Simone Ambroselli “Session 3 – Profiling (Costs and Benefits)” The impact of “Special cases” and intra-group transactions in the MNEs profiling activity 22nd Meeting of the Wiesbaden Group on Business Registers Tallin, September 2010

OBJECTIVES Wiesbaden Group Profiling Tallin, September 2010 Try to incorporate the treatment of special cases in the more general problem of “delineation” of statistical units Evaluate the DESK PROFILING approach with its benefits and costs in general and for a specific sector (chemical- pharmaceutical) Describe the strategy Istat is following to complete the business profiling Promote an open discussion about these topics (problems and solutions)

QUESTIONS Wiesbaden Group Profiling Tallin, September 2010 Questions for the evaluation of the DESK APPROACH UNDER WHICH CONDITIONS SPEs MAY BE TREATED AS AN ENTERPRISE? MAY INTRA-GROUP TRANSACTIONS AFFECT THE AUTONOMY OF THE UNITS? IS IT POSSIBLE TO DEVELOP AUTOMATIC RULES TO COMBINE THE LEGAL UNITS FORMING THE ENTERPRISE?

DEFINITIONS (From SNA, BoP, GNI TF) Wiesbaden Group Profiling Tallin, September 2010 Special purpose entities Foreign controlled entities having little or no physical presence often no employees and no-financial assets always related to another corporation, often as a subsidiary it is often resident in a territory other than the territory of residence of its parent Captive financial institutions Financial corporations that cannot act independently of their parents and are simply passive holders of assets and liabilities (for example, holding companies) Artificial subsidiaries (named as ancillary corporations in the 1993 SNA) Wholly owned by the parent corporation and created to provide services to the parent corporation, or other corporations in the same group, in order to avoid taxes (…) EXAMPLES: Ownership of land, buildings and equipment (lease back) Nominal employer of all the staff Keep the accounts of the parent

DEFINITIONS (2) Wiesbaden Group Profiling Tallin, September 2010 Intra group transactions Operations of MNEs that may involve SPEs Transfer pricing Use of transfer price for transactions among affiliated enterprises Global Manufacturing The different parts of the production process take place in different Countries Goods for processing Goods sent for processing abroad and returned after without change of ownership Merchanting Defined as the purchase of a good by a resident (of the compiling economy) from a non-resident and the subsequent resale of the good to another non-resident, without the good entering the merchant’s economy Toll manufacturer Arrangement through which one company uses its own specialized equipment to make a product for another firm Intra-group R&D imports and exports R&D results are transferred to different affiliates with transfer price practises

DEFINITIONS (3) Wiesbaden Group Profiling Tallin, September 2010 Special purpose entities For National Accounts the territorial aspect is crucial for the identification of institutional units In general, the artificial subsidiaries (and the captive financial institutions if they reside in the same country as their parent) are treated as an integral part of the parent and their accounts are consolidated with those of the parent but the simple solution may not be adequate for large MNEs that often act with SPEs and “normal” units in the same Country Intra group transactions Both for manufacturing and service units, the intra-group cross-border flows may produce a lack of autonomy for the “truncated” units affecting also the quality of the variables related to transfer price strategies.

Wiesbaden Group Profiling Tallin, September 2010 Many definitions but in practice? Trying to simplify the problem we are looking for: belonging to MNEs with little physical presence or with intra-group transactions (cross-border) that may affect Business statistics for some variables (turnover, imports or exports) Basic criteria for the enterprise delineation: autonomy in the economic sense market orientation. IDENTIFICATION

IDENTIFICATION OF SPEs Wiesbaden Group Profiling Tallin, September 2010 Bottom-up approach

IDENTIFICATION OF SPEs (2) Wiesbaden Group Profiling Tallin, September 2010 The bottom-up procedure is Simple No costs Data available (administrative/statistical data) BUT 1. National administrative data are sufficient to select all the special cases? YES if we consider the following variables: employment, turnover, localization (for SPEs with no employees and no-financial assets) More difficult if we would like to select SPEs that own land, buildings or equipment NO for captive financial institutions

IDENTIFICATION OF INTRA-GROUP FLOWS Wiesbaden Group Profiling Tallin, September 2010 Bottom-up procedure (for the units created for fiscal purposes and involved in foreign transactions) Desk profiling (evaluation of the annual and consolidated financial statements) Open question: arm’s length principle

STATISTICAL UNITS Wiesbaden Group Profiling Tallin, September 2010 EXAMPLE 1 A SPE with “incoherent” values EXAMPLE 2 A “truncated” group acting in a non autonomous way EXAMPLE 3 A “truncated” group acting in a European perspective with SPEs, Toll Manufacturing arrangements and intra-group transactions

EXAMPLE 1 Wiesbaden Group Profiling Tallin, September 2010 MNE X Italy MNE X Holding EURO 1 ITALY MNE X Ltd No address No emp Turnover (fiscal): ca 200 mln euros Imp: ca 140 mln euros Exp: ca 40 mln euros Emp: 1,500 Turnover (fiscal): ca 600 mln euros Imp: ca 40 mln euros Exp: ca 1 mln euros Vat position 2000/65/CE ?

