Rest of World Accounts Leonidas Akritidis National Accounts in Practice – Advanced course Luxembourg, 3-12 October 2016 THE CONTRACTOR IS ACTING UNDER A FRAMEWORK CONTRACT CONCLUDED WITH THE COMMISSION

Content Definition of the Rest of the World (RoW), Residency and geographic breakdown External Account (imports and exports) Primary / Sec. Income Accounts & Financial Acc. Special treatment of: cross-border FISIM goods sent abroad for processing Relationship between RoW and Balance of Payments (BoP) Challenges and globalisation

Definition of the Rest of the World The Rest of the World is not a real sector; there are non-resident units that have economic relationships with resident units Rest of the World accounts: overall view of the economic relationships between the national economy and the rest of the world From point of view of the rest of the world! (ESA 2010 1.117)

Concept of residency The total economy is defined in terms of resident units A unit is a resident unit of a country when it has a centre of predominant economic interest on the economic territory of that country That is, when it engages for an extended period (one year or more) in economic activities on this territory (ESA 2010-§1.61)

Concept of residency Exceptions: Units primarily engaged in consumption (households) that go abroad for short periods (less than a year). They include: border workers seasonal workers tourists, patients, students staff of international organisations that have headquarters in extra-territorial enclaves Representatives of the government (including their households) established in territorial enclaves

Centre of predominant economic interest A location (e.g. land or building) within the economic territory From which economic activities are engaged producing, financing, insuring, redistributing consuming owning land or buildings Over a period of at least one year

Economic territory Geographic territory, administered by a government, within which persons, goods, services and capital can move freely Also included are for example: national air-space territorial enclaves (e.g. embassies, military bases, etc.) territorial waters part of the continental shelf (North Sea)

Rest of the World (S.2) NOTE: Euro Area: S.2I = S.2111 + S.2121 Non-EU incl. international organisation (S.22) European Union (S.21) EU Institutions (S.212) Non-Euro EU institutions (S.2122) Euro Area institutions (S.2121) EU countries (S.211) Non-Euro EU countries (S.2112) Euro Area countries (S.2111) NOTE: Euro Area: S.2I = S.2111 + S.2121 Non-Euro: S.2X = S.2112 + S.2122 + S.22

Exercise: residency

Imports and exports (External Account) Imports of goods and services consist of transactions in goods and services (purchases, barters, gifts or grants) from non-residents to residents (ESA 2010 § 3.159) Exports of goods and services consist of transactions in goods and services (sales, barters, gifts or grants) from residents to non-residents (ESA 2010 § 3.158) Transaction => change of economic ownership

Imports and exports exclude: Income flows (e.g. compensation of employees, interest and revenues from FDI) Sale or purchase of financial assets, non-produced assets (such as land)

Imports/Exports of goods; Imports and exports of goods occur when economic ownership of goods changes between residents and non-residents This applies irrespective of corresponding physical movements of goods across frontiers

Imports/Exports of goods; For deliveries between affiliated enterprises (branch or subsidiary, or foreign affiliate): a change of economic ownership is imputed whenever goods are delivered between affiliated enterprises This applies only when the establishment receiving the goods assumes responsibility for making the decisions about the levels of supply and prices at which their output is delivered for the market

Imports/Exports of goods include: Non-monetary gold (i.e. not used for the purposes of monetary policy) Paper money and coins not in circulation and un-issued securities Electricity, gas and water Smuggled goods, drugs

Exports of goods without the goods crossing the frontier Examples: goods produced by resident units operating in international waters are sold directly to non-residents in foreign countries transportation equipment or other movable equipment not tied to a fixed location goods after changing ownership, which are lost or destroyed before they have crossed the frontier of the exporting country merchanting, i.e. the purchase of a good by a resident from a non-resident and the subsequent resale of the good to another non-resident, without the good entering the merchant's economy

Imports and exports exclude: The following goods which nevertheless may cross the national frontier: goods in transit through a country goods shipped to or from country's own embassies, military bases or other enclaves inside the national frontiers of another country transportation equipment and other movable kinds of equipment which leave a country temporarily, without any change of economic ownership equipment and other goods which are sent abroad for processing, maintenance, servicing or repair other goods which leave a country temporarily, being generally returned within a year in their original state and without change of economic ownership

Imports/Exports of goods: FOB valuation Value of the goods at basic prices + transport and distribution costs up to the border of the exporting country (May differ from the border of the importing country considered in CIF) + taxes less subsidies on the goods exported

Imports/Exports of goods: main source External trade statistics High level of detail for commodities (> 10 000 in the EU case) High level of detail for trading partners (> 200) International harmonisation (Harmonised System of the UN, WCO) Very reliable data sources (Customs data in general) CIF valuation for imports

Imports/Exports of goods The European case Two data collection systems: Extra-EU: Customs data Intra-EU: Intrastat survey

Imports/Exports of goods National versus Community concept National concept: no quasi-transit trade country of origin for imports Community concept: quasi-transit trade captured when Extra-EU flows involved country of consignment for Intra-EU imports

