Irish Economy 2012: Irish exports have been seen as the beacon amidst the bleak wreckage of post-crash times. However, while total exports have risen 61% in real terms in the period 2000-2011, employment in internationally tradeable goods and services firms - - both foreign-owned and indigenous firms - - is lower than in 2000 despite a 25% growth of the workforce during the property bubble period. The evidence of a sharp disconnect between the dominant foreign-owned sector and the depressed domestic economy is very evident and what could be termed phantom services exports are one key factor. We estimate that in respect of 2011, at least a third of the value of Irish services exports is overstated.
Ireland, The Netherlands, Switzerland and Luxembourg, the main European countries providing American companies with tax-haven type services, have seen the profit per employee in US non-bank affiliates grow exponentially in the past decade.
For example, US Bureau of Economic Analysis (BEA) data shows that in Ireland profit per employee at non-bank majority-owned overseas American firms grew from $144,400 in 2000 to $616,700 in 2009 while the rise in The Netherlands was from $102,440 to $520,360. Comparable data for the UK shows a rise from $22,950 to $56,018 and in Germany an increase from $13,558 to $19,721.
In 2009, US overseas non-bank affiliates employed 10.8m: led by UK at 1.19m; Canada 1.08m; Mexico 965,000; China 944,000; Germany 628,200; Thailand 159,000; Singapore 143,000 and Ireland at 102,700.
The BEA reported total overseas net income in 2009 at $808bn, headed by islands off the US southeast coast including Bermuda and Grand Caymans at $120.1bn; The Netherlands $117.7bn; Luxembourg $91.3bn; UK $66.9bn; Ireland $63.3bn and Switzerland at $51bn - - accounting for 63 per cent of the total.
Companies reported net income of $12.4bn in Germany; $11bn China; $8.3bn France and a loss of $247m in Sweden - - one of Europe’s rare star economies - - where 81,000 were employed by the American firms.
US firms had begun to sharply shift overseas profits to low-tax jurisdictions from 1999 and by 2002, reported profits had doubled in many of these countries. In Ireland while job numbers at American affiliates remained static at 86,000, profits rose from $12.3bn to $27.1bn.
So profit-shifting has been one area that is reflected in rising Irish exports and GDP. However, services exports have provided additional mechanisms to cut taxes and we estimate that Irish services exports are overstated by at least one-third.
In current price terms, Irish exports of goods and services were valued at €98bn in 2000 and €164bn in 2011, according to Ireland's Central Statistics Office. With a base of 100 for 2000, the European Commission's price deflator for Irish exports in 2011 is 103.8 and is strongly influenced by changes in the US dollar/euro rate.
Foreign-owned firms, mainly American, are responsible for about 90% of Irish tradeable exports and it's in the mid 90s in respect of services exports according to Forfás, the public policy advisory agency.
The real value of goods exports has been almost static since 2000 but in the period to 2011, the real value of services exports has increased by 322% and in 2011 accounted for 48% of the value of total exports.
The rise in services exports invokes mantras from politicians and economics commentators such as 'moving up the value chain' and 'high quality' jobs. It's universally seen as a positive compared with manufacturing even though many of the new jobs have been in call centres and funds administration.
Foreign firm employment in financial services increased from 6,300 in 2000 to 15,100 in 2010, according to Forfás, while financial services exports rose from €3.5bn in 2000 to €13.3bn in real terms in 2010.
There was a slight change in inward tourism revenues in the eleven-year period and the big change in services exports was in computer and business services which rose from €9.6bn in 2000 to €51.0bn in 2010 and €55bn in 2011 - - a real increase of 452%.
Forfás says that excluding financial services, the number of export services jobs in foreign firms in 2000 was 41,500 and 44,000 in 2010.
The computer and business services categories export total of €51.0bn in 2010 includes indigenous exports but these are not significant as highlighted above. In 2011 the value was €55.0bn
If we separate out aircraft leasing with its staff of about 1,000 operating over 3,000 commercial aircraft and generating exports of €6bn, the real increase is 357%.
Tracking the 'computer services' category suggests how the exports rise could have materialised without any significant change in staff numbers.
In current price terms, computer services exports were €6bn in 2000, €12bn in 2003, €16bn in 2006, €23bn in 2008, €28bn in 2010 and €32bn in 2011 - - 40% of 2011 services exports. Software installed on PCs is not included in services.
In 2003, Google Ireland had no revenue but in 2010 it reported revenues of €10.1bn (US$12.9bn), up €2.2bn on 2009. Google Inc reported worldwide revenues of $29.3bn. Most of Google Ireland's revenues relate to advertising revenue raised in countries outside Ireland. It's booked as an Irish export but it's not an export as traditionally understood. Today, companies like Google can carve the world into a small number of single markets with revenues booked in low-tax jurisdictions that are unrelated to the economic activities in those locations.
