become much stronger.

In the last 15 years, migration flows – both directions – in the 25 to 44 age group have been larger than those in the 15 to 24 age group. In the five years, pre-Covid, net migration of 25 to 44 year olds averaged +20,000 a year. The impact of Covid and the war in Ukraine make identifying the underlying trends for the last couple of years difficult.

To conclude here are two additional snapshots of Irish migration flows:

Migration flows of Irish citizens (available from 2006)
Migration flows with Australia (available from 2008)

The estimated net migration of Irish citizens was positive from 2017 to 2021 and was negative in each of the last two years: –2.200 in 2022 and –900 in 2023. And of the past eight years, Ireland has had one year (2022, -800) of negative net migration with Australia.

Finally, we use the Census results to assess how Ireland’s population of young adults has changed in recent years. From Census 2016 we have the population by nationality for the 20 to 29 age group. We roll that forward six years for Census 2022 and get the population by citizenship for the 26 to 35 age group.

There was a 76,500 increase in this cohort in the inter-censal period. Census 2016 recorded 554,000 people aged 20 to 29, and six years later, in Census 2022, there was 630,500 people aged 26 to 35

By country, the most significant change is for India, which shows an increase of 19,000 over the period. No other country had a five-figure increase. The next largest increases were Brazil, Romania and Italy. There were modest declines for Lithuania and the UK, with Poland showing the largest decline.

Over the period we can see that the number for Ireland increased slightly over the period – unsurprising as these are the benchmark for the estimated migration flows shown above.

Just how expensive has housing become?

2024-01-02T20:49:00.005+00:00

Nominal House Prices

Back in October, the CSO produced a publication to mark 50 years of Ireland and the EU. Included in this was a series of annual average house prices from 1970 to 2019. The values in the table are charted below and they show the average annual house price rising from €6,700 in 1970 (when converted to euro) to €295,700 in 2019.

The chart takes all the values as published by the CSO with the additional values for 2020 to 2022 taken from the CSO’s databank. The series closely follows other nominal house price series for Ireland (such as Fred’s) except for 2010 to 2015, with the chart above understating the post-2008 fall in house prices (which continued to 2012) shown by other indices – including the CSO’s own Residential Property Price Index.

The average for 2023 is likely to be around €370,000 and this estimated value is also shown above. Here are the CSO’s notes on the original table:

Note that 1970 – 2009 data is based on mortgage data whereas the 2010 – 2019 CSO data is based on Stamp Duty returns from Revenue. Figures for 1970 to 1977 are new prices only while all others are for new and second-hand properties in Euro or Euro equivalent.

The methodological change in 2010 and the low level of transactions, impacting the composition, likely explain the larger nominal fall of around 60 per cent) shown elsewhere. We will proceed with the values as given in the table. Our primary interest is a comparison of current prices to what they were in the 1970s, 80s and 90s rather than to what they were in the depths of the post-2008 recession.

In nominal terms, house prices are far higher than they were in the 1970s, 80s and 90s. In simple nominal terms, at €370,000 houses prices now are almost ten times higher than the average price from 1970 to 1995 (€38,700).

Indeed, the latest estimates are a record high for the series exceeding the previous peak of €350,000 from 2007. The chart also shows that in the last 50 years, Ireland has had just one period of nominal house price declines: 2008 to 2012.

But these numbers are of their time. Just how does €6,700 from 1970 compare to €370,000 in 2023? The price of everything has changed in the interim. Just how can we tell which year had more expensive housing?

Inflation-Adjusted House Prices

We can try to put the prices in terms of other products. The CSO collect national average prices for a range of items. Since 1983, they have been publishing a national average prices for 567ml of draught stout in a licensed premises. Using this, and some additional sources to extend the series back to 1970, we can put the average house price in any given year in terms of the number of pints that could be bought that year for the same sum.

In 1970, the average price of a pint was 21c and with an average house price of €6,700 the equivalent price of a house was 31,900 pints. For 2023, the average price of a pint is put at €5.48 and our estimated average house price of €370,000 puts 2023 house prices as equivalent to 67,500 pints of stout. Pint glasses mightn’t make good lenses but using them points to average house prices being about twice as high than they were 25 to 50 years years ago and not the ten times higher as the unadjusted nominal house prices suggest.

Using pints, we can see that houses were at their most expensive in 2006/7 – equivalent to over 90,000 pints. And the pints equivalent for 2023 is pretty much where it was back in 2002. Nominal house prices are well up on where they were in 2002 (€213,000 versus €370,000) but so too is the price of a pint (€3.21 versus €5.48). The current level is about twice as high as the 34,700 it averaged from 1970 to 1995.

Now maybe recent house prices are flattered by putting them in pints equivalent – due maybe to the impact of Excise increases. The CSO’s 50 years in the EU publication also gives us some other prices to use.

For example, a white sliced pan was 15c in 1973 and is €1.66 now. Taking the same approach as above shows that average house prices have gone from the equivalent of 60,100 sliced pans in 1973 to an estimated 222,400 now.

Perhaps for reasons for interest, it is harder to track down the full series for the national average price of a sliced pan. The pattern is as before and again we see that the peak level was seen back in 2006 – when the average house price was equivalent to over 300,000 sliced pans.

Real House Prices

While messing about with pints and sliced pans is useful for showing that nominal prices now are not the same thing are nominal prices from the past, it is whimsical at best. A much better approach would be to take a much broader set of prices such as the Consumer Price Index (CPI).

