Institutional Sector Accounts Non-Financial and Financial 2022

In recent years, Ireland's gross domestic product (GDP) has been driven by foreign-owned non-financial corporations (sector S.11a), as illustrated in Figure 2.1. In 2022, 61% of Ireland's GDP was value added by this small cohort of foreign-owned companies (up from 51% in 2015). To provide better insights into the Irish economy, this publication shows non-financial corporations in three subsectors: foreign-owned (S.11a) domestic (S.11b)  and redomiciled PLCs (S.11c) sub-sectors.

As can be seen from their value added, these large multinationals in Ireland continued to grow in 2022. Figure 2.2 breaks down the main direct contributions of foreign-owned corporations (S.11a) to GDP (they also contribute indirectly through purchase of goods and services from domestic corporations). The largest part of their impact is net profit, which flows out to the rest of the world as dividends and reinvested earnings. This increased by 28% in 2022. The next largest element is consumption of fixed capital (CFC) or depreciation, which is included in Ireland's GDP (B.1G) and Gross National Income (B.5G) even though the owners of the capital which is being consumed are not in Ireland. Modified GNI excludes the CFC on intellectual property and leased aircraft and this accounts for most of their depreciation. The taxes and wages are smaller relative to the overall GDP impact but large in national terms (€18 billion and €37 billion respectively in 2022). As we saw in the Households chapter, the proportion of total wages paid to Irish households that comes from these corporations continues to grow. Since 2013 they have consistently paid more in employing workers in Ireland than they have in paying tax as residents here; in 2022, their tax bill here was 49% of their wage bill, the highest it has been in the ten year series. Compensation of Employees has always been more than twice the tax contribution for these enterprises. 

Removing the Distortions of Foreign NFCs: GNI

Because so much of GDP flows directly out of Ireland, there is a lot of interest in alternative measures that better capture how the domestic economy is performing.

Figure 2.3 shows three similar measures that remove the effect of foreign-owned multinationals from the accounts. The basis of all three is Gross National Income (GNI, also known as the Balance of Primary Incomes). This differs from GDP by excluding net factor income from the rest of the world (investment income (D4) and compensation of employees (D1)). In Ireland this is predominantly the investment income of foreign-owned NFCs (S.11a). This investment income is largely made up of the net profit after tax of these S.11a corporations. The three measures looked at here all refine GNI to better measure how much the economy is growing or shrinking

The first measure shown in Figure 2.3 is Modified GNI (GNI*), a bespoke measure for Ireland's particular economy and also removes other items from GNI:

• depreciation on leased aircraft and on intellectual property assets
• investment income of redomiciled PLCs, that is corporations receiving investment income here from subsidiaries abroad which ultimately belongs to portfolio investors overseas.

These items are large and volatile and do not have a big impact on the domestic economy, and therefore removing them can exclude some distorting effects of the presence of some corporations here.

Net National Income is a second measure that takes out some of the distortions of large corporations here. NNI deducts all Consumption of Fixed Capital (CFC) from Gross National Income (the measures are respectively net and gross of CFC). It can be calculated from the GNI and the CFC which form part of the National Accounts framework. Thus it is an internationally comparable measure that can be calculated for almost any country. Because so much of the CFC in Ireland relates to foreign-owned NFCs this measure gives an improved measure of the domestic economy. NNI removes all CFC regardless of which sector owns the assets that are depreciating. It is thus always lower than GNI or modified GNI, and excludes some domestic parts of GNI. However, CFC is not a volatile variable, and as a level indicator, NNI's change year to year is a good measure of how the domestic economy is growing or shrinking. However, NNI leaves in the net factor income of redomiciled PLCs, which can affect its growth rate.

The third measure in Figure 2.3 is called 'Domestic GNI'. As mentioned, GNI can be calculated for each institutional sector in an economy, and when referring to a particular sector's part it is called the Balance of Primary Incomes. Domestic GNI is the sum of the Balance of Primary Incomes of:

• Government
• Households and NPISH
• Domestic corporations, financial and non-financial.