Google UK is Google's biggest overseas market and in 2010 generated about £2.15bn ($2.9bn) in revenues - - Google Inc. said the market accounted for 10% of group sales.
2010 accounts for Google UK Ltd., filed at the UK's Companies House, showed it made a pre-tax loss of £22m on turnover of £240m. The sterling turnover at Google Ireland was £7.9bn.
Google UK had almost 1,000 employees in 2010 compared with 1,500 at Google Ireland.
Microsoft Operations Ireland Ltd reported revenue of €13.4bn in 2011 up from €11.3bn in 2010 and this again reflects revenues in other countries that are booked in Ireland as exports. Irish company Oracle EMEA Ltd, a unit of the enterprise software giant Oracle, reported revenue of €4.3bn in 2010.
In contrast with Google and Microsoft, Oracle has offsets for double taxation relief in respect of taxes paid in other countries.
Facebook Ireland reported 2010 revenues of €229.1m, up from €15.2m in 2009. From September 2010, the Irish company took on responsibility for billing customers outside of the US and Canada for advertising running on its website. So as Facebook's international revenues grow, so will Ireland's exports.
In 2005, The Wall Street Journal reported that Dublin law firm Matheson Ormsby Prentice housed an obscure subsidiary of Microsoft that helped the computer giant shave at least $500m from its annual tax bill. "The four-year-old subsidiary, Round Island One Ltd., has a thin roster of employees but controls more than $16bn in Microsoft assets. Virtually unknown in Ireland, on paper it has quickly become one of the country's biggest companies, with gross profits of nearly $9bn in 2004."
In the fourth quarter fiscal year ending June 30, 2011, Microsoft reported only $445m in taxes in the US and other foreign countries, just 7% of its $6.32bn in pre-tax profit.
Microsoft said in a filing with the US Securities and Exchange Commission that its lower taxes in the quarter were "primarily due to a higher mix of earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland, Singapore and Puerto Rico, which are subject to lower income tax rates."
Reuters said Microsoft's pre-tax profits booked overseas nearly tripled over the six years 2006-2011, to $19.2bn in the 2011 fiscal year, from $6.8bn in the year ended in June 2006, according to company filings. By contrast, its US earnings had dropped, to $8.9bn from $11.4bn in the same period. Foreign earnings now make up 68% of overall income.
So there is no miracle in Ireland's computer services exports effortlessly doubling since 2006.
Microsoft's Round Island One Ltd. was converted to unlimited status in 2006 to keep its financial results secret and Apple Computer Inc Ltd., with its headquarters in Cork took the same route in that year.
The Apple company has about 2,800 staff and is the operational headquarters for the EMEA (Europe, Middle East, and Africa) and Cork is listed on individual country websites as the corporate point of contact. Apple's Southeast Asian regional company in Singapore is also a subsidiary.
The importance of Apple's Cork operation covering the EMEA and part of Asia is illustrated by the fact that in 2003 when Apple Inc reported an operating loss of $1m, Apple Cork reported an operating profit of $224m. In 2004, Apple Inc reported global operating income of $326m; Apple Cork reported an operating profit of $393m.
Cork revenues in 2004 were $3.3bn compared with Apple's global revenues of $8.3bn. By fiscal year ended September 24, 2011, Apple's global revenues had jumped to $108.2bn.
Even though access to the current accounts of Apple Cork's operation are not available, it's reasonable to assume that revenues for services for a significant operation of the world's most valuable listed company are now in the double billion digits.
We estimate that computer and business services export revenues are overstated by at least €30bn.
Outward payments for royalties and licences from Ireland amounted to €29bn in 2011. In addition, transfers to jurisdictions with no corporate taxes are also made via business service charges.
Finfacts asked Ireland's Central Statistics Office in respect of a US services company booking all its EMEA sales through its Irish subsidiary, including for example advertising revenue generated in Germany, if all that revenue would be treated as Irish exports?
The answer was yes. "We also get accounts from all companies including private, unlimited and guaranteed companies that don't submit statutory accounts," the spokesperson said.
The manufacturing sector is dominated by computer chipmaker Intel Ireland, a branch operation of a mailbox company in Grand Cayman and Irish units of Pfizer, the world's biggest drugmaker, which are directly owned by a Dutch limited partnership.
Exports of chemicals/pharmaceuticals/medical instruments at €27.4bn in 2000 rose to €56.4bn in 2011 in current price terms - - rising from 34% of goods exports (balance of payments basis) to 66%, while about 2,000 jobs were added in the sector over the twelve-year period, to a level of 39,000. Computer manufacturing was the main area in the goods sector that has declined since 2000 and capital intensive chemical production requires less labour input than personal computer production.
