1. 22nd Meeting of the Wiesbaden Group on Business Registers
The impact of “Special cases” and intra-group transactions in the MNEs profiling activity
Simone Ambroselli
“Session 3 – Profiling (Costs and Benefits)”
Tallin, September 2010

2. OBJECTIVES
Wiesbaden Group
Profiling
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)
Tallin, September 2010

3. QUESTIONS Questions for the evaluation of the DESK APPROACH
Wiesbaden Group
Profiling
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?
Tallin, September 2010

4. DEFINITIONS (From SNA, BoP, GNI TF)
Wiesbaden Group
Profiling
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
Tallin, September 2010

5. DEFINITIONS (2) Intra group transactions
Wiesbaden Group
Profiling
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
Tallin, September 2010

6. DEFINITIONS (3) Special purpose entities Intra group transactions
Wiesbaden Group
Profiling
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.
Tallin, September 2010

7. IDENTIFICATION Many definitions but in practice?
Wiesbaden Group
Profiling
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.
Tallin, September 2010

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

9. IDENTIFICATION OF SPEs (2)
Wiesbaden Group
Profiling
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
Tallin, September 2010

10. IDENTIFICATION OF INTRA-GROUP FLOWS
Wiesbaden Group
Profiling
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
Tallin, September 2010

11. STATISTICAL UNITS EXAMPLE 1 A SPE with “incoherent” values EXAMPLE 2
Wiesbaden Group
Profiling
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
Tallin, September 2010

12. ? EXAMPLE 1 MNE X Holding EURO 1 MNE X Ltd ITALY MNE X Italy MNE X Ltd
Wiesbaden Group
Profiling
MNE X Holding
MNE X Ltd
EURO 1
ITALY
MNE X Italy
MNE X Ltd
Vat position
2000/65/CE
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 ?
Tallin, September 2010

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

14. EXAMPLE 2: INTRA-GROUP TRANSACTIONS
Wiesbaden Group
Profiling
MNE Y Corp.
World
MNE Y
Marketing
MNE Y
Industries
EURO
MNE Y ITALY 1
Nace 20.16
ITALY
MNE Y ITALY 2
Nace 20.16
MNE Y ITALY 3
Nace 46.75
Tallin, September 2010

15. EXAMPLE 2 (2) MNE Y Corp. World EURO 62% 38% ITALY 99% 94% MNE Y
Wiesbaden Group
Profiling
MNE Y Corp.
World
62%
MNE Y
Marketing
MNE Y
Industries
99%
EURO
38%
MNE Y ITALY 1
Nace 20.16
ITALY
94%
MNE Y ITALY 2
Nace 20.16
MNE Y ITALY 3
Nace 46.12
Tallin, September 2010

16. EXAMPLE 3 MNE Z – a European perspective
Wiesbaden Group
Profiling
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)
Tallin, September 2010

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

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

19. EXAMPLE 3: THE IMPACT Impact on National Statistics Business Register:
Wiesbaden Group
Profiling
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
Tallin, September 2010

20. EXAMPLE 3: WHICH PROFILING
Wiesbaden Group
Profiling
MNE X Country … Marketing
MNE X Country… Manufacturing
MNE Z Supply Chain Ltd
GOD2
GOD1
“Global” enterprise: a delineation based on the different business functions
MNE Z Italy holding
MNE Z Italy Marketing
MNE Z Italy Ltd
MNE Z Italy Manufacturing
“Truncated” enterprise: to solve the inconsistencies in the NACE code attribution; to create a stable reporting unit
Tallin, September 2010

21. DESK VS VISITS DESK APPROACH: MAIN RESULTS AND LIMITS
Wiesbaden Group
Profiling
DESK APPROACH: MAIN RESULTS AND LIMITS
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.
Tallin, September 2010

22. LOOKING FOR NEW WAYS: EGR
Wiesbaden Group
Profiling
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
Top-Down approach
the starting point
useful for the identification of the intra firm flows and to support data consolidation hypothesis 1
From the “middle”
different sectors and more consolidating units
useful for identification of sub-perimeters 2
Bottom-up approach
the practical completion
useful for SPEs identification (branch with turnover and no physical presence; VAT positions) 3
Tallin, September 2010

23. LOOKING FOR NEW WAYS: VISITS
Wiesbaden Group
Profiling
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?
Tallin, September 2010

24. MAIN CONCLUSIONS New concepts
Wiesbaden Group
Profiling
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
Tallin, September 2010

25. MAIN CONCLUSIONS Dual coding system To guarantee
Wiesbaden Group
Profiling
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
Tallin, September 2010

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