Tuesday 25 October 2016

Global spotlight on our booming corporate tax take

Published 06/12/2015 | 02:30

DCC is up with the well-heeled elite of the FTSE 100, above, which is headquartered in Paternoster Square in London
DCC is up with the well-heeled elite of the FTSE 100, above, which is headquartered in Paternoster Square in London

Michael Noonan was reassuring us all again this week about the sustainability of our new meteoric corporation tax levels. The corporation tax take is set to hit €7bn this year – a new record, and well above the €6.6bn collected at the height of the boom back in 2007. 

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The Finance Minister said he had discussed it with the Revenue Commissioners for some time before they agreed “to commit” to writing their assessment of the origins of the massive tax take, €2.3bn more in business tax than was forecast at the start of the year.

There is one very discernible pattern about the sudden surge. Back in 2007 the value of Ireland’s economic activity (GDP) was €190bn and we collected €6.3bn.

Last year, GDP was €189bn and we only collected €4.6bn. This suggests that corporations were doing the same amount of business but making a lower profit margin on it than in 2007. Or, corporations had simply got a lot better at sheltering tax, using havens and paying less tax in Ireland as a result. Having reached the same level of economic activity as 2007 but with 160,000 fewer people at work, somebody is making a lot of money.

Forward just 12 months, and all has changed utterly. The EU is investigating Apple’s historical tax arrangements with Ireland; the government has closed a number of loopholes; new levels of disclosure about where profits are booked are being introduced. Bear in mind that in the last six years, a handful of multinationals accounted for a greater share of our tax take. In 2009 just 10 major companies accounted for 20pc of the corporation tax take. In 2012 the top 10 paid 30pc of it or €1.2bn.

The top 20 companies accounted for nearly 40pc of our corporation tax take in 2012, while just 50 corporations paid around 52pc of it. We are heavily dependent not only on how these corporations perform but on how they structure their international operations and where they book their profits.

If they tweak their international structures to book more profit in Ireland, it will show up as trading profits and not as once-off windfall gains. And in fact there is a good chance they will want to continue to do that in the years ahead – as long as further international tax scrutiny doesn’t force them to change tack.

Banking Inquiry is looking more like a reality TV show

The Banking Inquiry conundrum about its final report is being presented as a worthy race against time. But surely there is something more going on. Oireachtas members were falling over each other to land a seat on the inquiry, but right now it doesn’t look quite so glamorous and interesting after all. The upside was obvious – massive media exposure in the year before an election, grilling nasty bankers in public — and it was all televised. Having gone through the high-profile bit, the legal restrictions are now firmly kicking in. Members have looked at the draft report and are worried that it could all backfire on them, as legal constraints leave it looking a little vague, tame and woolly. It was always going to be heavily constrained by legal precedent and no findings of fact can be found against any person, bank or institution. It raises the question of what exactly they can say. A few generalities about systemic failure, lack of oversight and misguided government policy. It isn’t exactly rock’n’roll.

The problem for members is that disagreements over the content of the report have further robbed the inquiry’s findings of whatever veneer of credibility and authority they might have had. The members are trying to hammer out a deal in a race against the clock, to insert as many amendments as possible. Sounds like a reality TV entertainment show.

Making the valuation numbers stack up at AIB

It HAS been suggested that the State now values AIB at around €15bn or close to €2bn more than the last valuation at the end of 2014. Perhaps it is worth that, only the market can really decide.

We do know that the market values Bank of Ireland, as of this week, at €11bn. So is AIB worth €4bn more than Bank of Ireland?

Comparing both banks’ half-year figures from the summer suggests not. Bank of Ireland made a profit before provisions of €884m. It was then hit with fresh provisions and made an underlying half-year profit of €743m. AIB made an operating profit of €701m but then benefited from loan write-backs, which boosted its half-year figure to €1.2bn. Bank of Ireland had a customer loan book of €85bn. AIB’s was €65bn. New lending in the half for Bank of Ireland was €6.5bn, while for AIB it was €4bn.

Bank of Ireland said it was Ireland’s number one business bank, with over 50pc market share of new SME/agri lending. AIB doesn’t seem to agree, saying it had “the number one market position across all personal products and business lines,” plus it had the “market leading position in mortgages with 39pc share of drawdowns in Q1 2015.” Bank of Ireland said it had 18pc of new mortgage lending.

Remarking on its trading share price AIB suggested back in August that its shares were trading at five times its net asset value, and 1.6 times its NAV would be more appropriate.

Based on the figures at the time, that would suggest a value on the bank in August of €14.2bn. So, if the State’s valuation is correct, it has increased in value by €800m in three-and-a-half months. At that rate, we’ll get our €20bn back in no time.

DCC boys are doing the Lambeth walk

Diversified services group DCC is set to join the FTSE 100 after a strong trading performance has nearly doubled the value of its shares this year. Executives are among those riding the crest of the DCC wave. Chief executive Tommy Breen has 250,000 shares now worth €20.8m.

Add in executive share options currently in the black by €7.9m and employee share options worth €5.7m and his equity interest in the group is worth €33.4m.

CFO Fergal O’Dwyer has shares and options currently worth around €27.9m. Managing director of the DCC Energy division is the third executive director of the group. His 90,000 shares are worth €7.5m, while his executive and employee options are in the black by another €5.8m.

Its shares have been a stellar performer, especially since it moved its listing from Dublin to London in March 2013. DCC stock has rocketed by 150pc since then and the FTSE 100 entry may help take them further.

Of course the man watching all of this with great interest is DCC founder and former chief executive Jim Flavin, whose 2.6m shares are now worth €228m.

Sunday Indo Business

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