EFTA/UNECE/SSCU Seminar

1. EFTA/UNECE/SSCU Seminar “Economic Globalisation: A Challenge for Official Statistics" 3-6 July 2007, Kiev, Ukraine Dealing with complex and changing company structures and trading practices in compiling Foreign Direct Investment and Balance of Payments related statistics in Ireland by John Fitzpatrick, CSO, Ireland 1

2. Background and Context • Foreign Direct Investment (FDI) significant in Ireland • Inward FDI increasingly important over last 30 years • Outward FDI becoming more important • Main focus of this paper on inward FDI and FDI enterprises (FDIEs) in terms of compilation issues due to: • changing company structures • changing activities • trading and accounting practices • BoP/FDI reporting arrangements 2

3. Some Statistics Ireland’s International Investment Position (IIP) Liabilities, 2005 (€Billion) 3

4. Some Statistics (contd.) International Investment Position (IIP) Liabilities, 2005 as a ratio of GDP - Selected Countries 4

5. Some Statistics (contd.) Inward Foreign Direct Investment Position, 2005 as a ratio of GDP - Selected Countries 5

6. CSO Compilation System • Quarterly statutory surveys of enterprises • All BoP related transactions covered (receipts, expenses, investment) • Balance sheet stocks (IIP) and reconciliation items also collected • Data for national accounts also collected • Official CSO FT statistics used but adjusted for BoP purposes • Administrative data used (government departments, NCB) • Miscellaneous data collected • Results used for BoP, National Accounts and Financial Accounts 6

7. Specific Issues Encountered • Determination of statistical units • Obtaining and understanding data for FDIEs in Ireland • changing company structures • changing trading practices • accounting practices • Treatment of goods for processing (tolling); commissionaire trading • Phenomenon of recording in the compiling country: • turnover generated abroad • expenses incurred abroad and profits arising • The treatment of merchanting and similar phenomena 7

8. Statistical Units (SUs) • Well-maintained, comprehensive statistical register required • Need good information and understanding of: • company structure involved - type of legal units, country(ies) of incorporation • activities, trading arrangements, employment • reporting arrangements for company accounts and taxation • tax residency • Application of international SU criteria • Determination of existence and residency • straightforward in many cases • subjective judgement in others 8

9. Straightforward Case Simple example of inward FDI into Ireland 9

10. More Complicated Case • One intermediate holding company (H) between the ultimate parent and the Irish operation • Two scenarios (of four possibilities): • the intermediate H is incorporated in Ireland and tax resident in Ireland • the intermediate H is incorporated in Ireland and tax resident abroad • What are implications of mis-recording the residency of H? 10

11. H Deemed Resident in Ireland Inward FDI into Ireland via intermediate Irish holding company 11

12. H Deemed Resident Abroad Inward FDI into Ireland via intermediate foreign holding company 12

13. Mis-Recording Implications If H is taken to be a resident of Ireland when it is not: • transactions/positions between B and H are taken to be resident-to-resident and incorrectly excluded in BoP and FDI statistics of Ireland • transactions/positions between H and A (the parent) are taken to be resident-to-nonresident, and incorrectly recorded in Ireland’s BoP and FDI statistics May not be a major problem where H is simply an intermediate through which flows/positions between A and B occur. Incorrect geographical allocation will be the result if the foreign country of residence of H is different to that of A However, if H acquires funding in Ireland or elsewhere and on-lends to B then greater complexities arise and the magnitude of incorrect recording in terms of the amounts involved and the geographical allocation increases 13

14. Mis-Recording Implications If H is taken to be a foreign resident when it is not: • then transactions/positions between B and H are taken to be resident-to-nonresident and incorrectly recorded in BoP and FDI statistics of Ireland • transactions/positions between H and A (the parent) are taken to be nonresident-to-nonresident, and are incorrectly excluded from Ireland’s BoP and FDI statistics As for previous scenario, may not be a major problem where H is simply an intermediate through which flows/positions between A and B occur and if residency of A and H are the same If H acquires funding in Ireland or elsewhere and on-lends to B then, as in previous scenario, complexities arise and the magnitude of incorrect recording in terms of the amounts involved and the geographical allocation increases 14