EXAMPLE 1 (2) Wiesbaden Group Profiling Tallin, September 2010 MNE X Italy MNE X Holding EURO 1 ITALY MNE X Ltd Vat position Hp1 – Global profiling: global ent Hp2 - National profiling: the fiscal position is “ancillary” for the Italian Unit

Wiesbaden Group Profiling Tallin, September 2010 MNE Y ITALY 3 Nace MNE Y Industries EURO ITALY MNE Y ITALY 1 Nace MNE Y ITALY 2 Nace MNE Y Marketing World MNE Y Corp. EXAMPLE 2: INTRA-GROUP TRANSACTIONS

EXAMPLE 2 (2) Wiesbaden Group Profiling Tallin, September 2010 MNE Y ITALY 3 Nace MNE Y Industries EURO ITALY MNE Y ITALY 1 Nace MNE Y ITALY 2 Nace MNE Y Marketing World MNE Y Corp. 99% 38% 62% 94%

EXAMPLE 3 Wiesbaden Group Profiling Tallin, September 2010 MNE Z – a European perspective A new group’s structure starting from 2009 A project to semplify and to obtain savings in some functions Creating a structure based on business functions and not for group of products Planning at the European level (and not national) the supply chain Example: 1 subholding in Italy 3 italian companies 1 company decision center in a different European Country (with a VAT position in Italy)

EXAMPLE 3: FINANCIAL LINKS Wiesbaden Group Profiling Tallin, September 2010 MNE Z Supply Chain Ltd MNE Z Italy holding MNE Z Italy Marketing MNE Z Italy Ltd MNE Z Italy Manufacturing Marketing ICT, services Production Sub-holding EURO2 ITALY EURO1 MNE Z Supply Chain Ltd Vat position MNE Z GGH

EXAMPLE 3: OPERATIONAL LINKS Wiesbaden Group Profiling Tallin, September 2010 MNE Z Supply Chain Ltd MNE Z Italy Marketing MNE Z Italy Manufacturing MNE Z Italy Ltd Toll manufacturingOrders Holding Strategies Services MNE Z Italy holding Operational relationships

EXAMPLE 3: THE IMPACT Wiesbaden Group Profiling Tallin, September 2010 Impact on National Statistics Business Register: Before: two legal unit = two enterprises (one sub-holding; one manufacturing) After: four different legal units (how many ent?); new legal units with Nace codes previously hidden Foreign Trade After: the SPE is the new cross-border unit STS and SBS: After: consistency problems for in time series; problems with the “population” sampling

Wiesbaden Group Profiling Tallin, September 2010 MNE Z Supply Chain Ltd MNE Z Italy holding MNE Z Italy Marketing MNE Z Italy Manufacturing MNE Z Italy Ltd “Truncated” enterprise: to solve the inconsistencies in the NACE code attribution; to create a stable reporting unit GOD2GOD1 MNE X Country … Marketing MNE X Country… Manufacturing EXAMPLE 3: WHICH PROFILING “Global” enterprise: a delineation based on the different business functions

Wiesbaden Group Profiling Tallin, September 2010 DESK APPROACH: MAIN RESULTS AND LIMITS DESK VS VISITS It is necessary to complete the profiling activities in order to solve the problems of data consolidation and market/transfer price evaluation within the MNEs.

LOOKING FOR NEW WAYS: EGR Wiesbaden Group Profiling Tallin, September 2010 A common starting point at the European level to support the top down approach an easy way to analyse the internal structure of the group to assure a homogenous treatment able to overcome the problem of a “truncated” group view A MIXED APPROACH Bottom-up approach the practical completion useful for SPEs identification (branch with turnover and no physical presence; VAT positions) Top-Down approach the starting point useful for the identification of the intra firm flows and to support data consolidation hypothesis From the “middle” different sectors and more consolidating units useful for identification of sub-perimeters

LOOKING FOR NEW WAYS: VISITS Wiesbaden Group Profiling Tallin, September 2010 Visit profiling is the proper way to answer the issues still outstanding but its adoption may be costly Questions for the creation of the profiling team: WHO: what kind of experts? BR and others? WHEN: once a year (for SBS and NA) or more frequently (STS)? WHERE: only in one Country? UCI or reporting unit country? WHAT: the structure and which variables? WHY: for the delineation of statistical units and what else? HOW: following the structure of each group or creating a common list of questions?

MAIN CONCLUSIONS Wiesbaden Group Profiling Tallin, September 2010 New concepts Global enterprise (not restricted to a national territory) Global profiling (data collection of the main variables at the UCI level) PROs: a consistent data collection at the group level; no problems of double counting and data consolidation; the production of business statistics for the main variables at a higher territorial level (for example EU statistics obtained not as a sum of parts). National and global profiling produce different results because the sum of the “truncated” parts differs from the total

MAIN CONCLUSIONS Wiesbaden Group Profiling Tallin, September 2010 Dual coding system To guarantee the basic information for National Statistics purposes the need of a global view of the operational structures of the MNEs A coherent system of tools for the statistical units’ conceptual model classification variables figures of the main variables

Wiesbaden Group Profiling Tallin, September 2010 THANK YOU FOR THE ATTENTION