Figures from the CSO, show that prices as measured by the CPI in 2023 are around 1,420 per cent higher than they were in 1970. This means that spending €6,700 in 1970 (the nominal average house price) would be equivalent to spending 6,700 x 15.2 =101,900 if faced with the 2023 prices in the CPI.

We can use this to convert the nominal house price series into real prices using a constant price deflator. We can choose any year as the base. We will use 2023, thus the 2023 nominal and real figures are the same. The real figures for all other years are found by determining what the nominal house price for that year would be equivalent to if faced with the 2023 prices in the CPI.

The general pattern is roughly in line with what we got using pints and sliced pans. As expected using pints flatters current house prices: the price of a pint is around 26 times higher than it was in 1970 compared to a 15 times increase for the CPI. Sliced pans did the opposite as their price is around 11 times higher.

Anyway, using the CPI-deflated house prices we can see that Ireland had two sustained periods of real house price declines: the first from 1978 through to 1986 and the second from 2007 to 2012. Again 2006/07 shows as the peak.

Thinking in constant price terms isn’t always that intuitive and the numbers can be a bit messy. A better way to present real house prices is as an index: select a base year – typically set to 100 – and get values for all other years relative to that.

The shape of the charts are exactly the same. There was an extraordinary run-up in real houses from 1996 to 2006 when they more than trebled. When CPI adjusted, house prices in Ireland now are just over three times higher than what they averaged from 1970 to 1995. Why is this?

There are lots of reasons. One reason is that buying a capital good such as housing is not the same as buying consumption goods. Income may play a different role in the demand for housing compared to the demand for individual goods for consumption.

House Price to Income Ratios

To see whether house prices have become more expensive we can check how they have changed relative to income. Again, we can turn to some long-term series provided by the CSO. One such is the historical series published for the Average Industrial Wage (AIW) which goes all the way back to 1938.

We just need it from 1970 and this shows that the AIW now (€856 per week) is 22 times higher than what it was in 1970 (€23.20 per week). One simple thing we can do is divide the average nominal house price for each year by the annual Average Industrial Wage for that year. This gives:

In 1970, average house prices were around 5.5 times the annual average industrial wage. By the depths of the recession of the 1980s this has fallen to 3.6 in 1987. It remained around four up to 1994 and then exploded, with average house prices reaching almost 11 times the annual industrial wage in 2006 and 2007. It has remained on a rollercoaster and recent figures put average house prices at over eight times the AIW.

1970: €23.28 x 52 = €1,210 ; €6,700 / €1,210 = 5.5
1990: €286 x 52 = €14,866 ; €63,900 / €14,866 = 4.3
2006: €601 x 52 = €31,262 ; €339,500 / €31,262 = 10.9
2023: €856 x 52 = €44,512 ; €370,000 / €44,512 = 8.3

Relative to consumer prices, we saw that house prices in 2023 were around three times higher than what they averaged from 1970 to 1995. Relative to the average industrial wage, we see that house prices are around two times higher than what they averaged over the same period.

Before moving away from income we note two things:

The share of workers earning the AIW has declined
Housing is bought by households, not earners.

The AIW is useful because we have a long-run series for it. However, the weekly earnings of “production, transport, craft and other manual workers” in industry sectors (NACE B to E) may not be as representative of earnings as they previously were. Workers in many services sectors will earn less than the AIW. The share of workers earning more may have also have increased.

We also note that recent decades have seen a significant shift to more dual-income households. Thus a measure of household income may be more appropriate than the individual-level earnings data.

To get household income we turn to the national accounts. Definitions matter but here we will just note that we are using Gross Household Disposable Income. In national accounts, ‘gross’ means it is before depreciation and ‘disposable’ means after taxes and transfers. Data from 1995 on is available from the CSO and we will use the nominal growth rates in Stuart (2017) to extend the series back to 1970. We also need the number of households and these are taken from the Census and interpolated for the intra-Census years. This gives us figures for disposable income per household.

For 2022, CSO data puts gross household disposable income at €138.2 billion. With the Census reporting 1,841,152 households for the same year that gives us a figure of just over €75,000 for disposable income per household. With an average house price of €357,000 in 2022, the ratio of house prices to household disposable income is €357,000 / €75,050 = 4.76.

We can do this for all years since 1970 to get the following:

Again, we see the peak was reached in 2006, when average house prices were almost six times average household disposable income. It is likely to come in around 4.6 times for 2023, which is around where it was in 2002.

For our long-term comparison, this ratio of price to income averaged 2.6 from 1970 to 1995. The means the ratio is now 1.75 times than what it was over that period. The increase is lower than what was shown using individual earnings but not hugely so.

Mortgages: Rates, Repayments and Deposits

Before concluding that housing is far more expensive than it was 25 years ago we must look at how most households pay for housing: mortgages. This introduces interest rates which are hugely important for determining mortgage payments. Consider two 25-year mortgages for €100,000 which only differ by the interest rate charged. Let the first have a rate of 4 per cent and the second a rate of 12 per cent. What will be monthly repayments be?

€100,000 25-year mortgage at 4% interest = €527.84
€100,000 25-year mortgage at 12% interest = €1,053.22

The difference in the interest rate leads to a monthly mortgage payment that is almost twice as high. Interest rates matter! And in Ireland mortgage interest rates have varied a lot.

The CSO have long-term data on average mortgage interest rates – see Table 10 of this 2003 publication marking 30 years of Ireland’s EU membership. Data for recent years are taken from the interest rate statistics of the Central Bank of Ireland. They give the following series of annual averages:

From 1970 to 1995, mortgage interest rates averaged 11.4 per cent. They are now around 3.6 per cent (though rising).