15. Mis-Recording Implications If H is incorporated abroad but is tax resident in Ireland • Corresponding consequences arise for the two scenarios If B (manufacturing or service entity) is incorporated in Ireland and tax resident abroad • Treatment generally resolves satisfactorily: • where B has premises, employment, activity, etc. it will be an institutional unit resident in Ireland • the relevant statistics can be recorded as appropriate Vital that CSO is fully aware of all the information at compilation time but it may not be 15

16. Further Complexity • A is a holding company owned by a US parent P • A is incorporated in Ireland • A is tax resident in the Cayman Islands • A owns another holding company B, incorporated in Ireland and tax-resident in Ireland • B owns a company abroad, C, which is incorporated in the Cayman Islands and tax-resident there also • C has a branch, D, in Ireland which has premises, employment, activity, etc. 16

17. Further Complexity - Diagram Inward FDI - Country of Incorporation/Tax-residency 17

18. Recording Approach Correct recording of flows/positions here depends largely on how A is treated. Two scenarios: • A is treated as an institutional unit resident in Ireland • A is treated as an institutional unit resident abroad 18

19. Recording Approach If A is treated as an institutional unit resident in Ireland • A is an inward FDIE of P (US) • A’s Irish subsidiary B (an Irish-resident institutional unit) has a subsidiary (an outward FDIE), C, in Cayman • D (C’s branch in Ireland) is an inward FDIE of C • Reporting for A, B and D as individual resident enterprises may occur • However, as D (the Irish branch) has a real physical presence in Ireland, D and the two holding companies A and B might be consolidated tosimplify reporting of the inward (from US and KY) and outward (to KY) FDI transactions and positions between Ireland and the RoW • Either approach should essentially lead to the same result 19

20. A - Resident of Ireland FDI treatment (assuming consolidation in Ireland Data) 20

21. Recording Approach If A is treated as an institutional unit resident abroad • B, A’s Irish subsidiary, is an inward FDIE of A (KY) and indirectly of P (US) • B (an Irish-resident institutional unit) has a subsidiary (an outward FDIE), C, in Cayman • D (C’s branch in Ireland) in turn is an inward FDIE of C • Reporting for B and D as individual resident enterprises may occur • However, as D (the Irish branch) has a real physical presence in Ireland, it and the holding company B might be consolidated to simplify reporting of the inward and outward FDI transactions and positions between Ireland and the RoW • Either approach should essentially lead to the same result 21

22. A - Resident Abroad FDI treatment (assuming consolidation in Ireland data) 22

23. Differences in Treatment of A • Resolves to a difference in the geographical allocation of part of the inward investment into Ireland i.e. to US or to Cayman Islands • Important for any geographical analysis, particularly for IO areas • Further significant recording complications can arise if A: • provides funding (e.g. debt) to Irish residents or to non-residents • receives funding from Irish residents or from non-residents • The correct geographical allocation of such funding can present problems • CSO may be unaware of the facts for quite some time • Leads to distortion and revisions 23

24. Changing Company Structures • FDIEs in Ireland frequently change their company structures • CSO challenges are: • to be constantly aware of such changes • to obtain the necessary data • to determine how to record the data based on the international standards • One example given 24

25. Change in Name/Legal Status • Irish FDIE (A) changes its name to AA • AA Enters into a partnership with foreign affiliate B • Partnership called A (i.e. same as original FDIE) • A then transfers all its assets and liabilities to AA • A later goes out of existence and AA changes its name back to A 25

