Economic Territory, Units, Institutional Sectors, and Residency Course on Balance of Payments and

1. Economic Territory, Units, Institutional Sectors, and Residency Course on Balance of Payments and International Investment Position Manual (BPM6) IMF-PFTAC Nadi November 22-December 1, 2010 BP04

2. A. Introduction • A. Introduction • B. Economic Territory • C. Units • D. Institutional Sectors • E. Residence • F. Associated Issues Reference: Chapter 4 of BPM6

3. A. Introduction • Basic concepts for all macroeconomic statistics • International accounts are defined as transactions and positions between residents and nonresidents. • Identical concepts of residence are used in the BPM6,MFSM, GFSM, and the SNA.

4. A. Introduction Three questions: • What is the economic territory? • What is the statistical unit? • Institutional unit = entity that has transactions and positions. • Which territory is the unit most closely connected with? • Residence.

5. B. Economic Territory/Economy • The economic territory of a country is the relevant geographical area to which the concept of residence is applied. • An economy consists of all the institutional units that are resident in the economic territory

6. B. Economic Territory • Consists of the geographic territory administered by a single government; • Usually a country, but not necessarily. • Economic and currency unions. • Special zones, total excluding special zones • May have different laws and policies with “free trade zones” or other special zones. • National total still needed for global totals and for bilateral comparisons.

7. B. Economic Territory includes: • The land area • Airspace • Territorial waters • Islands • Territorial enclaves within other countries (embassies, military bases, aid agencies, etc)

8. B. Economic Territory (ctd) • The concepts of territory and residence ensure any statistical unit is resident of only one territory • A legal unit may need to be considered as more than one unit for statistical purposes • Special zones – offshore financial centres, free trade zones…

9. B. Economic Territory • A special type of economic territory is that of international organizations. • Not subject to laws of host country. • Not useful to consider as part of host economy. • IMF and UN not US residents. • However, they have transactions with host economy. • Both global and regional organizations. • Governmental-type functions, not businesses.

10. C. Units • Institutional units are the entities that own assets, incur liabilities, make contracts. • Because they are decision-making units, they should have, or be capable of having, their own accounts. • Reference 2008 SNA • Two main types: households and other (corporations, NPIs, government units)

11. C. Units Types of institutional units: • I. Households • including the individuals who make up a household • may include household businesses • II. Corporations • financial corporations • nonfinancial corporations • unincorporated businesses that are separate from their owners (quasicorporations) including branches • government-owned enterprises included in corporations sector, but may wish to show separately • III. Nonprofit institutions serving households (NPISHs) • IV. General government • V. International organizations • not a resident of any national economy

12. C. Units • Enterprise • An institutional unit that engages in production. • Normally a single legal entity, but occasionally need to split entity that operates in two or more economies. • May sometimes combine legal entities under common ownership. • But never across international boundaries or institutional sectors.

13. C. Units • Quasicorporations • Not incorporated, but behave as if incorporated: • Branches • Multiterritory enterprises • Notional units for natural resources • Some joint ventures • Quasicorporations for set-up costs incurred prior to incorporation of direct investment enterprise (permits, legal, etc.) • Trusts • Flexible corporate structures with little or no physical presence

14. C. Units • Branches • Where a single entity operates in more than one economy: • Divide operations – branch is identified as a separate institutional unit.

15. C. Units • Branches – Criteria: • Separate accounts, to balance sheet • and usually one or both of: • Substantial production for one year or more • Location, if there is a physical presence • Otherwise based on registration or legal domicile, if no physical presence such as in finance, insurance virtual manufacturing, etc), • Subject to income tax system • (Even if tax exempt)

16. C. Units • Branches – Construction Projects: • Some projects done by non-resident contractor. May give rise to a branch. • No local legal entity established • Major projects (e.g., bridges, power stations) taking more than one year and managed through a local site office = branch if also fits standard branch criteria • Short term or based from home territory and doesn’t meet standard branch criteria = imported service • Production delivered from base (eg, consulting, training, TA) – depends on criteria.

17. C. Units • Single entity operating in more than one economy ctd. • Occasionally, a seamless, indivisible operation, e.g., SAS Scandinavian Airlines, hydroelectric schemes on borders, also entity in joint sovereignty zone: • Split based on headquarters and branches, if possible; • Otherwise, prorate.

18. C. Units • Ownership of natural resources located within a country’s economic territory • Notional unit as owner (direct investment). • Purpose is to maintain natural resources as always being an asset on national balance sheet • But has corresponding liability (direct investment). • Notional resident unit can generate rent, rental, or operating leasing services

19. C. Units • Other types of units besides institutional units: • Establishments • An enterprise operating in several locations or industries may be broken up into establishments. • Local enterprise groups • Useful for direct investment statistics. • Global enterprise groups • Multinational enterprise.