We can get indicative monthly mortgage payments with three parameters:

The initial amount borrowed
The length of the mortgage
The interest rate charged

To make a comparison we will assume that the initial amount borrowed is 90 per cent of the average house price in each year. We will use a term of 25 years in all cases and apply the interest rate for each year as shown above. With these, we can get an indicative monthly mortgage payment and we will put that as a share of monthly average household disposable income. And this shows:

From 1970 to 1995, the indicative monthly mortgage payments averaged 29 per cent of household disposable income. This is higher than the current estimate which is around 25 per cent of household disposable income.

The above shows that the peak for mortgage payments to income was 41 per cent back in 1982, exceeding the local maximum of 37 per cent from 2007. As we have seen 2007 corresponds to the peak of real house prices. 1982 corresponds to the peak of mortgage interest rates which averaged 16 per cent over the year (which is also shown in this blog post from the Governor of the Central Bank).

It should be pointed out that this is very much a point-in-time assessment of mortgage payments to income. Of the three parameters used, only one remains unchanged: the initial amount borrowed. Key for determining the payment-to-income-ratio are the interest rate charged and the household’s disposable income. Both of these will change over time for borrowers. Interest rates trended down through the 80s and 90s while household income has trended up. For individual borrowers this will reduce the ratio of the monthly mortgage payment to household income.

The point-in-time assessment is useful, though, for the initial payment burdens faced by prospective purchasers. And as we have seen, this burden is now slightly lower than what it averaged over the period 1970 to 1995.

And this is before increased life expectancy and longer duration mortgages are taken into account. The above analysis assumed a 25-year term for all mortgages. In the last 20 years, mortgages with terms of 35 years have become prevalent.

Although the age of first-time buyers has increased this has been somewhat offset by increased life expectancy. In the early 1970s, an Irish male aged 25 had a life expectancy of a further 46 years (i.e. to 71). The detailed results based on Census 2016 give an Irish male aged 25 a life expectancy of a further 55 years (i.e. to 80). It is likely to be now another year or two higher again.

It is not all a one-way street from lower interest rates though. Present-day borrowers may benefit from lower interest rates but higher prices means they are required to have a bigger deposit.

From 1970 to 1995, a ten percent deposit based on the average house price was 26 per cent of average annual household disposable income. In 2023, a ten percent deposit is equivalent to 46 percent of average annual household disposable income. Prospective buyers may also need even higher deposits due to the Central Bank’s macro-prudential rules on mortgage lending. And that is what the evidence would appear to bear out.

The overview of new lending from the 2019 Household Credit Market Report shows that the deposits of FTBs in Dublin were just under 90 per cent of household income and they were 72 percent for Non-Dublin FTBs. Higher deposits means it is harder to access those lower interest rates. And we haven’t even mentioned ever-increasing private rents which further add to the difficulty of gathering that deposit.

Summary

Here is a summary of the indicators presented:

By most metrics housing is more expensive than it was 25 to 50 years ago. Nominal prices are almost ten times higher compared to what they averaged from 1970 to 1995. When adjusted for the general increase in the price level, real house prices are around three times higher now than the 1970-1995 average. Using income we see that house prices are under two times higher than that average.

When looking at mortgages we see that the measures are lower. Mortgage rates now are around one-third of their level from 1970 and 1995 and though, house prices have increased, an indicative monthly mortgage repayment is now a lower share of average household income. Moving in the other direction is the deposit required which is now almost twice as large as a share of average household income compared to what it was in the 70s, 80s and early 90s.

Compared to 2003, most of the indicators are actually little different. Inflation-adjusted house prices and price-to-income ratios did rise, fall and rise again over the period but are back close to 2003 levels. Mortgage interest rates and the payment-to-income ratio are also close to 2003 levels.

The ratio of a 10 per cent deposit to income is also similar but the lending environment is much different. Back in 2003, borrowers were more likely to be lent more than 90 per cent of the purchase price and factors like parental guarantees were much more widespread. The Central Bank’s macro-prudential lending rules now restrict these with a greater requirement for borrowers to have the deposit to hand.

The Ongoing Trickle of Repossessions

2023-12-20T10:43:00.003+00:00

The latest mortgage arrears statistics from the Central Bank provide an update for the end of September (Q3) 2023. They show there continues to be a trickle of repossessions.

During the third quarter of 2023, there were ten court-ordered repossessions and ten abandonments/voluntary surrenders of primary dwelling houses. During 2023, court-ordered repossessions have been occurring at a rate of around one per week.

We are now also provided with a more complete breakdown of repossession activity. The number of repossessions shown above can be broken down into those carried out by banks and non-banks. Non-banks include regulated lenders such as Pepper and Start and also unregulated loan owners. The chart below shows a split out of the maroon area in the opening chart.

In the last 15 years, there has been a total of 3,400 court-ordered PDH repossessions. Of these around 70 per cent have been undertaken for banks. However, the banks stalled their execution of repossession orders in early 2020 (likely pandemic related) and there has been no increase since. In the year to the end of September, there were 57 court-ordered repossessions and 42 (nearly 75 per cent) were carried out for non-banks.

Figures on legal proceedings suggest that the banks have pretty much ceased using legal proceedings to obtain repossessions orders. Here is the number of accounts with legal proceedings in progress.

In early 2016, the banks had almost 12,000 PDH mortgage accounts with legal proceedings in progress. The last figures show that this had fallen to just 1,100 by the end of September. This is 0.2 per cent (1 in 500) of the 594,000 PDH mortgage accounts held by the banks.