Imports/Exports of goods Example: quasi-transit trade Shoes are imported from China to Antwerp (BE) with a value of 10 million euros and re-exported to France with a value of 20 million euros Belgian accounts (national concept): Imports, 0 / Exports, 0 French accounts (national concept): Imports from China, 20 million € (source Intrastat) / Exports, 0 European accounts (community concept): Imports, 10 million € (source Customs)/Exports 0

CIF valuation of imports The CIF price is the price of a good delivered at the frontier of the importing country before the payment of any import duties or other taxes on imports or trade and transport margins within the country (ESA 2010 - §3.169) CIF values used in Supply and Use tables FOB values used in National Accounts (and BoP statistics) => CIF/FOB correction applied to total imports of goods

Imports/Exports of services Definition: imports of services consist of all services rendered by non-residents to residents Definition: exports of services consist of all services rendered by residents to non-residents

Imports/Exports of services include: transportation of exported goods after they have left the frontier of the exporting country when provided by a resident carrier transportation of imported goods by a resident carrier; transportation of goods by residents on behalf of non-residents which does not involve imports or exports of the goods processing and repair activities on behalf of non-residents; these activities are to be recorded net, i.e. as an export of services excluding the value of the goods processed or repaired installation of equipment abroad when a project is of limited duration by its nature

Services account Services breakdown: Manufacturing services on physical inputs owned by others, Maintenance and repair services, Transport, Travel, Construction, Insurance and pension services, Financial services, Charges for the use of intellectual property, Telecommunication, computer and information services, Other business services, Personal, cultural and recreational services, Government goods and services.

Imports/Exports of services Main data source: BoP statistics Survey of enterprises (airlines, hotel/restaurants) Survey of households (travel expenditure) International transactions reporting system (ITRS linked to exchange controls) Administrative data sources (by-product of administrative functions) Official data (e.g. government services) Information from partner countries & international organisations Modelling (e.g. FISIM)

Primary Income Account Compensation of employees Taxes on production and on imports, Subsidies Property income

Property Income ESA2010: definition (para: 4.41) "Property income (D.4) accrues when the owners of financial assets and natural resources put them at the disposal of other institutional units. The income payable for the use of financial assets is called investment income, while that payable for the use of a natural resource is called rent. Property income is the sum of investment income and rent."

Property income D.41 - Interest D.42 - Distributed income of corporations D.43 - Reinvested earnings on Foreign Direct Investment D.44 - Other investment income D.45 - Rents (fishing rights in territorial waters)

D.41 Interest Payable on various financial assets - deposits, bonds, loans, trade credits etc. Recorded on an accruals basis (continuously) Interest flows must be netted of FISIM, it is recognized in the system a service thus must be eliminated from interest (see agenda item on FISIM)

D.42 Distributed income of corporations Profits distributed to shareholders *Dividends and ‘dividends’ of quasi-corporations Payers: corporations, ROW Recipients: owner sector (i.e. anyone) Sources: business surveys, stock exchange, income tax

D.43 Reinvested earnings on FDI Transaction ??? What transaction ! ! ! Can’t see any ? ? ? D.43 Reinvested earnings on FDI

D.43 – Reinvested earning on FDI (RIE) represents imputed undistributed income of foreign subsidiaries to national owners.

Subsidiary France Investor United Kingdom RIE Rerouted income

France Subsidiary Investor United Kingdom Dividends RIE Before we continue with RIE, a short recap on Foreign Direct Investment (FDI) FD Investor is a unit, which own 10% or more of the voting power in a non-resident unit, example: Subsidiary France Investor United Kingdom Dividends RIE

France Subsidiary Investor United Kingdom RIE Rerouted income D.43 – Reinvested earning on FDI (RIE) represents imputed undistributed income of foreign subsidiaries to national owners. Then this income is reinvested (rerouted) via the Financial Account (F.512 / F.519). Subsidiary France Investor United Kingdom RIE Rerouted income

D.43 Reinvested earnings Calculation in practice: Calculate profits of the subsidiary (FDI unit) Estimate its dividends and other distributed income RIE = profits – dividends Given that the national unit owns only 50% of the subsidiary = 0.5 * RIE will be transferred to the national owner.

