ESTP Course on the EGR 16-17 November 2015

ESTP Course on the EGR 16-17 November 2015 3. Concepts definitions and user needs

Programme Concepts and definitions on multinational groups • Economical aspects • Statistical aspects Concepts and definitions on EGR EGR users' needs

Multinational enterprise groups • Economic aspects • Evolutionarystages • Activities • Organisation and governance • Behaviours • Statistical aspects • Statisticalrepresentation • Derivation of groups structures • Representationin EGR

Main facts of globalisation • Capital is much more mobile than labour • Countries where costs of labour are lower • Location of raw material inputs • Transports costs are relativelylower • Communication technology boom • Enterprises need to growth • Sell and offer after selling services • Location in different countries Often multinational groups are criticized to runaway activities

Economic definition of multin. groups • One possible definition, according to Franklin Root (1994): • A multinational group is characterised by the fact that there is 'a parent company' that: • engages in foreign production through its affiliates located in several countries, • exercises control over the policies of its affiliates, and • implements transnational business strategies in production, marketing, finance and staffing that transcend national boundaries.

Evolutionary stages of the multinational groups • Export Stage • Foreign production stage • Multinational Stage

I – Export stage • Only export – initial demand • Network of export agents - expansion of export • Foreign sales branch or assembly operations - save transport cost

II – Foreign Direct Investment stage There are economic limit to foreign exports (tariffs, quotas and transport costs) • Environmental factors • laws, regulations, access to credit, public services, infrastructures, rawmaterials • Market factors • Meet consumer demands on the markets, provide assistance and post sales services, etc. • Economicfactors • Lower labour costs, no exchange rate fluctuations,

III – Multinational Stage • Production is switched from the parent producers to its legally independent affiliates or subsidiaries • Strategic financial and economic control is centralised • Subsidiaries not pop up randomly in foreign nations • Decision of top management • Critical step in growth strategies • Risks (uncertainty, lack of information, …) • Large investment • Investment go from countries where profits are expected to be low to countries with high expected returns

Exports versus FDI Foreign production is not always an answer Foreign markets can be better served by exporting, rather than by creating a foreign subsidiary if there are economies of scale If large scale production reduces unit cost, it is better to concentrate production in one place If there exists excess of domestic productive capacity, there is no point in creating another plant abroad Multinational groups always have large external trade flows

Objectives and market orientation • The economic objective is global profit maximization • However, most multinational groups are either: • home country oriented • host country oriented • Depending on the production/products types • Only some are world-oriented, but must adapt to local markets and this requires a very large and complex organisation

Organisation and governance • Organisation:legal, regulatory, institutional and ethical environment of the multinational group • Governance:“how investors get the managers to give them back their money” • Governance determines who has power and makes decisions • Both terms address the concept of control • The board of directors is typically central to the governance • Its relationship to the other primary participants, typically shareholders and management, is critical • Additional participants to governance include employees, customers, suppliers, and creditors.

Joint Ventures Two or more companies that divide control to: • Conduct activities in a third country • Conduct activities with a local company • Joint venture may includeslocal government Because: • Costs are too high for a single company • Local governments request • The new company is able to enter the market that neither parent could have entered singly • Increase market power

Taxation Operating in many countries, MNCs are subject to multiple tax jurisdictions, i.e., they must pay taxes to several countries Multiple Tax Jurisdictions create two problems: Overlapping jurisdictions Two or more governments claim tax jurisdictions over the same income and it may result in double taxation Underlapping jurisdiction Taxevasion

Transfer prices • Differences among national income tax systems affect the decisions regarding the location of subsidiaries, financing, and the transfer prices • Transfer prices are the prices paid for imports/exports between legal units in the same multinational group • Multinational groups manipulate such prices so that profits are highest in the low tax country • Purpose: to minimize the total tax a multinational groups pays. Abuses in pricing across national borders are illegal and tax authorities try to identify them, but it is difficult to prove

Why we need groups in statistics? • For defining the economic aspects of the multinational enterprise groups itisnecessary to understand: • Where the groups' affiliates are located • Whatactivities are carried out in the different countries • Whatis the organisation • How is the governance (who has global control) • All about intra-group transactions (products, values, countries, prices, …) • ……….

