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

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

Some Statistics

Ireland’s International Investment Position (IIP) Liabilities, 2005(€Billion)

3

Some Statistics (contd.)

International Investment Position (IIP) Liabilities, 2005 as a ratio of GDP - Selected Countries

4

Some Statistics (contd.)

Inward Foreign Direct Investment Position, 2005as a ratio of GDP - Selected Countries

5

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

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

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 others8

Straightforward Case

Simple example of inward FDI into Ireland

9

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

H Deemed Resident in Ireland

Inward FDI into Ireland via intermediate Irish holding company

11

H Deemed Resident Abroad

Inward FDI into Ireland via intermediate foreign holding company

12

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

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

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

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

Further Complexity - DiagramInward FDI - Country of Incorporation/Tax-residency

17

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

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 to simplify 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

A - Resident of Ireland

FDI treatment (assuming consolidation in Ireland Data)

20

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

A - Resident Abroad

FDI treatment (assuming consolidation in Ireland data)

22

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 revisions23

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

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

Change in Name/Legal Status (contd.)

Inward FDI - changes in name/legal status INITIAL SITUATION

26

Change in Name/Legal Status (contd.)

Inward FDI - changes in name/legal status - INTERMEDIATE SITUATION

27

Change in Name/Legal Status (contd.)

Inward FDI - changes in name/legal status - ‘FINAL’ SITUATION

28

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

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

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

‘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

‘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

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

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

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

THE END

DISCUSSION

37