Thursday, December 12, 2013

Facebook or Faceless!

Reading a summary of the financial position of Facebook Ireland recently, once again brought home to me the extent to which the activities of such well-known profitable companies clearly display a crass regard for any true ethical obligation with respect to tax liabilities.

According to the Financial Times, Facebook used a complex tax avoidance scheme to limit its corporation tax bill to €1.9 ml. in 2012 (based on a turnover of €1.79 bl.) That would work out as just a little over .1%!

However of the €1.79 bl. turnover a truly incredible €1.75 bl. relates to administrative expenses for the use of intellectual property. This money (i.e. royalty payments) is paid into a special holding company Facebook Holdings that is incorporated in Ireland but registered elsewhere for tax purposes. So the money in turn passes through this company on its way to subsidiaries based abroad. Many of these appear to be located in the Cayman Islands where no tax is payable.

Of course Facebook is not alone in this respect with Google and Apple (among others) using similar tax avoidance schemes.

And Ireland is clearly not the only country benefiting from such schemes with for example several  other European countries such as the Netherlands, Luxembourg and Switzerland offering especially attractive incentives.

Now these companies can still brazenly keep a straight face in maintaining that they conscientiously fulfil all their tax and regulatory obligations. When asked why they have located in Ireland they routinely provide gushing accounts regarding the quality of the work force (while opportunities for tax avoidance are never even mentioned).

Unfortunately we are presented here with stark evidence of the unacceptable face of capitalism.
Countries such as Ireland can derive considerable benefits through attracting key multinational operators like Apple, Google and Facebook into their midst. The whole national tax system is then deliberately skewed to the liking of these companies.

For example, though the Irish economy has been going through a deep recession since 2008 with domestic taxation rising and expenditure on services falling, not alone has there been a unanimous official agreement to maintain the low corporation tax rate (12.5 %) but additional incentives have been made available (e.g. tax concessions for top executives) to make the island even more attractive.

In many ways however the tax rate is used as a red herring to divert attention from the reality of how these companies  pay virtually no tax here through a seeming ability to declare any amount of revenue they wish as royalties. They then use the double Irish system of incorporating a holding company that is registered in a tax free haven elsewhere to then effectively screen all these revenues away from tax.

So theoretically for example in the case of Facebook, it does not really matter how high the official tax rate is here in Ireland if it can in effect declare all revenues as administrative expenses and then transfer this revenue to a tax haven registered in another country (where no tax liability applies)!

Thus everyone involved seems therefore more than happy to focus sole attention on the merits or demerits of the official corporate tax rate on profits, which effectively then acts as a smokescreen against looking at this deeper issue of how these companies effectively avoid paying almost any tax in Ireland.

Presumably the fact that are willing to pay some small amount of tax (regardless of how minuscule) creates the appearance of tax compliance (which again can be seen as the best tactical approach from their perspective).

Now the multinational companies play an increasingly important role in the Irish economy.

However you will scarcely ever hear any word of objection to the tactics which these companies employ as it would not be seen to be in our national interest.

For example yesterday we had the directors of a big charity here in Ireland rightly being grilled by the public accounts committee of our national parliament regarding the apparent misuse of its voluntary funding.

Now one might think that the activities of multinationals (such as Apple, Google and Facebook) are of much greater significance both in economic and ethical terms. However it is highly unlikely that a similar public grilling of its representatives would ever happen as the very attempt to seek accountability would be seen to run counter to our narrow self interest.

And we would not be alone in this regard! As competition for such international investment is intense, other countries where such companies might locate would be likely to behave in exactly the same manner!

Therefore if the ethical issues of massive tax avoidance are to be properly addressed, this will require an internationally agreed system of regulation (with every country willing to play by the same rules).

However by the very nature of capitalism this will not easily transpire while each country is still motivated to maintain its own competitive advantage (relative to others).

Indeed this is a huge weakness of capitalism which eventually could wreck havoc on the international system.

We have quickly moved in modern times to a system where genuine global co-operation is increasingly required on a broad range of fronts.

For example our climatic problems cannot be addressed while countries still seek to maintain a short-term competitive advantage with respect to others.

Likewise global financial problems cannot be solved while institutions seek to maximise returns for the benefit of their own executives and shareholders.

And the enormous problems associated with the manner in which multinational corporations wield so much power, cannot be dealt with while again individual countries seek to maximise their short-term advantage through turning a blind eye to the significant ethical issues involved.

Tuesday, December 10, 2013

Ireland in Transition

I was watching an interesting programme presented by Ian Kehoe (from The Sunday Business Post) showing how the recent resurgence in the Irish economy owes a great deal to a considerable amount of overseas capital investment, especially with respect to sales of distressed property.

As is well known the Irish property boom came to a shuddering halt in 2008 leading to massive falls in value with respect to both residential and commercial property.