Enterprise Group Enterprise Group Enterprise 1 Legal Unit 1 Enterprise 2 Legal Unit 2 Enterprise n Legal Unit n   Statistical representation (1) • 1. As a simple set of legal units bounched together • 2. As a set of enterprises carring out economic activity

Head of GroupA Enterprise Group Enterprise 1 LEUB LEUF LEU G Enterprise 4 LEU C LEUD LEUH LEUI Enterprise 2 LEUE LEU J LEU K Enterprise 5 Enterprise 3 Statistical representation (2) • 3. As a complete structure of legal units and their controlling relationships and the economic enterprises

Information needed • Legalunits • Unique identifiers • Relationships: ownershipshares/votingrights • A owns x% of B… • Enterprises • Economicactivity • Economiccharacteristics (turnover, employment,…)

Operational criteria for control (1) • Source: Business Registers Recommendation Manual - Eurostat • 1) A legal unit directly owns more than 50 % of the voting rights of another legal unit (direct control); • 2) A legal unit indirectly owns more than 50 % of the voting rights of another legal unit, through subsidiaries (indirect control); • 3) Existence of special legislation decree or regulation, which empowers the government to determine corporate policy or to appoint the directors of the legal unit;

Operational criteria for control (2) • 4) A legal unit fully consolidates the accounts of another legal unit, according to the criteria of the Seventh Directive, and no other legal unit consolidates the same legal unit (control by virtue of full consolidation); • 5) Administrative sources, collecting declarations in application of specific laws for market regulation, provide the information that a legal unit controls one or a set of legal units, even though it owns less or 50 % of its voting rights (effective minority control) and no other legal unit owns more.

From shares…

…to control

Concepts of UCI GGHGDC • UCI:Ultimate controlling institutional unit of a foreign affiliate” shall mean the institutional unit, proceeding up a foreign affiliate’s chain of control, which is not controlled by another institutional unit • GGH: one legal unit at the top of the control which is not controlled by any other legal unit and which controls all other legal units in the hierarchy • GDC: The global decision centre is the unit where the strategic decisions of an enterprise group are taken • In most of the cases the global decision centre equals to the global group head

Conclusion • For getting to a statisticalrepresentation of the groups itisnecessary to understand: • Whatis the statisticalpurpose • Which basic information isneeded and wherecanbefound • Whatis the logical model for representing a group • Whatalgorithm do we have to perform to build up the physical structure of the groups • Whatqualitylevelisneeded for the statisticalpurpose • StatisticalUnits, Characteristics, Timeliness of frames, … • How to validate the characteristics of a group relevant for the statisticalpurpose

EuroGroups Register - EGR • 4 applications: • EGR Identification service • EGR Core • EGR Interactive Module • EGR FATS users interface • ORACLE DB • The administration is done by Eurostat (G3 – Section BR) • It contains confidential data • It is located on a secure server • For allowing the on line access, a special secure environment has been created

Main concepts in EGR 2.0 • Authenticity of NSIs data • Unique identification for all legal units • Record based updating • Live register / Master frames

1. Authenticity of NSIs data • Is the place where the original and latest version of a data element or a set of data elements is stored. • Updating of data takes first place in the authentic store and then elsewhere. • The data of authentic store are used as the 'truth‘ without additional investigation. • Data defined/validated by an authentic store cannot be 'overwritten' by another source. • Obligation on request to justify the data provided • A 'validator' has the right to question the 'truth'

2. Unique identification for all legal units • EGR consolidates the several truncated groups received form the NSI authentic stores • For the consolidation a unique identifier (LEID) is absolutely necessary for all legal units • The EGR unique identifier is called LEID and it is issued by the EGR Identification Service • The LEID has to be used for all data exchanges to and from the EGR and the national registers • EGR Identification Service is an on line application integrated with the EGR core system

3. Record based updating It means that the reference date is available per record and not per characteristic Rationale: NSIs send complete records as authentic store to the EGR. If an updated is necessary, even if per one single characteristics, only the NSI is responsible to send the updated record. Implications: the NSI is the sole responsible to ensure the consistency of all the characteristics at the reference date.

4. Live register / Master frames With EGR 2.0 we aim to have a live register that can be updated on line and continuously by NSI directly in the conolidation area, meaning before the frames are extracted. Two parellel years are accessible. Each year at a certain agreed date Master frames are extracted. 'Frame methodology' is the set of rules and procedures agreed with the statistical producers defining the timetable and the quality required for the Master frames.