It thus excludes the Balance of Primary Incomes of foreign-owned corporations (S11a and S12a) and redomiciled PLCs (S11c)

Domestic GNI is lower than GNI* because it excludes the Balance of Primary Incomes (and hence all CFC) of S11a and S12a, not just their CFC on IP and aircraft. As we noted in discussion of employment, these firms have significant presence here, including buildings, machinery and equipment, and the CFC on this is significant. Domestic GNI includes the CFC of domestic sectors, and so is more complete than NNI. This also has the advantage of excluding the Balance of Primary Incomes of Redomiciled PLCs, which is almost entirely made up of their investment income from the rest of the world. However, by excluding the entire Balance of Primary Incomes of foreign-owned corporations, we are excluding the taxes they pay on income and wealth, most importantly corporation tax. These taxes have not been deducted at this stage in the sequence of accounts. Since this money is used by the Irish Government to provide public services, excluding it is taking out a significant transaction that does affect the domestic economy.

As Figure 2.3 shows, these measures all have similar rates of change. As discussed above, all three have advantages and disadvantages. GNI* is the best known of these three measures. The Institutional Sector Accounts provide a detailed picture of the economy that allows for a variety of insights and ways of examining its performance. 

Removing the Distortions of Foreign NFCs: The Current Account

Since 2015, capital investment in Ireland has grown at a very high rate. This is illustrated in figure 2.4, which shows investment in constant prices from the Annual National Accounts. This increase has been driven by foreign-owned NFCs moving intellectual property (such as patents) to Ireland, usually as a company here purchases it from another company which is in the same group but in a different country. This adds very significantly to Ireland's imports, specifically imports of services. These products remain on the balance sheet in Ireland and their depreciation (consumption of fixed capital) is, as mentioned, part of Ireland's GDP.

These imports of intellectual property (IP) by foreign-owned corporations significantly affect the balance of economic transactions with the rest of the world (the current account balance, the negative of B12 of S2 in the sector accounts), which is an important economic indicator. These imports have made this balance very large and volatile, so it is difficult to interpret what it means for the Irish economy. For this reason, the CSO has developed a Modified Current Account for Ireland. This Modified Current Account removes the large IP imports and other globalisation effects, to give a new Current Account that is more representative of the domestic economy. Figure 2.5 shows the Current Account and the less volatile Modified Current Account.

It is helpful to see the Current Account in terms of investment of capital. Our Current Account with the rest of the world is the total saving (B8G) of the domestic economy less what is invested in capital formation (P5). 

Gross Saving - Investment = Current Account Balance.

This is an equation that holds for the economy as a whole, and since we can calculate saving less investment for each subsector of the economy (such as government or financial corporations), we can estimate the contribution of each sub-sector to the Current Account Balance. 

When we remove the large foreign-owned corporations from saving and investment we have the saving less investment of domestic sectors. This gives us an approximate Current Account Balance for these sectors, as illustrated below. This is not exactly the same as the Modified Current Account for the balance of payments. The sector accounts are based on the transactions of institutional units (such as a household or a company) and start with the value added of these units, while the Modified Current Account starts with net exports and approaches the adjustment using asset types (such as intellectual property or aircraft), and so the two approaches yield similar but slightly different results.

We can see from Figure 2.6 that in recent years, households and corporations have saved more than they have invested in fixed assets in Ireland, so they contribute to a positive Current Account Balance. This is particularly noticeable in the last two years as households have saved more. In 2022, government net saving was also positive, so all domestic sectors contributed to the current account balance. The GDP discrepancy (the difference between the income method and expenditure method) was the only negative in the estimate.

In our data bank tables, gross value added at basic prices is broken down by institutional sector, economic activity (A21 sections of NACE Rev.2) and by component (compensation of employees and gross operating surplus at basic prices). (Basic price gross operating surplus is after the addition of taxes (D.29) and the subtraction of subsidies (D.39).) This allows for analysis within each sector and sub-sector. For example, Figure 2.7 shows the compensation of employees paid by non-financial corporations by economic activity in 2022. As we might expect, most of the wages in Manufacturing and ICT come from foreign-owned corporations, but they also pay a significant minority in the wholesale and retail trade sector, and in Administrative and Support Services. On the other hand, in sectors such as Construction and Accommodation & Food Services, relatively little of the wage bill is paid by foreign-owned corporations.