D.44 - Other investment income D.441 - Investment income attributable to insurance policyholders D.442 - Investment income payable on pension entitlements D.443 - Investment income attributable to investment funds shareholders

Secondary income Current taxes on income and wealth, Social contributions and benefits, Other current transfers: Current international cooperation, Miscellaneous current transfers (includes personal transfers) VAT and GNI-based EU own resources Adjustments for change in pension entitlements

UK Row Financial Account: Stocks in 2013 (£ billion) Source: Office for National Statistics

Cross-border FISIM

Cross-border FISIM FISIM output is generated by Financial Intermediaries on loans and deposits only; The reference rate should contain no service element and reflect risk and maturity structure of deposits and loans. The interbank borrowing/lending rate may be a suitable choice. Separate reference rates should be applied for different currencies. FISIM implicitly included in the (actual) interest requires to adjust interest for FISIM (pure interest) recorded in the primary income account. 43

FISIM allocation, incl RoW: by sectors resident FISIM producers non-resident

FISIM allocation incl. RoW: by sectors Cross-border relationship

FISIM allocation: in cross-border relationship

FISIM allocation: in cross-border relationship

FISIM allocation: in cross-border relationship Now when FISIM is recoded as Trade in Services, it must be eliminated from interest (D.41). In other words, D.41 must be recorded at the ref. rate level, so called “pure interest” (BPM6, 11.75) D.41rec. by FIs on loan € Ref. rate FISIM exports on Loan = 3 € D.41 receivable by res. FIs = 6 € D.41 adj. receivable by res. FIs = 3 € THUS: FISIM adj.= -3€ FISIM exports on Deposit= 1 € D.41 payable by res. FIs = 2€ D.41 adj. payable by res. FIs = 3 € THUS: FISIM adj.= +1 € D.41pay. by FIs on dep. time t

FISIM allocation: in cross-border relationship + + -

Goods sent abroad for processing

Goods sent abroad for processing The term ‘goods sent abroad for processing’ refers to a situation where a client (the principal) sends goods it owns to another unit (contractor) abroad to be processed (outward processing) Once the goods are processed (inward processing), they are returned to the principal, where they may be further processed or sold The client pays a fee to the processor for the services provided

Goods sent abroad for processing In the ESA 2010, the goods sent abroad for processing are not considered as exports when they leave the country and as imports when they come back since there is no change of ownership In the country of the processor, the goods are not considered as imports when they enter and not as exports when they leave the country The fee paid to the processor is an import in the country of the principal and an export in the country of the processor

Goods sent abroad for processing Example:

Goods sent abroad for processing

Goods sent abroad for processing

Goods sent abroad for processing Difficulties for the input/output analysis For example, physically the processor produces drugs and consumes chemicals, in national accounts it produces services and does not consume chemicals

Goods sent abroad for processing If the two companies are affiliates of the same group, the recording in the accounts depends on legal arrangements. For example, if the group decides that the company in country B is now the principal, the accounts become:

Goods sent abroad for processing In the case of goods sent abroad for processing, there is an inconsistency between national accounts/balance of payments and the International Merchandise Trade Statistics Concepts and Definitions 2010 (IMTS 2010) In the ESA 2010 and in BPM6, imports and exports are recorded on the basis of the change of ownership In the IMTS 2010 imports and exports are recorded on the basis of the crossing of borders

Goods sent abroad for processing Besides standard case - goods sent abroad for processing and returned after processing - ; many possibilities, for instance: Final product sold in another country Processing with several suppliers Multi-country processing

Relationship BOP-RoW There is complete concordance between the ESA2010 and BPM6 with respect to the delineation of resident units, valuation, time of recording, conversion procedures, and coverage of goods, services, income, capital transfers, and foreign financial assets and liabilities. The coverage and terminology of major aggregates have been fully harmonized. There is a major presentational difference in that the international accounts use functional categories as the primary level of classification for investment income, the financial account, and the IIP, whereas the SNA uses instruments and sectors.

Relationship BOP-RoW Practical issues: In some countries, RoW and BoP are compied by the some institution/compilers (e.g. ONS in the UK), this ensures that RoW and BoP are fully consistent; However, in most of the countries BoP is compiled by NCBs, while RoW is complied by NSIs. It should also be noted that financial account is usually compiled by NCBs. This leads to differences caused by different data vintages used, imputations, models, etc. A good cooperation between BoP and RoW is therefore extremely important to eliminate (or at lest reduce) such differences that also impact on the issue of asymmetries.

Functional classification in BOP For financial flows and stocks, BOP functional classification distinguishes: Direct investment Portfolio investment Financial derivatives (other than reserves) and employee stock options Other investment Reserve assets Each category is broken down by instrument

Challenges and globalisation Has increased the challenges to countries of recording their domestic economies in the national accounts Especially due to the increasing share of international transactions undertaken by multinational companies, where the transactions across borders are between parents, subsidiaries and affiliates

Challenges and globalisation transfer pricing the increase in processing deals, where goods are traded across international borders with no change in ownership international trading via the internet the trade of intellectual property assets across the world workers' remittances multinational corporations organising their business across national boundaries amongst other things to minimise the global tax burden the use of off-shore financing vehicles re-exports of goods, and in the EU the transport of goods between Member States after entry into the Union increase in foreign direct investment relationships

In 2015, an important guide on global production was released In 2015, an important guide on global production was released. Nowadays, global production encompasses a broad range of business arrangements and organizational forms. Multinationals firms play a significant role in the international trade. The guide provides best practices developed by countries and internationally agreed on the practical guidelines needed to foster international comparability.

Exercise RIE