Chemicals/pharmaceuticals/medical instruments exports have risen by 50% in current price terms since 2004 but employment has remained static at 39,000.
Irish industrial production data shows a rise of 76% in the multinational-dominant 'modern sector' in the period 2000-2010 and a fall of about 11% in the 'traditional sector' dominated by indigenous food and drink manufacturers.
The US BEA reports a jump in 'wholesale trade' by Irish affiliates from in 2000 to in 2009, which may suggest that part of what is booked as industrial production, involves very little if any processing in Ireland.
The BEA said in respect of 2008 that among 51 host countries, the share of GDP in 2008 accounted for by non-bank foreign affiliates of US parents ranged from 20.8% in Ireland to 0.1% in Saudi Arabia. In only 2 of the 51 host countries - - Ireland and Singapore - - did the value added of foreign affiliates of US MNCs (multinationals) account for more than 10% of GDP. Seven of the top ten countries with high foreign affiliate shares of host-country GDP are high income countries, namely Ireland, Singapore, Canada, Norway, the United Kingdom, Switzerland, and Hong Kong. The relatively high affiliate shares of host country GDP in these countries can be traced to some of the following factors: widespread use of a common language with the United States, marketing and commercial legal systems similar to those in the United States, favourable intellectual property laws, the availability of a skilled work force, political stability, and low corporate tax rates.
Value added equals the difference between an industry’s gross output (consisting of sales or receipts and other operating income, commodity taxes, and inventory change) and the cost of its intermediate inputs (including energy, raw materials, semi-finished goods, and services that are purchased from all sources). The value added for US non-bank companies in Ireland was 12% of GDP in 2000 and 23.6% in 2007.
In March this year, Ireland's Department of Enterprise, Jobs and Innovation bragged in respect of 2011 that "Ireland had the third largest trade surplus in absolute terms in the EU, behind Germany and (narrowly) the Netherlands. It was notable that many of the larger countries had very significant deficits."
“This Government have consistently pointed out that a strong export performance will be crucial to achieving the economic and jobs recovery we are all working so hard for," Richard Bruton, the enterprise minister said. "The strong performance of our exports in 2011 confirms the potential for a wider recovery in the economy."
Also in March, the Department of Transport said that half of all aviation leasing companies operating in the global aviation leasing sector are based in Ireland, including nine of the top ten operators, and more than 3,000 aircraft valued at €83bn - - half of Ireland's annual GDP -- are leased out of Dublin. The sector contributes more than €300m in corporation tax.
So much is outsized when it comes to foreign direct investment in Ireland.
Sales per Irish employee in the foreign-owned chemicals sector were €860,000 in 2000 and €1.97m in 2010, according to Forfás. In computer programming and consultancy, sales per employee were €609,000 in 2000 and €1.36m in 2010. In financial services, sales per employee fell from €1.15m in 2000 to €256,000 in 2010.
Forfás data is in respect of all foreign companies (mainly American) which receive support from State enterprise agencies.
The BEA reported Irish affiliate sales of $247bn in 2009, up from $69bn in 2000 when there was not a significant difference with Forfás figures. One significant sectoral rise in the period reported by the BEA was in 'wholesale trade' which rose from $10bn to $64bn.
The number of Irish affiliates with assets greater than $25m rose from 413 to 608. BEA data shows total assets at Irish affiliates rose from $106bn in 2000 to $791bn in 2009 with 'finance and insurance' (ex. depository institutions) rising from $34bn to $262bn.
Sales per Irish employee, according to the BEA grew from $760,000 in 2000 to $2.4m in 2009.
Whether BEA or Forfás data on sales per Irish employee is used, it is still a multiple of revenue per employee at a US affiliate's parent.
This month The New York Times reported that in his forthcoming book, 'The New Geography of Jobs,' the University of California, Berkeley, economist Enrico Moretti points out that the average American factory worker makes $180,000 (€134,600) worth of goods a year, more than three times what he produced in 1978, in today’s dollars.
This week, The Wall Street Journal published analysis based on data gathered by Standard & Poor's Capital IQ from corporate filings with the Securities and Exchange Commission. The analysis includes 468 companies of the current S&P 500 that had reported financial results for last year.
Overall, the Journal found that in 2007, S&P 500 companies generated an average of $378,000 in revenue for every employee on their payrolls. Last year, that figure rose to $420,000.
All the significant American companies with Irish affiliates are S&P 500 companies.
Microsoft had a global revenue per employee of $777,140 in fiscal 2011 and $27m in Ireland; Google had a global revenue per employee in 2010 of $1.33m and $8.52m in Ireland.
Google and Microsoft
In 2010, some 4,100 employees working in three American software/ web companies and the aircraft leasing sector, generated sales of €32bn - - 44% of Irish services export in that year.