20. D. Institutional Sectors

21. D. Institutional Sectors • Central bank and other deposit-taking corporations allow links to monetary statistics • Monetary authorities sector (as in BPM5) compiled when relevant (i.e., when some or all reserves held outside the central bank; the concept of monetary authorities underlies reserves assets) • General government allows links with government finance statistics.

22. D. Institutional Sectors • Other sectors • Other financial corporations: • Insurance, pension funds, other financial intermediaries, captives, financial auxiliaries. • Nonfinancial corporations, households, and NPISHs. • Other splits to be consistent with SNA (e.g., balance sheet approach).

23. D. Institutional Sectors • International organizations • a special type of unit, resident in its own economic territory, not part of any national economy • global or regional • financial (IMF, World Bank Group, regional development banks, ECB) and nonfinancial (UN, EU) • discussion of central bank of a currency union in Appendix 3.

24. E. Residence – General Concept of residence • Economic connections of a unit to an economic territory. • Not based on nationality or legal criteria. • Not based on currency used. • Expressed as an economic unit’s center of predominant economic interest.

25. E. Residence - General Center of predominant economic interest • Dwelling, place of production, or other premises, within the economic territory of the country on, or from, which the unit engages, or intends to engage, in economic activities and transactions on a significant scale, for an indefinite or long period.

26. E. Residence - Households Households and individuals • A household has a center of economic interest when members of that household maintain, within a country, a dwelling or succession of dwellings that the members treat and use as their principal residence.

27. E. Residence - Households Households and individuals • The guideline for determining residence is • presence or the intention to be present; • for a period of one year or more. • In practice, tends to be identified in groups, rather than individuals. .

28. E. Residence - Households Special cases: • Diplomatic representatives • But: non-diplomats, locally engaged staff; international organization staff. • Members of the armed forces • Students • Medical patients • Ship’s crew

29. E. Summary of effect of residence of households

30. E. Summary of effect of residence of households • Note: net effect of residence of guest worker on the current account balance may be limited, due to offsetting transactions • Compensation of employees less living expenses (travel services) for nonresident temporary worker may be similar in value to • Personal transfers sent by resident temporary worker

31. E. Residence - Enterprises Enterprises • An enterprise has a center of economic interest and is a resident unit of a territory when the enterprise is engaged in a significant amount of production and plans to do so over an indefinite or long period of time. • Normally enterprises will have a location in a single economy because of: • Companies law; • Taxation law.

32. E. Residence - Enterprises Particular types of enterprises • Operators of mobile equipment • For example, airline, railway, trucking, shipping. • Based on residence of the operating enterprise, rather than location of the equipment. • Shipping not based on registration. • NPISH – e.g., Red Cross • not international organisation – if substantial and ongoing may be a branch

33. E. Residence - Enterprises • Shelf companies, shell companies, special purpose vehicles (SPVs), special purpose entities (SPEs): • No physical location. • Residence according to country of incorporation/registration. • Not according to location of assets, owners, or administering office.

34. E. Residence - Enterprises • Special zones or legislative exemptions for particular enterprises: • Manufacturing (e.g., free trade zones); • Financial or other services (e.g., “offshore financial centers”).

35. F. Other Issues Associated with Residence - Data by Partner Economy • BPM6 provides a detailed discussion of data by partner economy (Para 4.146-4.167) • Issues for: • CDIS (Coordinated Direct Investment Survey) • CPIS (Coordinated Portfolio Investment Survey) • BIS international banking statistics • Goods (country of origin, consignment, destination) • Freight and insurance

37. F. Other Issues Associated with Residence - Data by Partner Economy • Issues for financial instruments: • Basic principle is based on the economy of residence of the counterparty to the transaction or financial position • For BOP, partner attribution for financial account could be on “transactor” or “debtor/creditor” approach(Para 4.154)

38. F. Other Issues Associated with Residence - Data by Partner Economy (3) • For direct investment • As a basic principle, transactions and positions by partner economy should be reported according to immediate host/investing economy (Para 4.156) • Supplementary data on “ultimate host economy” and “ultimate investing economy” or “ultimate controlling parent” • Implications for Coordinated Direct Investment Survey

39. F. Other Issues Associated with Residence • Change in residence of units • Migration of person • Migration of corporation • Rare, but euro-companies can migrate within EU. • What is called corporate inversion or restructuring usually involves moving assets and liabilities between related companies, rather than a single company changing its residence.

40. F. Other Issues Associated with Residence • Globalization • Individuals and money more foot-loose. • What is the future of residence-based statistics? • Alternatives to residence-based statistics: • Consolidated statistics (BIS banking data based on headquarters) • Foreign Affiliates Statistics (FATS/AMNE)

41. Main Changes from BPM5 • Discussion on units • Requirements for recognising a branch amended • No imputed institutional unit for employing staff of non-resident enterprises • New idea of multi-territory enterprises and special purpose entities

42. Main Changes from BPM5 • Adopts SNA institutional sector classification • Residence defined as centre of predominant economic interest • Residence criteria specified for mobile individuals • Residence of entities with little or no physical presence determined on jurisdiction of incorporation or registration