Contact: nadim.ahmad@oecd

1. Global Manufacturing: International Transactions in IPPs and Goods for Processing OECD National Accounts Working Party Meeting Paris December 2010 Contact: nadim.ahmad@oecd.org

2. Background • UNECE lead Publication on: • The Impact of Globalisation on the National Accounts. • Steering Group recognised that further guidance-research needed on global manufacturing. • Two related papers produced for NAWP • Conceptual: transfers of IPPS within MNEs • Practical: measuring goods for processing

3. Trade in IPPs within MNES • An item for the research agenda/clarification? • Increasing tendency for MNEs to transfer IPPs to SPEs low tax jurisdictions. • Because IPPs are produced assets, this results in value-added shifting across economies but little change in GNI. • Considerable changes to productivity can also occur.

4. Trade in IPPs within MNES • Key issue raised by such transfers however is whether the accounts should record associated transfers of value-added, which may only reflect administrative changes in the MNE. • Although the asset may have legally changed hands, the key question is has economic ownership also changed? • Important to note that this is not an issue about payments incorrectly classified as PI that should be rerouted and where the revised EBOPS classification should help.

5. The research question? • If company A, the producer and sole user of an IPP, transfers ownership of the IPP, for tax purposes, to a specially created shell subsidiary in a low-tax jurisdiction to whom it subsequently pays annual licence fees for use, and receives all of the post-tax income from the subsidiary, does it make sense that gross value-added in A falls and B rises; despite the fact everything else has remained equal?

6. Economic Ownership • Paragraph 10.5 of the 2008 SNA defines legal and economic ownership. It says: • The legal owner of entities such as goods and services, natural resources, financial assets and liabilities is the institutional unit entitled in law and sustainable under the law to claim the benefits associated with the entities. By contrast, the economic owner of entities such as goods and services, natural resources, financial assets and liabilities is the institutional unit entitled to claim the benefits associated with the use of the entity in question in the course of an economic activity by virtue of accepting the associated risks.

7. Financial leases • 17.304. A financial lease is one where the lessor as legal owner of an asset passes the economic ownership to the lessee who then accepts the operating risks and receives the economic benefits from using the asset in a productive activity…... One indicator of a financial lease is that it is the responsibility of the economic owner to provide any necessary repair and maintenance of the asset. …….

8. Argument • Impute a transfer of ownership back to the parent and reroute payments of services by the parent to the SPE as property income flows. • But not always clear when this should occur and further guidance is needed. E.g. the paper illustrates the example of an author. But becomes more complicated in cases where the ‘ SPE’ engages in some transforming production.

9. Until then.... • Prudent to leave flows as they are for now. .... But with the proviso that where there are flows in services there is also an underlying asset recorded on the balance sheet.

10. Goods for Processing • Not insignificant criticism of 2008 SNA recommendation; particularly with regards to IO analysis. • Paper elaborates on these criticisms and argues that they are perhaps misplaced; especially in the context of goods sent for processing where in the 1993 SNA ‘no’ imputations are made for domestic processing services, creating asymmetries .

11. Goods for Processing • However, clear that further guidance is needed, particularly in delineating between merchanting and goods for processing, where the margin may be blurred in practice e.g. where IPPs owned by the ‘merchanter’ or ‘principal’ are embodied/installed. • And in providing practical advice for dealing with customs data.

12. Going forward • UNECE led steering group has recommended that these issues should fall under the umbrella of further research on global manufacturing. • The format and timing of the vehicle to take forward the work will require further consideration.