Some of the reduction, of course, came about as the non-performing loans were sold to non-bank entities but the fall in the overall total is very clear. And it can be seen that the level of non-banks has been stable in recent years. In Q1 2019, non-banks had 4,400 PDH accounts with ongoing legal proceedings. The latest figure for these entities is 4,300.

That is not to say there has been an improvement in the mortgage accounts held by non-banks. The arrears on these accounts is still very high.

Of the 710,000 or so PDH mortgage accounts in the latest update, almost 115,000 (16 per cent) were held by non-bank entities. And of those almost a quarter (27,300) were in some form of arrears.

The arrears ranged from relatively small (less than 90 days arrears) to incredibly large (over 10 years arrears). It is bizarre that we have to produce figures for such significant arrears. Non-bank entities had 21,000 PDH mortgage accounts that were more than 90 days in arrears.

Included in that are 4,500 accounts that are more than ten years in arrears. The total balance outstanding on these loans is €1.3 billion, giving an average balance of €280,000. There have been €833 million of missed payments on these giving an average level of arrears of just under €185,000. That is an incredible amount of missing payments.

It is worth noting again that arrears is not a good measure of current loan distress. It does not tell us when the payments were missed. An account that had two years of missed payments a decade ago but has had every payment made since will be counted as being two years in arrears.

Also, the measurement of arrears in terms of days past due is impacted by the repayment required. If an account has had €6,000 of historical missed payments and the required monthly payment is €1,000 then that account will be 180 days (six months) in arrears. If the required monthly payment rises to €1,200 – due to. say, interest rate increases – and there is no new arrears, then the €6,000 of historical arrears becomes the equivalent of 150 days (five months) of arrears.

This measurement issue won’t impact a count of the total number of accounts in arrears. There has been no rise in the total number of accounts in arrears.

As shown above, there remains around 29,000 PDH mortgage accounts which are more than 90 days in arrears. Of these 21,000 are held by non-bank entities. The banks have 8,000 such accounts but this represents just 1.3 per cent of the total PDH mortgages they hold (594,000). The banks do not have a problem with a long-term mortgage arrears.

In some cases this will have occurred with the borrower getting back in track either with or without a cure or modification. In other cases it is because the banks have simply sold the loans. There were plenty of claims that these sales would lead to a surge in repossessions. All we have seen so far is a trickle.

No Surprise in November CT Receipts

2023-12-06T13:16:00.001+00:00

When the June figures were published the €4.2 billion of Corporation Tax collected in the month pointed to receipts of around €6 billion in November. The year-on-year declines for August, September and October were attributed to largely idiosyncratic volatility in such a concentrated source of tax revenue.

And so it proved, with the monthly receipts for November coming in broadly in line with expectations at €6.3 billion or five percent above the crude projection based on the June figure. With November being the most important month of the year for Corporation Tax, November 2023 was a record month, surpassing the €5.0 billion collected in the same month last year.

In year-to-date terms, November was enough to push 2023 back up above the equivalent total for 2022. The difference looks small on the chart but the €22 billion collected so far in 2023 is almost €1 billion higher than what was collected in the same period last year. The difference to 2014 is staggering.

The recent volatility in the receipts can be seen with the 12-month sum. If December 2023 just matches what was collected last December then the total for the year will be €23.5 billion, up on the €22.6 billion from last year.

The volatility is highlighted in the annual changes from the above chart. This shows some extraordinary changes.

Towards the end of 2022, CT was growing at an annual rate of over 60 per cent – exhilarating but unsustainable. This growth plummeted during 2023 and approached zero in October. The November numbers mean that the annual change in the 12-month sum rebounded a little and rose to 2.8 per cent – and such is the scale of these receipts now that even such a small relative increase is a pretty significant sum.

It is hard to say if the December returns will garner much attention, and as a standalone month there is no discernible pattern. 2022 was a boom year for CT but December 2022 was actually lower than December 2021 – that volatility thing again.

Corporation Tax is a highly volatile source of revenue. While there can be some information in the monthly changes there is also an awful lot of noise. Here the year-on-year comparisons of monthly CT receipts since January 2016 – and note that the chart excludes some of the volatility as the vertical axis is cut off at +100. The final point shown is November 2023 which was was 27 per higher than November 2022. Missing values are used when the calculation of the annual change involved a negative number (three instances since 2016: January 2019, April 2019 and April 2021).

Monthly figures that are lower than the same month of the previous year are not uncommon, though some occur in months that are not important from a CT perspective. Around one-third of months in the chart above have negative values – and this was a period when aggregate CT revenues grew at an extraordinary rate.

Four of the six months from December 2022 to May 2023 were negative in year-on-year terms. The run of three negative figures in a row that was seen from August to October this year was a bit unusual – we have to go back to early 2021 to see such a run, when the pandemic would have had an impact, and the only other instance shown of three negative values in a row was in early 2017.

The proximity of the recent three-month negative run to the key month of November also likely contributed to the focus. Those negative outturns will also have been seen as an opportunity to try and dampen expectations. Who knows what December will bring. Probably more volatility but structural shifts remain absent for now.

Volatility to the fore in Corporation Tax revenues

2023-11-04T15:02:00.005+00:00

For almost a decade now, the year-to-date revenues from Corporation Tax have exceeded the equivalent amount from the previous year (with early 2021 being the only minor exception). We can see below that the 2023 year-to-date figure for October has dipped below the 2022 line. The €15.7 billion collected so far in 2023 is €0.4 billion (3%) below the amount collected to October 2022.

We can also see that this is a reversal of the position seen only a few months ago. By July, 2023 was running nearly €2 billion ahead of 2022 (€10.9 billion versus €9.0 billion). The reversal since means that this year’s Corporation Tax receipts for August, September and October have been around €2.3 billion lower than the equivalent months from last year.

