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Explore the complexities of global manufacturing services and goods processing under a framework contract. Understand the implications for trade, ownership, and financial transactions.
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4. Manufacturing services / goods for processing THE CONTRACTOR ISACTING UNDER A FRAMEWORK CONTRACT CONCLUDED WITH THE COMMISSION
Introduction • Production processes are increasingly globalised. • Offshoring can take several forms: • Shifting manufacturing operations or services activities to affiliated enterprises overseas, • Contracting manufacturing or service activity for a fee to an unrelated party overseas. • Globalization process makes it necessary to observe: • Who owns the goods… • …and who may be delivering services under contract to process the goods
Introduction • Old standards (BPM5 and SNA93) • Imputed change of ownership when goods sent abroad for processing = trade in merchandise. • Concern about the rise in exports and imports of goods, • Dependence on transfer pricing (transactions between affiliates) • Inconsistency with the financial transactions • New standards (BPM6 and SNA 2008) • Imputations no longer made. If no change of ownership, no trade in goods • Payment of a fee to the processor, recorded as an import of “manufacturing services on physical inputs owned by others”.
Introduction • Implementing the new standard is not straightforward • IMTS record cross-border movements of goods, irrespective of whether there is a change of ownership or not. • Goods sent abroad for processing will continue to be recorded in IMTS but values must be removed for national accounts and BOP compilation. • Going further, any goods subsequently sold or purchased abroad without returning to the country of the owner need to be added to IMTS.
Definition • “Manufacturing services on physical inputs owned by others cover processing, assembly, labelling, packing, undertaken by enterprises that do not own the goods concerned” (MSITS) • Includes oil refining, liquefaction of natural gas, production process of chemicals, assembly of clothing and electronics,… • Excludes assembly of prefabricated construction (construction services) and labelling and packing incidental to transport (transport services). • A unit in country A (the principal) makes a contract with a unit in country B (the contractor) under which B transforms in a substantive way raw materials or semi-processed goods sent by A.
Definition • Viewed from the compiling economy • Outward processing: resident company (principal) sends goods abroad for processing while retaining ownership of the goods. • Inward processing: a resident company (processor) is engaged in the physical transformation of goods that are before and after processing under the ownership of a foreign principal.
The case of processing on own account • Manufacturing undertaken on own account • The processor purchases supplies of goods and raw materials from one or more foreign suppliers: recorded as general merchandise, • Undertakes assembly and processing of the goods, • The final product is sold on account of the processor. • The processor keeps the ownership all along the process. • Manufacturing undertaken on goods owned by others • No change of ownership • A contract between the principal and the processor
Processing fee v net value of goods • The net value of goods flows for processing may differ from processing fee: • Problem of assessing values of goods sent or returned (no sale or purchase): the values recorded by customs at the time of import and re-export are notional values. • Cross-period movement of the goods. • Inclusion of holding gains and losses: price changes over the processing period. • Inclusion of overheads (research, patents, marketing…). • Processed goods sold to the country of the processor or to a third economy. • As a consequence the value of processing fee should be collected separately, as part of BOP or services data collection
Case 1 Case2 Case 3 Different scenarios Client Country (A) Processing country (B) Thirdcountry (C ) Case 1: goods return to the country of origin Case 2: goods enter the domestic economy of the country of processing Case 3: goods are shipped to a third country via the country of processing Different scenarios: afterprocessing the goodsmaybe sent back to the principal (scenario 1), theymaybedelivered in the economy of the processor (scenario 2), or theymaybeshipped to a third country via the country of processing (scenario 3)
Accounting for the three scenarios In all three cases there is a record of processing services. In addition in case 2 there is an export of finished goods to B and in case 3 an export of finished goods to C.
Adjustments in merchandise trade • Goods for processing (either inward and outward) need to be removed from merchandise trade • Identification of goods subject to processing arrangements: values and commodity codes. • A specific customs procedure, generally highly regulated and identified through “nature of transaction codes”: some of them relate to « inward or outward processing ». • Inward processing defined as “customs procedure under which goods can be brought into a customs territory conditionally relieved from payment of import duties and taxes, provided such goods are intended to be used in one or more processing operations “. • Outward processing defined as “the customs procedure under which goods that are in free circulation in an economy may be temporarily exported for manufacturing, processing and repair and then re-imported with total or partial exemption from import duties and taxes”.
