Finland: Compiling merchanting according to BPM6 Item 16, Balance of Payments Working Group 23.10.2013 Juha Martikainen, Statistics Finland

Introduction Definition Change in the treatment of merchanting Reporting Different forms of merchanting Data collection in Finland Difficulties Large enterprise work and profiling BPM6 revision in Statistics Finland

Definition of Merhancting “Merchanting transactions—that is, the purchase of goods by a resident (of the compiling economy) from a nonresident combined with the subsequent resale of the same goods to another nonresident without the goods being present in the compiling economy” If there is a change in the physical form of the goods during the period they are owned by the merchant, as a result of manufacturing services, then the transaction should be classified as general merchandise, and not as merchanting”. (BMP6, 10.41) In the manuals the definition of merchanting is short and sweet but we dealing with the complexity of the globalized world, which make it much more sweeter

The change on the treatment of merchanting in BPM6

The physical movement of goods does not reflect a change of ownership Economy: A Merchanting (A to C) Negative exports BPM6 (B to A) -100 Exports BPM6 (A to C) 150 $ Economy: C Generel merchandise (B to C) Imports IMTS (B to C) 150 The Goods Economy: B Exports IMTS (B to C) 100 A recidence of the country A acquires the ownership of the goods € Ownership rights Ownership rights

Recording of merchanting in BPM5 and BPM6

Reporting the geographical breakdown – two possible options as discussed in previous BoP WG The example considers two transactions: Transaction 1: DE buys goods from Russia for 100 and sells it to France for 120 Transaction 2: DE buys goods from China for 150 and sells it to Denmark for 200

Reporting the geographical breakdown Finland is in favor of option 2 Reporting of the net export to the country of buyer It is difficult to get gross values of the goods in case of global production Transfer prices are used in a large extent Information just on the net values Gross values have to be estimated Option 2 is in line with the European accounts No extra information needed for EU/Euro area accounting 8

Different forms of merchanting Global wholesaling and retailing trade Merchant earns a margin by purchasing and selling Commodity trading Historically merchanting often involved on price differences of commodities Trading in commodity derivatives is not regarded as merchanting Transactions resulting from global manufacturing Many transactions within a multinational enterprise (MNE) fall in the definition of merchanting

Multinational enterprise in global manufacturing type of merchanting Similar as other type of merchanting except that all transactions take place within the MNE. In reality global manufacturing type of transactions combine elements of merchanting and processing If the good is processed while the ownership stays in compiling economy, the transaction should be recorded in the BPM6 heading ”manufacturing services on physical inputs owned by others” in the service account. The ”manufacturing” of the good can be organized in a various ways which gives room for an interpretation

The data collection in Finland Business survey on International trade in services has questions on global production and trade Merchanting Manufacturing services on physical inputs owned by others (inward, outward) Geographical breakdown The gross value of the goods / the net value of the margin Merchanting might be under reported in the survey Quality control: comparison with other information, especially sales statistics – sales from aboard to aboard

Some enterprises have had difficulties on reporting of the merchanting The concepts can be difficult to understand Merchanting can be bounded in the other global production activities No information in the business accounting Geographical breakdown of the production In the business survey it is impossible to cover all unique cases Some companies have strict policy for the interpretation No answering if not precisely asked

Large enterprise work and profiling in Statistics Finland Cooperation with the largest enterprises Response burden vs. quality of the information Coherency in statistics BoP, National accounting, business statistics The key problem is, how to truncate a MNE into the national level? ESSNET on profiling GEN – global enterprise group TEN – truncated enterprise group

The global business arrangements can be extremely complex In the production of high-technology goods the most valuable resource is in intangible assets The ownership of the intermediate product aren’t in a significant role in the value chain of the MNE The concept of ownership is not always clear Who gets the economic benefit? Transfer prices are common in the transactions within the MNE Selling price may cover elements of R&D, marketing, financing etc. Cases are unique

Merchanting and the global value chain Merchanting is closely connected to the global value chain What is the “critical resource” behind the value added? Where the global company wants to show value added? The most difficult issues for the compiler of the statistics Cooperation with the transfer pricing unit of corporate tax authorizes on the phenomenon No enterprise level information Substance over form in the interpretation Is it the head office, which carries the risk, controls the business, which gets most of the value added? No any exact rule of formula for dividing the global value added

Comparing the source statistics International merchandise trade statistics (IMTS) The customs statistics on goods International trade in services statistics (MSITS) The Sales inquiry Sales to abroad Sales from abroad to abroad Structural business statistics Inventories statistics Foreign affiliate trade statistics (FATS) Financial statements of the companies

Critic for the business profiling type of macroeconomic statistic

Why to do business profiling in Finland? Some MNE have a huge impact to the statistics in Finland Concentration just to the most important cases It is the best way to get to know the phenomenon and develop accounting and IT-systems Coherency in concepts and processing After all enterprises are quite willing to do cooperation Developing statistics in EU and participation in other international projects

Ongoing revision in Statistics Finland Revised time series for the merchanting Net values from services to goods With the existing information Estimations are needed Studying the impact of the BPM6-revised business survey Changes in the time series can be considered Improve practices and methods on the treatment of the asymmetry of the source information Merchanting on the suppley and use tables (National Accounts) International projects

Recent guides and on going work on the subject Guide on Impact of globalization on national accounts, UNECE, 2012 Manual on Goods Sent Aboard for Processing, Eurostat (2013) Task Force on Global Production, UNECE (2014) Typology of Global Production Arrangements Principles of Economic Ownership Ownership of IPP Large and complex cases units Multiterritory enterprises Quasi-Transit Trade

Thank You!