These three months last year saw €7.2 billion of Corporation Tax collected, this year they brought in €4.8 billion - a fall of one-third, which does appear to be dramatic.

As seen above, this year was still the second-highest on record for these three months but is the fall just volatility that can be expected in such a concentrated revenue source or a harbinger of a more systematic decline? For the time being volatility seems the more likely landing spot.

To put the recent declines in context we can look at the 12-month rolling sum of receipts.

The change in direction in the past three months is pretty clear. November is the most important individual month for Corporation Tax and a one-third drop there relative to November 2022 certainly would be alarming.

The recent falls have put the 12-month sum back close to where it was this time last year, with the annual change in the 12-month sum having plummeted towards zero in recent months. Annual growth rates of 40 per cent plus while exhilarating are not sustainable.

In the 12-months to October 2022, €21.9 billion of Corporation Tax was collected. The 12 months to October 2023 have seen revenues of €22.2 billion – an increase of 1.25 per cent.

To assess the concern that could be raised after the falls in recent months we go back to the Revenue Commissioners guidance on when large companies need to pay their Corporation Tax.

Large companies

Large companies can pay their preliminary CT in two instalments when their accounting period is longer than seven months.

The first instalment is due on the 23rd of the sixth month of the accounting period. The amount due is either:

50% of the CT liability for the previous accounting period

45% of the CT liability for the current accounting period.

The second instalment is due on the 23rd of the eleventh month. This will bring the preliminary tax up to 90% of the final tax due for the current accounting period.

The key months are month six and month 11 of the company’s financial year, by which time 90 per cent of the estimated tax due for the current year must be paid. Any remaining tax due will be paid when the company files it tax return.

A company must file its return and pay any tax due nine months after the end of the accounting period. The company must make this payment on or before the 23rd of the ninth month.

Clearly any individual month can be any of these deadlines: month six, month 11 or month plus nine. The likely candidates for the months we are looking at are:

August: month 11 for companies with a September year-end
September: month +9 for companies with a December year-end
October: month 11 for companies with a November year-end

August

Here are the monthly receipts for August since 2009. There was an exceptional increase in August 2022 which was up 167 per cent on August 2021. Some of this was reversed in 2023 but August 2023 was still significantly higher than all years prior to 2022.

The impact of payment timings can be seen if we combine the receipts for March and August – month six and month 11 for companies with a September year end.

Across the two months of March and August there was no fall at all in 2023. This points to a company having a large increase in its tax liability in 2022 and paying most of this in August 2022 (when it needed to have 90 per cent of its preliminary tax paid). For 2023, the payments were more balanced as the March payment would have been based on 50 per cent of the 2022 liability with a smaller amount due in August this year to bring the payments up to the required 90 per cent.

The fall in August 2023 seems mainly volatility due to concentration and the timing of payments.

September

The fall in September was small which also points to volatility.

September 2022 was pretty much double September 2021 (€2 billion versus €1 billion). Some of this increase was reversed in 2023 but it is hard to point to anything systematic that might be going on.

It could just be that companies with December year-ends that filed their 2021 tax returns in September 2022 had more of their final tax payment outstanding than when they filed their 2022 tax returns in September 2023. With lots of companies having December year-ends we can’t point to any company-specific factors but it could be just a general timing issue.

October

The monthly figures for October seem particularly volatile and it is hard to discern anything that might be going on.

There was a local peak in October 2018 of €1.6 billion. This fell to €1.0 billion in 2019 and pretty much collapsed to just €200 million in 2020. This put October 2020 as one of the lowest Octobers in the last 15 years.

There was a strong bounceback in 2021 and a further increase to €2.3 billion in 2022. Relative to that there was a large fall in 2023, back to €1.3 billion (which was also lower than both 2018 and 2021).

It is because of this fall in the October receipts that the year-to-date total for 2023 is running behind the 2022 level. As we have seen, the August fall was offset by a rise in March, and the September fall was pretty modest. So, the October fall could be significant – if we could link it to something.

We could try to link the October payments to those made the previous May, which are month 11 and month six for companies with November year ends, but that doesn’t reveal a lot. May is also also month 11 for companies with a June year end.

The monthly receipts for May have actually been pretty stable over the past four years. This could mean rising payments from companies with June year ends and falling payments from companies with November year ends but there is no way of telling that.

For companies with November year ends we can see the October (month 11) payments but as noted above, outside of being especially volatile, there is no discernible pattern. It is possible that a company with a November year end (for the purposes of paying Irish Corporation Tax) has had volatile profits over the last few years and this has likely been driving the volatility in the October Corporation Tax receipts.

This again points to the concentrated and volatile nature of these Corporation Tax receipts with a company-specific factor driving changes in the aggregate figures. It does not point to a structural shift in the overall pattern of receipts.

November

November is a month that could be a bell-weather for such structural changes. It is the most important month for Corporation Tax. November is month 11 for the most common year-end: December. Last November saw €5 billion of Corporation Tax collected – the highest monthly total ever, and higher than the annual total for 2014.

The data back to 2009, show a strong relationship between the June and November receipts.

June 2023 was the highest June ever with receipts of €4.3 billion. If the above relationship holds, this points to record receipts again in November, this time to the tune of €6 billion.

One aggravating factor could be the rise shown above for receipts in August. August is month 11 for companies with September year ends. These companies’ tax returns and their final payments will be due nine months later – the following June.

