The below are the major foreign holders of US Treasury securities. Notice that number 1 on the list is China, followed by Japan. Ireland is number 3 on the list, which many may find interesting.
Ireland is a safe haven, tax shelter country. Many companies hold cash in Ireland in the form of US Treasury securities. This is why they appear on the list. Countries that got hit particularly bad during the financial crisis of 2008 lowered their corporate tax rates massively to encourage foreign investment. Ireland was one of those countries. It was able to attract foreign capital and investment, and has dramatically increased its foreign currency reserves since the 2008 crisis.
Marketwatch wrote a piece back in September of 2017, asking the question, Why is Ireland the US Government’s 3rd Largest Creditor? In the piece, the author notes the possibility that Ireland’s holdings are actually not owned by the Irish government. He notes they are possibly owned by corporations who have set up shop in Ireland in order to hide the profits they have made from their European operations. From Marketwatch,
“Investors and analysts suspect Ireland appears as one of the U.S.’s largest creditors on paper because Google parent Alphabet and other American corporations like to hold their overseas profits in highly liquid Treasurys. These cash-rich firms want to avoid the 35% repatriation tax, but they don’t want to let the foreign-earned cash sit idly by.”
Recall that in the most recent Trump Tax Act, passed in December of 2017, Trump allowed companies to bring back foreign profits to the United States for a one-time tax holiday. Instead of paying the usual tax rate (~30%), they would pay half of that. According to the Financial Times,
“The Tax Cuts and Jobs Act imposes a one-time “deemed repatriation tax” of 15.5 per cent on the profits businesses have accumulated overseas, whether or not they choose to repatriate them as Apple has with its pledge to bring $38bn back to the US.”
Today, as I write this, it’s coming up on 1 year since the Trump Tax Cut was passed. Logically, if Irish holdings of treasuries are actually corporate holdings of offshore profits, we should be seeing the Irish holdings decrease somewhat, if not substantially, as those profits are repatriated to the United States. The assumption that those holdings are owned by American tech firms makes perfect sense, according to the following from Marketwatch,:
“As a country that offers a combination of low corporate taxes and an English-speaking workforce, it’s little surprise Ireland is now the country of choice for many U.S. companies looking for a launching pad for European operations. It currently hosts the European headquarters of Google, Facebook, Apple and Microsoft. The four firms including Amazon, which has located its main office in Luxembourg, hold more than $200 billion worth of government paper, according to their corporate filings.”
To check and see if any repatriation has happened since the law was passed, we examine US Treasury TIC data. In December of 2017, at the time the repatriation law (Trump Tax Act) was passed, Ireland and Luxembourg held $544.1 Billion of US Treasury securities.
As of the September 18th, 2018 release of TIC, they now hold $533.3 Billion. The difference is a decrease of $10.8 Billion. If Apple was supposed to bring back $38 Billion just on its own, it surely hasn’t done anywhere near that yet.
TIC data does not distinguish between public and private ownership of US Treasuries. The above values therefore, lump together Irish government holdings, with Facebook/Google/Apple/Microsoft holdings held in Irish banks.
This means we can’t be sure that Ireland didn’t somehow buy 100 Billion of treasuries to offset the $110.8 Billion of corporate repatriation. Being a tiny country with a GDP (economic worth) of $294 Billion, Ireland has no reason to buy that many treasuries.
But let’s play devil’s advocate. Let’s look at the countries that actually legitimately buy US treasuries. Those countries are China, Japan, and Saudi Arabia. China has a huge export surplus that it keeps in US Treasuries, Japan is a huge buyer for its public pension funds, and Saudi Arabia essentially uses the US Dollar for all its oil business. In Saudi Arabia’s case, that means Saudi Arabian US Dollar holdings should roughly go up and down with the price of oil. Lets look and see how their holdings of US Treasuries changed since the US tax reform.
|Country||December 2017 (Billions USD)||July 2018 (Billions USD)||Change (%)|
|Price of Crude Oil||$ 61.81/Barrel||$ 68.83/Barrel||
|Ireland & Luxembourg||544.1||533.3||
Notice how Saudi Arabia is the only country that increased its holdings of US treasuries. Notice how the price of oil increased by about the same amount. This follows our thesis. Here’s a chart of crude oil below for your reference:
Notice the dramatic rise in oil prices since July of 2017.
What the data proves is that no country legitimately buying US treasuries for its sovereign holdings actually increased holdings since the Trump tax cuts; on the contrary, they have decreased them. That means that if the Irish government was going to do anything, they would have also decreased, since they don’t have any specific reason, like oil exports, to hold US Dollars. This tells me that in actuality, corporations like Apple, Amazon, and Facebook, who have European domiciles in Ireland, have done little repatriation since the Trump tax cuts.
That conclusion was recently affirmed by the Wall Street Journal here.