Business Irish

Tuesday 20 February 2018

Our scary reliance on just 10 foreign multinationals

Payments by just 10 foreign multinationals represent 40pc of our total corporation tax take
Payments by just 10 foreign multinationals represent 40pc of our total corporation tax take
Richard Curran

Richard Curran

The Revenue Commissioners moved last week to reassure us all that last year's sudden surge in corporation tax payments was not just down to one or two big multi-nationals paying more tax.

The Government expected corporation tax receipts last year to come in at around €4.5bn - but in fact they hit nearly €6.9bn. This had sparked suggestions that big firms such as Apple Inc might be tweaking their international corporate structures in the face of growing international criticism of tax planning and a European Commission probe.

According to the Revenue, the rise in business taxes was broad-based and reflected the general recovery in the economy. It turns out that 16,000 firms that paid no corporation tax prior to 2014 made contributions totalling €500m.

This figure is supposed to suggest that the recovery and the consequent tax take was very broad-based. But it seems a little strange.

An examination of the figures Revenue produced ultimately shows how vulnerable our economic model is when it comes to multinationals.

First, just 10 major foreign multi-nationals contributed a massive 40pc of our total corporation tax take (or €2.76bn). This was up from 37pc a year earlier. This means that those 10 global firms paid about €1.2bn more in tax here than they did in 2014.

Revenue also said that, despite this larger share paid by the top 10, the overall ratio of foreign multinationals to indigenous firms remained the same, at around 80pc foreign to 20pc indigenous.

It is extraordinary to think that while indigenous Irish businesses collectively paid €1.3bn in corporation tax last year, just 10 multinationals paid more than double that amount.

It highlights in the starkest terms our failure to develop indigenous Irish companies and our enormous dependence on foreign investment.

Some of those corporations, such as Intel or Apple, have invested billions of euro in Ireland. As we saw last week, even one of the world's greatest companies - Intel - is having to cut a few hundred jobs in Ireland. However, it has invested billions in machinery and manufacturing facilities. It isn't going anywhere.

But others such as Google, Facebook, Twitter or other technology firms by their very nature are much more mobile.

And what about those 16,000 firms that suddenly managed to make a profit in 2015?

This is really puzzling. It is hard to imagine that thousands of start-up companies all uniformly turned into profit last year. Similarly, it doesn't seem to make sense that longer-established businesses, which had struggled in the recession years, all returned to profit in the same year.

Perhaps some of them racked up big losses in the recession, which gave them tax loss credits, which in turn ran out last year.

It is reassuring to think the sudden rise in corporation tax didn't all come from one or two companies just having a good year. However, the figures show that of the €2.2bn in additional tax, €1.2bn of the increase did come from just 10 companies having a good year. We hope it continues.

Expanding Dalata gets ready for the hard bit

After spending more than €560m buying hotels last year, Dalata Hotel Group chief executive Pat McCann still has another €100m available to commit. It's quite a kitty.

Dalata acquired 15 hotels in Ireland and the UK last year alone.

The challenge for the group in recent months has been what to buy. Management told shareholders during the week that they expect to commit the rest of that €100m before the end of this year and would look at paying a dividend in 2017 - which would be pretty extraordinary, given that it only floated in 2014.

The board signalled at the AGM last week that it would not go for the Gresham or the former Burlington Hotel. Prices are looking higher now - and Dalata might have the cash, but it doesn't want to buy badly.

With more hotels set to close, such as the Ballsbridge Hotel in Dublin some time in 2018, the demand for hotel rooms in the capital looks likely to continue.

McCann is on the record as saying hotel prices will increase further, a comment that ran the risk of attracting the ire of Minister Michael Noonan, who delivered the 9pc reduced VAT rate for the sector.

Dalata is reaping the benefits of buying trading hotel businesses at cheap prices, which saw its profits hit €28.4m last year.

One option for the company is to look more at new builds than acquisitions. As well as the planned new build at Charlemont Street in Dublin, Dalata has its eye on a number of other development sites.

Buy a hotel and you get an income stream that very year, but you run the risk of paying too much. Build a hotel and the payback is longer in coming, but it could be greater in the long run.

In a way, getting this far this quickly required McCann and the board's credibility and experience to raise so much money and spend it well. Once the expansion bit is finished, Dalata will have to knuckle down to the tougher job of making its assets deliver.

Dalata shares floated at €2.50 in March 2014 and hit €5.50 earlier this year. They then fell back to around €4.20. Profit-taking may be behind much of the drop. Signalling a dividend for next year early on might go some way towards attracting a different kind of longer-term investor while also heading off further profit-taking at the pass.

It seems to have done the trick, as Dalata shares were up 5pc on the week.

Glanbia and Kerry both avoid the dairy squeeze

Two giants of the Irish food sector, Glanbia and Kerry, are both sticking to their 2016 full-year earnings guidance, after delivering fairly confident trading statements during the week.

Kerry's business is so diversified that currency movements and tough trading conditions in one market can be offset elsewhere. The business is so tightly managed that, despite tough trading conditions, it is sticking to its 6pc-10pc growth in earnings per share this year.

Glanbia is facing a tougher trading environment with the international slump in dairy prices and currency shifts. A euro that is increasing in value against other currencies hits the bottom line figures when they are translated back into euro.

Glanbia's investment in its dairy ingredients division is paying off, but its real growth story is dependent on the continued expansion and success of its consumer global performance nutrition division.

In the first three months of this year, it achieved high single-digit growth in its American-branded sales, but this was offset somewhat by selling less private label products. As long as Glanbia can keep growing those US-branded sales, cyclical challenges in other parts of the group won't hurt as much.

Consumer nutrition products is a tough, competitive business to be in, and Glanbia will have to work very hard on the ground to retain those private label contracts, see off competitors and find new acquisitions.

Meanwhile, at home dairy farmers are not happy. Some are struggling. After borrowing heavily to expand their herds, they are getting very worried about the price of milk. They are directing their ire at executive salaries across the industry.

Chief executive Siobhan Talbot could give them little comfort at the group's agm when she said things may get worse before they get better on milk prices.

Some farmers are questioning her €1.9m salary and also the 22pc rise in staff costs at Glanbia. Inevitably in an expanding global business with US employees and currency fluctuations, once you translate those costs back, the wage bill is going to rise.

Equally, farmers have done incredibly well out of the exponential growth in Glanbia's share price in recent years, much of which is down to the performance nutrition business in the US.

But try telling that to farmers facing bad weather - nothing is growing and they feel like it is them instead of their livestock placed in the crush.

Sunday Indo Business

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