Up to recently, very little Corporation Tax was collected in August (and also in March). This would translate into very little final tax due the following June. Now however, the combined receipts for March and August exceed €4 billion. This can be expected to lead to additional tax payments the following June when companies with September year ends file their tax return and make their final payments.

The above relationship between June and November was almost exclusively based on the June payments been the first preliminary payments for companies with December year ends so they were a strong predictor of the second preliminary payment in November. This relationship may no longer be as clear cut as more of the June receipts could be due to companies with September year ends.

Even with this we would still expect this November’s receipts to be strong. Talk of structural decline in Ireland’s booming Corporation Tax seems premature – for now. But we can certainly expect them to be volatile.

Numbers of FTBs continue to edge up

2023-10-28T12:26:00.001+01:00

A couple of indicators during the week show that the number of first-time buyers (FTBs) continues to rise. First, the volume of market transactions tagged as FTBs in the CSO’s residential property price index. This is updated monthly and the volume of transactions is shown here on a 12-month basis.

There were 17,500 stamp duty filings tagged as FTBs made in the 12 months to the end of August. Of these, 12,500 were for existing properties and 5,000 were for new properties. The increase in the last year has been exclusively in existing properties.

The volume of FTB transactions has been rising for more than ten years and the total is now pretty much back on the increasing trend evident up to the onset of COVID.

The second source is the mortgage drawdown data from the Banking and Payments Federation. This is available quarterly with this week’s update giving figures for Q3 2023. Again, the figures are presented on an annual basis. One plus of the mortgage data is that it is available back to 2004 (though the new/existing split is only available from 2006).

The pattern in the mortgage series from the BPF matches that in the volume series from the CSO. In the year to the end of Q3, there were just over 25,000 mortgage loan drawdowns by FTBs in the BPF data. This is around 60 per cent of the levels seen during the height of the credit bubble.

There are a number of reasons why the level is higher in the BPF data compared to the CSO (25,000 versus 17,500). Most of it is likely because they are counting different things: mortgage loan drawdowns versus market transactions.

People who self-build can draw down an FTB mortgage, but obviously there is no market transaction to be included in the CSO data. FTB mortgages can be drawn down for non-market transactions, such as family transfers or someone may take out a mortgage to renovate a property they received as a bequest. It may also be that a mortgage drawn down in stages is represented by multiple drawdowns in the BPF data.

With these in mind it could be taken that the CSO figure gives the lower limit for the number of FTBs with the BPF figure giving an upper limit. The true number of FTBs may be closer to the upper limit. Whatever about those differences, the trends match, and show both rising.

The Household Sector in the first half of 2023

2023-10-17T11:54:00.001+01:00

A few weeks ago, the CSO published the Q2 2023 update of the non-financial institutional sector accounts. We will use those to check in on the status of the household sector for the first six months of this year (H1) and how it compares to last year and to 2008.

First, the current account. In the prevailing environment, it is important to note that the figures in the table below are in nominal terms, i.e. not inflation adjusted. We will look at some of the aggregates in constant prices towards the end of the post.

The start point of the current account here is Gross Domestic Product. For the household sector this is the value added produced, a large share of which is due to the imputed rents attributed to owner-occupier households with the remainder arising from the activities of the self-employed.

From there the account proceeds through a series of inflows and outflows until the bottom line is reached, Gross Savings, which is disposable income not used for consumption.

Most of the items in the table show an increase for H1 2023 over H1 2022. One of the most significant is the continued growth of compensation of employees received. This is up 7.3 per cent (remember in nominal terms) and stood at €64.6 billion for the first six months of the year. Non-financial corporations are the most important source of COE and their pay outlays are up 8.0 per cent in year-on-year terms.

The largest relative changes are for the interest flows. Both interest paid and interest received are up almost 60 per cent in 2023. Taxes on income and social contributions, particularly those paid to the government sector, rose in line with the rise in income. Social benefits received rose slightly for H1 2023 but remain lower than they were in 2020 and 2021 as COVID-19 supports were withdrawn.

All told, the national accounts estimate of household disposable income for H1 2023 was €73.8 billion. With consumption expenditure of €64.8 billion and a €1.8 billion adjustment for the excess of contributions to private pensions over benefits received from them, the gross saving of the household sector is put at €10.6 billion for the first six months of the year.

This is lower than each of the previous three years and gives a savings rate of 14.5 per cent for H1 2023, which remains slightly higher than the 12.1 per cent recorded for H1 2019 in pre-COVID times.

To see how that saving might be used we can turn to the capital account.

Again, the figures are in nominal terms. The key figures in the capital account are the amount Gross Savings taken from the current account and the amount of Gross Capital Formation (investment in new capital assets) undertaken by households. These are the main items that give rise to the net borrowing/lending of the household sector. There are some other minor flows for capital taxes paid, investment grants received and other capital transfers.

With gross savings of €10.6 billion and with the household sector “only” undertaking €4.5 billion of gross capital formation, the household sector had €6.6 billion available for net lending. This goes on the financial balance sheet.

The CSO don’t do quarterly updates of their financial institutional sector accounts but the Central Bank do with estimates for Q1 2023 the latest available. These show the household sector adding a further €2.7 billion to their burgeoning deposit balances. Between currency and deposits, the Central Bank estimate that the household sector had €198 billion on hand in Q1 2023, up from €154 billion in Q1 2020. Households also used savings to make the contributions to private pensions referenced above.

On the liability side there was very little movement in Q1. Repayments on existing loans were pretty much equivalent to drawdowns of new loans, with a net increase in loan liabilities of just €36 million in Q1. Though it should be noted that repayments have exceeded drawdowns for the past 15 years or so.