End use of the EGR • EGR can be usedin a coordinatedmanner by all EU statisticalauthorities for: • Identifying survey populations (i.e. Inward and Outward FATS) • Supporting EU sampling schemes • Linking to other available data sources (admin. and/or statistical) • Coordinating classifications (NACE, country of UCI, etc.) • Tracking major events (Mergers, Acquisition, etc.) • Grossing up • …

Information offered by the EGR Users of the EGR can see: • Structure of control with all affiliates • Ultimate Controlling Unit for O-I FATS • Statistical data fromotherNSIs on the subsidiaries in EU • NACE and employment of the groups and subsidiaries • Shareholdingsof at least 10% for FDI compilers • Severalidentification numbers to merge the EGR subsidiarieswithotheravailable archives and registers and derive statistics

Users of EGR Main usersconsidered at the moment are: • Inward FATS • Outward FATS • FDI In future: • Foreigntrade • Global Value Chain • International sourcing • Etc…

FATS statistics • I and O FATS statistics are produced according to: Regulation (EC) No 716/2007 and the FATS Recommendation Manual • Inward FATS statistics are produced by National Statistical Institutes • Outward FATS statistics are produced either by National Statistical Institutes or by National Central Banks.

Inward FATS • Foreign Affiliates Statistics (FATS) measure the commercial presence through affiliates in foreign markets. Inward FATS describe the overall activity of foreign affiliates resident in the compiling economy • Inward FATS data are annual • From 2008 data on NACE Rev. 2 is used and sections B to N are covered • Data on section K of NACE Rev. 2 (financial sector) is provided only for a limited number of variables and not included in the Total business activity (BUS) aggregates.

Outward FATS • Outward FATS describe the activity of foreign affiliates abroad controlled by the compiling country • The population of statistical units is composed of all foreign affiliates that are controlled by an institutional unit resident in the compiling country • The population of reporting units contains all resident institutional units that control affiliates abroad • The population of statistical units does not equal the population of reporting units in outward FATS. • Outward FATS data are annual • From 2008 data on NACE Rev. 2 is used and sections B to N are covered

FATS – UCI: main concept • UCI is the "ultimate controlling institutional unit" • UCI concept compulsory from 2007 • The concept of control is the same of ESA and the same as applied by the EGR for creating the group structures • The UCI provides the geographical breakdown for FATS statistics • Wrong attribution of UCI leads to a misclassification problem

FATS – UCI: difficult cases • Difficult to identify the UCI • Some Member States use direct and indirect control, others use only direct • Sometimes the UCI and the Global group head may differ (special cases for UCI) • Rules, especially on natural person, still differ among MS and can create different vision on the groups • FATS considers all affiliates that are controlled by a single investor or by a group of associated investors acting in concert with more than 50% of ordinary shares or voting power • Other criteria may also be relevant for defining foreign control, (multiple minority ownership, joint ventures, and qualitative assessment determining control)

Special cases • Four types of special cases are defined, where the definition of the global decision centre/UCI requires special treatment • 1) Natural persons and families • 2) Units located in tax havens, in offshore financial centres, special purpose entities, non-profit institutions • 3) Dual listed companies • 4) Joint ventures • The starting point is always the GGH • If the GGH is one of the 4 cases, other units downward in the chain should be examined and appointed as the global decision centre/UCI

Implementation of GGH UCI/GDC • GGH assigned by default by reconstructing the whole chain of control • The UCI used by FATS statistics is considered the same concept as the GDC • If the GGH is not the GDC it has to be manually assigned by profilers or by FATS users

Finding GDC, a very complex task… • According to some major world-wide publications: • Wall-MartExxon MobilRoyal dutch ShellBPToyotaChevronINGTotalGeneral MotorsConocoPhillips • Are U.S. ultimately and globallycontrolled…

I – O FATS • According to the FATS-Regulation, data providers send the data within 20 months of the end of the reference year. • In future it is foreseen to shorten the data delivery to T + 18 • Data are published by Eurostat around two years after the end of the reference year • Revision on the data and frame error correction is done in some MS

EGR as frame population for FATS Definition: a frame population is a statisticaldatafilecontaining all the statisticalunitsthat are in scope for a certain statisticalactivity • Different from a Target population • EGR shall coordinate the populations for I and O FATS • In one country • Amongdifferent countries • EGR shall assign the UCIs for all I and O FATS and for all MS • EGR shallcoordinate the qualityactivity of severalactors • EGR shall deliver population frames to start surveys • EGR shall deliver population frames to produce final statistics • EGR timing and referenceyearwillbebased on users' needs

Foreign direct investment (FDI) • Produced by National Central Banks according to Regulation (EC) No 184/2005 on Community statistics concerning balance of payments, international trade in services and foreign direct investment • The methodological framework used is that of the OECD benchmark definition of foreign direct investment - third edition, which provides a detailed operational definition that is fully consistent with the IMF’s balance of payments manual (fifth edition).

Thanks for your attention Questions?

ESTP Course on the EGR 16-17 November 2015