26. Change in Name/Legal Status (contd.) Inward FDI - changes in name/legal status INITIAL SITUATION 26

27. Change in Name/Legal Status (contd.) Inward FDI - changes in name/legal status - INTERMEDIATE SITUATION 27

28. Change in Name/Legal Status (contd.) Inward FDI - changes in name/legal status - ‘FINAL’ SITUATION 28

29. Outcome • Possible reason for structural change • Partnership may be a convenient/flexible arrangement for distributing profits and equity • If not known to compiler: • If transition is completed within short period (3-months) then the data for potentially only that period affected • If transition takes longer (say 2 years) and if compiler only becomes aware of it afterwards then statistical impact greater • Distortions can affect geographical allocations • Early knowledge therefore crucial 29

30. Trading Practices • ‘Commissionaire’ model • Irish FDIE produces goods which it sells abroad to a final customer • Irish FDIE’s affiliate abroad acts as a selling agent but never takes ownership of the goods • Affiliate receives a fee (commission) from the Irish FDIE for its selling services • Value of the goods exported from Ireland reflects: • production and other local costs in Ireland and also include the costs and margin of the selling agent • Irish FDIE’s margin also included 30

31. Trading Practices (contd.) • ‘Tolling’ model • Movement of goods across national boundaries for further processing (“tolling”) without the goods changing ownership until they are in a ‘finished’ state • When ‘finished’ the goods are sold to the final customer either in the processing country or another country • Goods exported from Ireland for tolling generally cover chemicals and pharmaceuticals • Value of the goods sold and tolling fee paid have to be determined 31

32. ‘Commissionaire’ Model • Some features • Very significant in relation to software; can reach extreme proportions • Irish FDIE may have small number of staff duplicating the software • If Irish FDIE is the ‘principal’ entity involved in a market (e.g. EMEA) it records in its books all of the turnover and costs relating to that market for itself and other affiliates operating in that market • If an affiliate in another country becomes the principal, then the sales, expenses and profits figures can change significantly without necessarily any material change in employment levels or the physical dimensions of the enterprise • Such changes in trading arrangements appear to occur for tax reasons 32

33. ‘Tolling’ Model • Some compilation aspects • Reporters may not know: • when processing and sale are completed • the country of the customer • Official Irish export trade figures used in BoP have to be replaced by the appropriate sales values when change of ownership known or assumed • Processing/tolling fees have to be determined • Lack of full knowledge of phenomenon and timing aspects causes distortion • Less reporting difficulty for goods imported into Ireland for tolling 33

34. Accounting Data • Ultimate parents of Irish subsidiaries are usually US - based • Irish subsidiaries prepare management accounts in accordance with the US Generally Accepted Accounting Practices (GAAP) • CSO’s Quarterly BoP (including FDI) data are generally reported on the basis of such management accounts • Statutory obligation to prepare audited accounts of Irish-incorporated entities in accordance with either Irish accounting practices or the International Financial Reporting Standards (IFRS) - both can differ notably from the US GAAP • Problems understanding and interpreting the data • Consequent impact on the compilation of the statistics • World-wide accounting standard would help 34

35. Accounting Data (contd.) • Different reporting requirements depending on legal form, etc. of entity • Branch - accounts for entire company filed • Unlimited liability company - no statutory requirement to file accounts • Debts guaranteed by another company - accounts of latter filed • Parent company - consolidated accounts can be filed • MNCs may have central accounting and taxation units - may be late in year when receipts and expenditure allocated to affiliates Reporting enterprise (even senior) staff may not be familiar with company structure, immediate/ultimate parent, transactions and counterparts 35

36. Concluding Points • Paper meant to highlight issues encountered which can impact on the data • Compilation of results not an easy exercise  compiler seldom satisfied • Overall quality of the CSO’s BoP and FDI statistics good but one or two companies’ data can cause problems if not detected in time • Importance of compiler having close ongoing contact with enterprises • Well-prepared company visits by compiler best option  with senior staff • Other follow-up modes of contact important too • Access to annual accounting data crucial  company structure, trading practices, etc. and changes occurring • Need to create and maintain a good relationship between compiler and reporter  more open information; confidentiality guarantee 36

37. THE END DISCUSSION 37