All told, the Central Bank estimate that the household sector had €507 billion of financial assets at the end of Q1 2023, with an offsetting amount of liabilities of €143 billion.

Some Constant Price Series

The CSO also some of the main aggregates using constant prices. These series are also seasonally adjusted. Here are the series for Disposable Income and Consumption Expenditure.

It can readily be seen that the income increase shown in the table for the current account in nominal terms is eliminated with the adjustment to constant prices. In real terms, aggregate household disposable income has been declining in recent quarters. Real consumption has continued to rise and is not far off its pre-COVID trend. In aggregate terms, both series are well ahead of the previous peaks reached in 2008.

To conclude, we make one additional adjustment to the CSO constant price series – put them in per capita terms.

As the population is growing fairly rapidly this shows that the decline in per capita income is more pronounced than that shown by the aggregate figures, and that per capita real consumption has essentially been flat for the past year or so.

It is also interesting to make comparisons back to the previous local maxima for each series from 2008. Both the disposable income and consumption series are actually little different to their peaks in early 2008 – the latest readings put both series about 2 per cent above those 2008 peaks.

This might suggest a “lost 15 years”. However, the environment on which each were achieved are wholly different. We can see this by looking at the ‘Saving minus Investment’ of the household and government sectors. This is each sector’s contribution to the current account of the Balance of Payments and is the Net Lending/(Borrowing) of a sector excluding capital taxes, investment grants and capital transfers. For this we return to nominal figures and annualise them by looking at their four-quarter moving sum.

The difference between 2008 and 2023 is huge. In 2008, the household sector was in deficit to the tune of €20 billion. Via the circular flow, this borrowing was contributing to household income. When the crash came the borrowing was taken over by the government as tax revenues collapsed and spending on income supports increased. Without this borrowing, income (and consumption) would have been much lower.

For 2023, there is a combined surplus of €20 billion. There is a €40 billion difference between the positions of 2008 and that of 2023. Now both the household and government sectors have an excess of disposable income over their consumption and capital formation expenditure. In terms of GNI*, it is equivalent to going from borrowing 12 per cent of national income to lending 8 per cent of national income. Simply comparing the income and consumption outcomes misses the scale of the turnaround in the borrowing/(lending) position of the economy.

We are in an income position to spend more – Corporation Tax concerns aside! But do we have the resource capacity to produce the things that we would like to buy, such as new housing units?

The aggregate Corporate Tax calculation enters an unsettled spell

2023-10-09T10:07:00.001+01:00

In recent years when looking at the annual update from the Revenue Commissioners of the aggregate corporate tax calculation we noted that things were relatively calm, albeit it with elevated levels of receipts. These were for tax returns filed for financial years ending during the 2018, 2019 and 2020 calendar years.

We now have the update for tax returns filed filed for financial years ending during 2021 (the last of these returns would have been filed in September 2022). The 2015 upheaval is a well-worn track so we will just focus on the five most recent years.

The Determination of Taxable Income

We’ll start with the determination of taxable income.

Right from the top we can see big changes for 2021. There an increase of over €55 billion in gross trading profits recorded on tax returns for the year, reaching €250 billion. This carries right the way down the table with the end showing that taxable income increased by over €40 billion.

However, there are some significant changes along the way. Early on, we see that after being relatively stable from 2018 to 2020 the amount of capital allowances used jumped again in 2021, coming in at just under €100 billion as a result of a €23 billion increase.

Next we see a large increase in foreign income included in the tax returns of Irish-resident companies. For 2021, this exceeded €20 billion for the first time and was close to €10 billion more than the next highest year. The next part of the table will show the impact of this on tax payments (answer: very little).

Other income also saw a jump in the amount of capital gains included to reach €5 billion in 2021. This is actually a regrossed amount. The applicable CGT rate is 33% but the gains are included in the tax return to be taxed at 12.5 per cent. Hence, the gains are regrossed and multiplied by 2.64 (= 33/12.5) to get the amount to give the necessary amount of tax.

In charges and deduction we see that trade charges, mainly certain royalty expenses, rose back to levels seen up to 2019. This was the largest change among these items.

All told, the CT returns filed for years ending during 2021 had just over €150 billion of taxable income with €6 billion of that subject to tax at 25 per cent. We now turn to the calculation of tax due.

The Determination of Tax Due

The starting point of this part of the calculation, Gross Tax Due is simply the amount of taxable income multiplied by the applicable rates (either 12.5 or 25 per cent).

The relative simplicity of the Irish CT regime means there isn’t a whole lot going on here. The biggest reason for the reduction of gross tax due is because of tax already paid.

The largest single item in the above table is double taxation relief and this was almost €3 billion in 2021. The additional foreign tax credit of nearly €450 million can be added to this. These reflection the foreign corporate taxes paid on the €23.5 billion of foreign income included in the top half of the table. Little additional Irish tax is due as the amount already paid, albeit abroad, covers the gross tax due in Ireland.

The item for gross withholding tax on fees is somewhat similar but in this case it is Irish tax that has already been paid. In some circumstances, when the buyer of services is paying them they will pay 80 per cent of the invoiced amount to the supplier and 20 per cent to the Revenue Commissioners. The 20 per cent represents a withholding tax at the standard rate of Income Tax. When filing their tax returns, companies will record any service fees that have been withheld from them and reduce their tax due figure accordingly. The Revenue Commissioners will already have received the amount.

The most significant item in the table that actually reduces companies’ tax bills is the R&D tac credit. Between the R&D credit used and the excess R&D credit refunded the total cost was just over €750 million in 2021, a slight increase on the outturn for 2021.

