Improving the SNA treatment of Transactions within Multinationals Author: Dylan Rassier, BEA Discussant: Nadim Ahmad, OECD IARIW-OECD Conference: W(h)ither the SNA Paris,

Accounting for MNEs - The problem A well known one…. – Proliferation of transactions within MNEs and their ‘accounting baggage’ – transfer pricing, SPEs, intangibles …. – …driving wedges between GDP and GNI and between a comforting (archaic) view of production and the classic factors of production – labour and tangible capital. – Creating interpretation difficulties for the accounts. – In a nutshell, is the value-added always ‘real’. Without explicitly saying so, the paper sets outs to tackle this issue to improve interpretability. 2

‘Legal’ vs ‘economic’ residence Paper highlights one particular issue that may drive part of this wedge: – the allocation of some units to an economic territory on the basis of ‘legal’ corporation: # 4.15 (f): For entities such as many special purpose entities, that have few if any attributes of location, the location is determined by their place of incorporation And highlights the implication of this recommendation on the accounts. 3

A slight clarification Without detracting from the main issue at hand, and indeed substance of the paper, the language in the paper mistakenly gives the impression that #4.15(f) is a general underlying principle rather than a pragmatic ‘exception’. A message reinforced in #26.28 and #26.30 (b): – if the production does not involve physical presence, such as some cases of banking, insurance, other financial services, ownership of patents, merchanting and “virtual manufacturing”, the operations should be recognized as being in the territory by virtue of the registration or legal domicile of those operations in that territory. In other words the underlying principle in the SNA remains ‘economic residence’, aligning with 4

The issue(s) – (i) Problem The fact remains however that the inclusion of ‘units with ‘no’ physical presence’ can have a distortionary effect on the accounts. Solution To treat these outside of the economic territory (core accounts) and provide supplementary estimates. 5

The issue(s) – (ii) Transactions within MNEs: – Attracts less attention in the paper but is equally important – Economic ownership vs legal ownership Perhaps key to driving the wedge and also to distorting measures of productivity. Guidelines developed by the Task Force on Global Production but this remains very much a live issue. 6

Apportionment A potential solution to ‘estimating’/’correcting’ intra- firm transactions – Notwithstanding the contention, particularly in the tax community. But some care is needed – most approaches work on attributes such as turnover, employment and tangible capital. – So de facto, flows related to intangible capital (including ‘non-produced assets’) are allocated as a residual of sorts – implying shared ownership (partitioning) by users of the assets. – And data requirements (requiring the whole of the MNE view) may be onerous in many countries – but BEPS action plan 13 may provide some light at the end of a (probably) long tunnel. – Not forgetting potential introduction of international asymmetries 7

Conclusions Clear that additional detailed guidance on transactions within MNEs would be welcome TFGP and Globalisation in the National Accounts are setting the agenda but many thorny issues remain. New Handbook on International Integrated Economic Accounts should also tackle the MNE issue. 8

Current Solutions Generally adopt the supplemental approach – Either by removing entities from the core accounts (economic territory) and including them as supplemental items or retaining in the core accounts and having ‘of-which’ items. Some complications arise with the first option however, notably concerning: – Taxes paid – International asymmetries – which part of the ROW should the excluded unit go? 9

Finally Another welcome contribution to the debate….. ….. that highlights considerable challenges for the SNA (and GDP in particular) to remain relevant 10