The data by economic activity provides many insights into the structure of domestic corporations (S.11b). For example, comparing domestic corporations in 2013 and 2022:

• the value added by Irish-controlled companies has almost doubled (+92%) from €40bn to €77bn but the increases have been unevenly spread
• The highest growth has been in Administrative & Support Services (which includes aircraft leasing) which grew by €7bn from €2bn to €9bn and in Professional, Scientific & Technical activities, such as law and accounting, which went from €3bn GVA to €9bn.
• Domestic Construction firms, from a low base in 2013, increased their GVA by €5bn from €2bn to €7bn, significant growth but less than the professions. 
• Accommodation & Food Services also grew its GVA by more than average, by 113% to €5.5bn. The other large domestic sector, Wholesale & Retail Trade grew by nearly €4bn, which represents a 47% increase.  
• In the sectors where foreign-owned firms dominate, Manufacturing and ICT, domestic firms have grown less than in other sectors: by 39% in Manufacturing and by 75% in ICT. 

Profit Share

Both the gross profit (B.2g) and the wages (D.1) increased for domestically-owned corporations in 2022. The bar graph (left axis) in Figure 2.7 below illustrates the values of profits earned and wages paid in the sector. The line graphs (right axis) show the profit share, that is, the share of total GVA that is profit. The profit share of domestic-corporations rose during the pandemic, having been below the ratio for the overall Euro-area in earlier years. It remained above the Euro-area aggregate in 2022 at 43.6%. The rise in 2022 was due mainly to Accommodation & Food Service and Transportation & Storage: during the pandemic the wages in these sectors had fallen only slightly due to government supports, while profits had decreased very significantly. Following the reopening, profits recovered sharply while wages increased but by a smaller amount.

For Foreign-owned NFCs in Ireland (S.11a) the profit share is extraordinarily high, around 87% in recent years, reflecting the profit recorded in Ireland that arises from these companies' global operations. By separating out these firms, we can see that domestic corporations are within European norms and trending above our neighbours recently. (Profit in Figure 2.7 is shown at factor cost (as in table ISA03) not basic prices (as in table ISA05), that is, not adjusted for taxes and subsidies on production).  

Capital investment is an important indicator of likely economic growth since it is the acquisition of assets to be used in production in this and future years. The investment rate is calculated as the ratio of gross fixed capital formation (P51G) to gross value added (B1G). As we noted above, foreign-owned corporations have been bringing large capital investments to Ireland in recent years and this has driven up capital investment sharply. An investment rate for the NFC sector (S.11) as a whole reached 70% in 2019: this reflects the movement of Intellectual Property by multinationals within their group, and distorts any estimates for Irish NFCs. When we remove these corporations, the remaining domestically-owned corporations have been developing their fixed assets at a slower steadier rate. Figure 2.9 below illustrates this investment rate for domestic corporations. In 2022, they invested more than ever in new assets for production: €13bn. This represents an investment rate of 17%, a rise from 15% in 2021. The EU-27 rate has been consistently significantly higher at 24% in recent years. 

Return on equity is a measure of profitability of corporations in relation to the capital invested in them. A higher return on equity indicates the owners are getting a better return on their investment. For this indicator, 'profit' is gross entrepreneurial income (B.4G) less tax on income and wealth (D.5). This is divided by the balance sheet value of equity and investment fund shares (AF.5).

For non-financial corporations, the value for the Euro Area is around 20% in recent years (for Germany it averages over 50%). For Domestic NFCs (S.11b) In Ireland it is much lower: 10.1% in 2022. this is a rise on 2021, reversing a trend over recent years. The improved return is due to both higher profits and a decline in the value of equity due to price changes. These trends are shown in Figure 2.10 below.