All told, the bottom line is a tax due figure of €15.1 billion for tax returns filed for periods ending during 2021. There are some timing differences but we can that, in recent years, the tax due figure from the aggregate CT calculation, closely matches the CT receipts collected for the Exchequer.

We will conclude with a look at some of the tumult in the aggregate figures, with most of this seeming to concern capital allowances, in particular those for intangible assets.

Snowballing Claims for Capital Allowances

As before we will look at the total amount of capital allowances claimed, the total amount used (that is, actually offset against gross profit) and the consumption of fixed capital from the National Accounts.

Up to 2019, the most significant feature was the growth in the figures. he ratios shown were relatively stable. Up to 2019, capital allowances used were just over 90 per cent of the amount claimed, and consumption of fixed capital (depreciation) in the National Accounts was just under 90 per cent of the amount claimed. This stability did not continued into 2020.

In 2020, we can see that capital allowances used fell to just over 50 per cent of the amount claimed. We also see a break in the link between capital allowances claimed and consumption for fixed capital in the national accounts.

The break of this link is interesting as it suggests that the increase in capital allowances claimed is not fully linked to assets that would be included in the capital stock for National Accounts purposes. In the last two years, capital allowances claimed in the aggregate CT calculation have risen by over €80 billion (from €86 billion to €173 billion) while consumption of fixed capital for NFCs in the national accounts has increased by “just” €20 billion (from €78 billion to €98 billion).

A second pointer comes from looking at how the unused capital allowances, which came to almost €75 billion in 2021, show up elsewhere in the CT stats. Typically, we might expect an increase in unused capital allowances to result in an increase in loss carried forward. In most situations, unused capital allowances from one period are carried forward as a loss to use against income in a subsequent period.

However, changes in losses carried forward were nowhere near large enough to accommodate the scale of unused capital allowances in the above table. The are lots of losses forward sloshing around the Irish CT system and lots of them are the result of unused capital allowances but the changes in 2021 (+€7 billion in losses forward) are of little help in explaining what is going on with capital allowances.

Of little help except it tells us where to look. There is one instance where unused capital allowances are not carried forward as a loss but as capital allowances to be claimed again in subsequent periods (until they are eventually used). And those are capital allowances for intangible assets. And perhaps, unsurprisingly, this is where there have been the largest changes in recent years.

Unfortunately, the Revenue do not provide figures for capital allowances for intangible assets used but we do have figures for such capital allowances claimed. Here they are by sector for recent years with very large growth recorded for a number of sectors notably manufacturing, wholesale and retail, and ICT.

We can see from the total (€131 billion in 2021) that, on their own, capital allowances claimed for intangible assets significantly exceed the total amount of all types of capital allowances used in 2021 (€99 billion). We can safely conclude that capital allowances for intangible assets are the reason those ratios broke down in the previous table.

Is there cause for concern? It is hard to know. We know that there were significant onshoring of IP assets to Ireland in 2021 and 2022. This would have increased the amount of capital allowances claimed. And we know that there are now legislative restrictions on the amount of such capital allowances that can be used.

Since October 2017, new claims for capital allowances for intangible assets have been restricted to offsetting 80 per cent of the profit (before deduction of interest and these capital allowances) by such capital allowances. Prior to this the cap was 100 per cent. Any available capital allowances above this amount cannot be used in the current year and are carried forward to be claimed as a capital allowances in subsequent years.

The reason for the cap on capital allowances for intangible assets is to ensure that losses cannot be artificially generated for use elsewhere by a company or group. Capital allowances for intangible assets are ringfenced for use only against profits generated by the acquired intangible asset. If unused capital allowances could be carried forward as a loss they could be used against any profits. All that has changed in recent years is the cut-off for the cap.

The cap will likely result in a “snowball effect”, at least initially, increasing the gap between the capital allowances claimed in any year and the amount used. In the early years a company will have capital allowances that they can claim each year (following either the accounts or fixed rate approaches). The cap may mean they cannot use all of these in the current year.

Then they may also have unused capital allowances from previous periods that they will also claim in the current year. These will also be unused in the current year. Thus the amount of unused capital allowances to be carried forward grows. This could continue until they are no new capital allowances to be claimed and the unused capital allowances carried forward will be unwound until they are fully exhausted.

We don’t have precise figures but maybe a bit of guesswork can put us in the ballpark. Claims for capital allowances for intangible assets have skyrocketed in recent years. For the sake of exposition, let’s say the cap means that €10 billion of the amount claimed cannot be used. That would mean that €10 billion would be carried forward to be claimed in the next period.

In the next period let’s assume that the cap again means that €10 billion of the amount claimed for that year cannot be used. We than also have the €10 billion from the previous period that is brought forward and again claimed. This means there are now €20 billion of unused capital allowances.

In the next period there’s another €10 billion of that year’s claim that can’t be used and this is added to the €20 billion from previous periods that are brought forward claimed again. We are now up to €30 billion to be carried forward and so on.

We cannot say that this is the only thing that is going on but it does seem likely to be a large part of the story. And for the IP that was onshored in 2020 and 2021 this will go on for a few years yet. The gap between the amount of capital allowances claimed and the amount used will grow ever larger. Down the line the full amount of the capital allowances will have been claimed and the amount available in any subsequent year will only be those which have been carried forward and these will eventually be fully exhausted.

The figures are so large that there may be something else going on but it is hard to make out. What we can see are the growing claims for capital allowances for intangible assets. Due to the snowball effect outlined above this is likely to continue. It could be some time before calm returns to the aggregate CT calculation.