US data shows that Irish valued added for the information sector is low compared with manufacturing. In effect, manufacturing firms are reporting more taxable income in Ireland.
In 2010, Google Ireland's net income before tax as a ratio of revenues was 0.18% down from 0.60% in 2009. Tax paid in both years was €17m. Google Ireland's revenues of €10.1bn accounted for 44% of group sales. Google Ireland's payroll costs in 2010 were €152m for an average head count of 1,513.
In 2010, Google Inc. reported net income before tax of $10.8bn on revenues of $29.3bn - - a ratio of 37%.
In 2010, Microsoft Operations Ireland's net income before tax as a ratio of revenues was 12.6% up from 7.5% in 2009. Tax paid in 2010 was €150m up from €89m in 2009. This Microsoft Irish company accounted for 23% of group revenues in 2010. Its 2010 payroll costs were €82m for an average head count of 689. Microsoft's Round Island One's unpublished results would increase this ratio of Irish booked sales to group revenues.
The fiscal 2011 accounts have been filed with the Irish Companies Office this month and they show an 18% rise in revenues to €13.37bn but reported profits fell 58% to €593m as cost of sales grew from €770m to €1.15bn, while administrative expenses jumped from €9.13bn to €11.61bn. Net income before tax fell to 4.4%.
Corporate taxes fell to €76.5m. There was an average of 661 staff in 2010/2011 and payroll costs were €82m.
Three key takeaways from this: Most of the revenue increase of €2.1bn became part of Ireland's rising computer services exports; the jump in costs most likely reflects profit-shifting as Microsoft Inc.'s net income before tax was as strong as in 2010; The Irish payroll bill was unchanged from 2010, tax fell to 0.57% of revenues and while the headlines figures are impressive from an Irish context, there was minimal real incremental impact, if any, on the Irish economy in the year. The numbers employed actually fell.
In 2011, Microsoft Inc. reported net income before tax of $28.1bn on revenues of $69.9bn - - a ratio of 40%, unchanged from 2010.
Growth like a rocket
“We have become so competitive over the period of austerity that if the world economy rises, we’ll take off like a rocket and will have very significant growth rates in the next couple of years,” Michael Noonan, Irish finance minister, said at an eve of St. Patrick's Day event at the Paris Bourse on March 16.
The celebrations may have started early, in more ways than one.
On competitiveness, Patrick Honohan, governor of the Central Bank, had people like the minister in mind, when he said in a speech in 2010: "There are knock-on effects of the distinctive globalized structure of the Irish economy on other accounting measures of performance. With the structural shift towards high-productivity sectors during the 1990s and again since 2007, unit labour costs tend to fall even if wage costs for any individual firm or industry are increasing. Because of this shifting composition effect, as has been well-known for decades, but is routinely forgotten by superficial analysts, unit labour costs are a false friend in judging competitiveness developments for Ireland.
Measurement and accounting are of crucial importance at times of structural change. Careful scrutiny is needed to ensure that policy choices are quantitatively well-judged. These matters will no doubt retain their importance throughout the period of the recovery programme now being discussed with the IMF, the EU Commission and the ECB."
Apart from extraordinary capital investment compared with the rest of the economy, the acceleration in profit-shifting in the past decade does not mean that this is all captured in the GNP (gross national product) national accounts data where the profits of multinationals are excluded. Inputs can be inflated in price to make transfers to jurisdictions with a lower corporate taxation rate than Ireland's 12.5% rate.
Using Forfás data for 2010 and adding the 6,000 net jobs generated by IDA Ireland supported companies in 2011 (Enterprise Ireland and Shannon Development added no jobs), the total full-time permanent employment in the internationally tradeable goods and services sectors in December 2011 was 281,000 compared with 320,000 in 2000 and 292,000 in 1999. There were 144,000 employed in the foreign-owned export sector in 2011 - - down from 166,000 in 2000.
Competitiveness has improved but armchair commentators on exporting and devaluation advocates appear to believe that in non-commodity international markets, price is the key when developing new markets is usually a hard multi-year slog.
Besides, it's the foreign-owned companies that will continue to drive export growth but as outlined here, headline export growth has been impressive since 2000 but not for jobs.
Simply, a global boom until 2007 did not provide rocket boosting jobs growth. Why would it now?
Spin and reality
After more than fifty years hosting significant affiliates of foreign companies, Ireland remains an attractive location for foreign direct investment.
However, it doesn't have to facilitate companies in evading tax related to sales in other European markets.
In 2011, Irish services exports grew by €5bn to €79bn and the computer services category increased by €4bn.
Was this a real increase that positively impacted the Irish economy?
Exports reports 2014 & 2015
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