Nature of transactions codes This table is built from the point of view of the owner of the goods (the sending country) Source: « Manual on goods sent abroad for processing » Eurostat 2014 Edition
Supplementary information needed • Information from business surveys or ITS surveys (BOP) • Inward processing: • Value of the processing service provided to a non-resident. • Value of goods received from abroad for processing (if available). • Value of goods returned after processing (if available). • Outward processing: • Value of the processing service provided by a non-resident • Value of the goods sent abroad for processing • Value of the goods returned after processing (if available)
Purchases of goods abroad • Not recorded as imports in IMTS statistics because they do not cross the borders of the economy of the principal • A solution: ask the respondents of business surveys to provide a split between domestic purchases of intermediate goods and purchases abroad. To be combined with questions on processing services. • Use a proxy in absence of information: subtract the processing fee paid from the value of the reimports after processing (outward) or of the export flow after processing (inward).
Estimate exports directly following processing • Sales abroad after outward processing are not recorded as exports in IMTS statistics as they do not cross the borders of the economy of the principal • The nature of the transaction codes may provide information on goods not returning to the country of the principal after processing. • An alternative could be matching turnover from foreign sales (reported by the principal) with goods sent for processing not returning to domestic economy. • In absence of information a proxy would be to add the processing fee paid by the principal to the value of the goods before processing.
IMTS/Goods reconciliation table Use of a bridge table showing the reconciliation of merchandise trade statistics and trade in goods data used in BOP and national accounts
Measurement of the processing fee • Several options • Use of an ITRS: a new code for processing fee. • Use of a business survey: • Add questions on costs of processing services when goods are processed abroad • And on revenues of domestic contractors from foreign clients • Use international trade in services surveys: • How to define the sample (the owner and the contractor: enterprises involved in outward and inward processing). • Use of importer-exporter register associated with merchandise trade statistics, linked to the firms accounting. • Use of customs data (net figures, but subject to timing problems and other restrictions).
The Maquiladora industry in Mexico • Regulation of enterprises authorized to make temporary imports of goods for manufacturing, assembly or repair. • Exempt of the payments of duties and taxes if finish products are sold abroad. • Strict control of this industry defined by Customs Law, Foreign Trade Law, Operation Rules for foreign trade transactions, specific decrees for the regulation of economic activities oriented to the exportation. • When an enterprise gets the Maquilidora program there is no restriction for its location (free trade zones or elsewhere). • The authorization defines the HS codes for the exports and imports. • Transactions of the Maquilidoras (temporary imports of goods and exports of compensating products) are identified with specific records in the customs declaration.
Mexico (cont.) • Value of the goods temporary imported to be declared by enterprises when exporting manufactured products (link between temporary imports and exports). • Transactions of the Maquilidoras (temporary imports of goods and exports of compensating products) identified with specific records in the customs declaration. • Value of goods temporary imported must be declared by enterprises when exporting manufactured products (create a link between temporary imports and exports). • If part of the production is sold in the domestic market, the enterprise should pay duties and taxes and the transaction is recorded with a special record (clearance for sale in the domestic market).
Mexico (cont.) • 3000 enterprises monthly surveyed by the INEGI through internet • Employment and salaries • Purchase and consumption of goods and services • Value added of exports (wages and salaries, domestic expenses and profits), corresponding to the processing fee. • Follow-up by a Group on Foreign Trade Statistics (INEGI, Customs Administration, Bank of Mexico, Secretariat of Economy).
Hong Kong • Outsourcing in China to take advantage of geographical proximity and low costs. • New international statistical standards have a major impact on goods and services accounts. • The C&SD adopted a pragmatic approach for recording goods for processing, combining modelling, enhanced surveys, and expanded trade declarations (trade with and without change of ownership). • Estimate of the share of goods related to outward processing • Estimate of the processing fee (benchmark ratios of processing fee to the value of goods involved for processing)
Hong Kong • Monthly surveys on processing and assembling contracts • Information on the value of the processing fee paid by HK and raw materials procured directly by China. • Value and origin of raw materials procured and delivered directly from sources other than HK. • With a breakdown by commodity. • Offshore trade activities involving outward processing with processed goods sold offshore • Compiled from the quarterly survey on merchanting and other trading activities (QSMTA) • Includes sales value and cost of processed goods sold offshore, • Value of raw materials sent from HK, • Value and origin of raw materials from other places, • Processing fees and raw materials procured directly by China.
Conclusion • New standards give a better view of the impact of globalization on the worldwide production processes. • But a lot of challenges to face for the compilers and need of new datasets. • Whatever the solution, a close cooperation between BOP compilers, national accountants and trade statisticians is needed. • Bilateral cooperation with partner countries when possible to avoid asymmetries.