Many of the largest loans on these properties were sold to NAMA (an Irish state organisation that has arguably now become the largest property company in the world). Likewise, many other assets however still exist on the banks' balance sheets, which they are anxious to sell to the highest bidder.

And as Irish developers no longer possess the financial means, these assets are being quickly sold principally to the US (on both coasts) the UK and other international investors.
Some of these assets have been bought up also by successful Irish developers based abroad (though these would be in a minority).

For example the programme focussed on one Neville Isdell (former Chief Executive of Coca Cola) who has purchased the CHQ in Dublin's Docklands. This was developed with the intention of becoming an iconic commercial centre before the crash quickly ended all hopes. Though €45 million had been spent on its development it was purchased by Isdell for just €10 million.

Another excerpt featured William J. McMorrow of Kennedy Wilson a real estate auction company that is already invested billions in buying up large portfolios of property in Ireland.

Then there was the owner of a British chain of pubs Wethespoons that are now buying up pubs at knock down prices in Ireland with a view to becoming the biggest operator.

There was also a broker Michael Hasenstab from Franklin Templeton that invested several billion in buying up Irish bonds at the height of the crisis (when interest rates were very high). This audacious act paid off handsomely with large profits being made on the investment. It also injected much needed confidence into the bond market at the time with interest rates subsequently falling dramatically.

We also saw Wilbur L. Ross who bought a substantial stake in the Bank of Ireland (one of Ireland's two largest banks) again helping to stabilise its fortunes at the height of the crisis.

So what do we make of all of this from a wider economic perspective?

Undoubtedly the popular mood here would be one of deep resentment. Thus, as many ordinary folk still struggle greatly with an overhang of debt in their personal lives, they see these outside (largely anonymous) wealthy investors as vultures that our seizing large swathes of property at bargain basement prices.

Of course the attitude of the investors themselves would be somewhat different. They would point to this as healthy capitalism where market forces reign supreme. They would further maintain that they are in fact helping significantly to regenerate the Irish economy through their willingness to invest with the prospect of recovering markets thereby promoting new activity and employment.

And certainly from a short-term perspective there is a great deal of truth in this view.

However it does raise the very disturbing longer term spectre of Ireland becoming increasingly dependent on the whims of these outside investors.

Even before the crash Ireland had become heavily dependent on multinational investment (especially of US origin). Though this greatly increased wealth generation, a very significant proportion of this wealth then flowed out of  the economy through profit repatriation (running at about 1/6 of GDP).

Since the financial crisis, not alone has Ireland becoming even more dependent on such foreign investment in manufacturing industry and services but this has now spread dramatically into commercial retail and residential property activity.

So in the short to medium terms, what we are likely to experience in Ireland is a significant increase in the amount of money being repatriated from the economy each year.

Profit flows themselves are likely to increase due to the intensification of investment, especially in internationally traded services, with a growing contribution of outflows also from the retail sector.

Outflows with respect to interest repayments abroad will also sharply increase due to Government repayments on the substantial bail-out funds we received during the crisis from our Troika partners.

Now strictly these payments would be measured with respect to debt borrowed from abroad. However there is the further complication that since the crisis increasing amounts of Irish debt are now held by non-resident institutions (e.g. Franklin Templeton) which means in effect an additional large outflow.

On top of both these profit and interest outflows we will also see a large rise in outflows relating to rental income (as so much commercial and residential property is now controlled by foreign landlords).

Though it is very difficult to put an exact figure on it, it is not beyond the bounds of possibility that we could see in the next decade an effective doubling in the proportion of net foreign outflows. That would mean that up to 1/3 of the money generated from economic activity in Ireland could subsequently be repatriated to other countries!

This would imply that though a substantial - and even sustained - recovery may well emerge in the Irish economy over the next few years, its effects are likely to significantly bypass most ordinary citizens living here. Put simply for many years economic growth in Ireland is set to repay outside investors (rather than the majority of domestic citizens).

I would also fear that it may work in an very uneven fashion with a considerable amount of money (though domestic and overseas investment) eventually finding its way back into property thus inflating prices unduly once more. This in turn will create an artificial market for many domestically produced goods. Though this will enable higher levels of employment to be maintained, greater levels of inefficiency will operate. So the cost of living in Ireland is likely to stay above and even increase with respect to the EU average.

There is also the worrying fact that investor sentiment can just as easily turn against our interests in the future.

For example if Franklin Templeton considered (on shrewd profit calculations) to sell a substantial amount of its Irish debt in the future, this could have a very damaging impact on the Irish bond market generally.

So from this perspective, institutional investors (with no commitment to national economic priorities) now have the power to effectively blackmail small countries with respect to their own private interests.

This cannot be a healthy development for capitalism internationally. In fact, if the mistaken capitalist view that private greed somehow translates into public virtue, is allowed to continue unchallenged, then the international economic system itself is likely to be its eventual casualty.

We were given a severe warning sign of this through the financial crisis of 2008. However its deeper message has clearly not yet been heeded!