Chapter

8. Special Cases

Author(s):
International Monetary Fund
Published Date:
October 2003
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8.1 Some types of enterprises or activities warrant special mention. The SIMSDI survey sought information on the treatment of a number of these special cases: namely, quasi-corporations arising from construction enterprises and the operation of mobile equipment; cross-border real estate transactions; transactions with offshore enterprises and Special Purpose Entities (SPEs); and the treatment of expenditure on natural resources exploration.

Quasi-Corporations: Construction Enterprises and Operation of Mobile Equipment

8.2 On occasion, an enterprise will produce goods and services outside its own economy but not establish a separate legal corporation in the host economy. According to the Benchmark and the BPM5, if (1) production is maintained for one year or more, (2) a separate set of accounts is maintained for the local activities, and (3) income tax is paid to the host country, a quasi-corporation that has a direct investment relationship should be established in the host country for balance of payments compilation purposes. This recommendation should be followed with regard to the activities of construction enterprises. A similar recommendation applies when an enterprise in one economy installs machinery and equipment in another economy. An enterprise that operates mobile equipment in another economy is considered to have a center of economic interest in the other economy if the operations are accounted for separately and are recognized by the tax and licensing authorities of the other economy as those of a separate enterprise. If these conditions are met, production should be attributed to the host economy in which such production occurs and should be treated as production of an enterprise having a direct investment relationship with the parent company that has established the operations in the host economy.

8.3Table 8.1 gives the results of the 2001 SIMSDI update regarding the countries that include in their inward FDI transactions data the activities of quasi-corporations involving construction enterprises and mobile equipment (aircraft, ships, and drilling rigs) and compares these numbers with the situation in 1997. Tables 41 and 42 of Appendix I give the details by country for the inward and outward FDI transactions and position data.

Table 8.1.Quasi-Corporations Involving Construction Enterprises and Mobile Equipment
Number of CountriesCountries That Include in Their Inward FDI Transactions Data Activities of Quasi-Corporations Involving:
Construction enterprisesMobile equipment
AircraftShipsDrilling rigs
Total 2001 (61)23161620
Total 1997 (61)16101012
Change+7+6+6+8
OECD 2001 (30)126710
OECD 1997 (29)7456
Other 2001 (31)1110910
Other 1997 (32)9656

OECD countries

8.4 There has been some improvement in the number of OECD countries that include the activities of quasi-corporations in their inward FDI transactions data. Half of the OECD countries for which quasi-corporations involving construction enterprises and the operation of drilling rigs are applicable now include the activities of those quasi-corporations in their inward FDI transactions data—12 of the 24 countries for which quasi-corporations involving construction enterprises are applicable, and 10 of the 20 countries for which quasi-corporations involving drilling rigs are applicable. However, despite modest improvements since 1997, only about one-third of the 18 countries for which quasi-corporations involving the operation of aircraft or ships are applicable include those activities in their inward FDI transactions data—6 countries include the activities involving aircraft, and 7 include the activities involving ships. The numbers for the outward FDI transactions data and inward and outward FDI position data are similar.

Other countries

8.5 Somewhat higher proportions of other IMF member countries include the activities of quasi-corporations in their inward FDI transactions data—52 percent of the 21 countries for which quasi-corporations involving construction enterprises are applicable; 59 percent of the 17 countries for which quasi-corporations involving the operation of aircraft are applicable; 56 percent of the 16 countries for which quasi-corporations involving the operation of ships are applicable; and 59 percent of the 17 countries for which quasi-corporations involving the operation of drilling rigs are applicable. The numbers for the outward FDI transactions are similar, and those for the inward and outward FDI position data are somewhat lower.

Nonresident Ownership of Land and Buildings

8.6 All land and buildings located within an economy, except structures owned by a foreign government, must, by convention, be regarded as being owned by resident units. If the actual owner is a nonresident enterprise or individual, the ownership is deemed to have been transferred to a notional resident institutional unit that, in turn, is deemed to own the land and buildings. The nonresident has a financial investment in this notional unit, which is therefore treated as being a direct investment enterprise.

8.7Table 8.2 shows the results of the 2001 SIMSDI update compared with the 1997 survey regarding the number of countries that include in their FDI transactions data the purchases and sales of land and buildings by nonresident enterprises and nonresident individuals. Table 8.2 shows that there have been significant improvements since 1997, affecting both the inward and outward FDI transactions data and both nonresident enterprises and nonresident individuals. Almost 90 percent of the 54 countries for which purchases and sales of land and buildings by nonresident enterprises are applicable now include these transactions in their inward and outward FDI transactions data. Table 43 of Appendix I gives the details by country for 2001 for both the inward and outward transactions data and the inward and outward FDI position data.

Table 8.2.Purchase and Sale of Land and Buildings by Nonresidents
Number of CountriesCountries That Include in Their FDI Transactions Data Purchases and Sales of Land and Buildings Involving:
Nonresident enterprisesNonresident individuals
InwardOutwardInwardOutward
Total 2001 (61)48474040
Total 1997 (61)33322827
Change+15+15+12+13
OECD 2001 (30)28272423
OECD 1997 (29)20191817
Other 2001 (31)20201617
Other 1997 (32)13131010

OECD countries

8.8 There has been a significant improvement since 1997 in the number of OECD countries that include purchases and sales of land and buildings by nonresident enterprises in their inward and outward FDI transactions data, and all OECD countries except New Zealand now include these transactions. (Luxembourg does not compile FDI transactions data and Mexico does not compile outward FDI statistics.) In addition, all but four include purchases and sales of land and buildings by nonresident individuals in their inward and outward transactions data—the exceptions are Canada, Ireland, New Zealand, and Switzerland. (Nonresident individuals are not permitted to own land or buildings in the Czech Republic at present.)

8.9 Somewhat fewer OECD countries include the ownership of land and buildings by nonresidents in their position data. Three OECD countries (Iceland, Luxembourg, and New Zealand) do not include the ownership of land and buildings by nonresident enterprises in their inward and outward FDI position data, and six OECD countries (Canada, Iceland, Ireland, Luxembourg, New Zealand, and Switzerland) do not include the ownership of land and buildings by nonresident individuals. In addition, in the case of Austria, the position data disseminated in the national publications do not include the ownership of land and buildings by nonresident individuals, and in the case of Germany, the outward position data reported to the OECD for publication do not include data on the ownership of land and buildings by nonresidents. However, in both instances, these positions are included in the IIP data reported to the IMF for publication.

Other countries

8.10 As with the OECD countries, there has been a significant improvement since 1997 in the number of countries that include purchases and sales of land and buildings by nonresident enterprises in their inward and outward FDI transactions data. Only 5 of the 25 countries for which purchases and sales of land and buildings by nonresident enterprises are applicable do not include these transactions in their inward FDI transactions data—including Croatia, Indonesia, Nigeria, and Peru. Six countries also do not include them in their outward FDI transactions data, including Colombia, Croatia, and Kuwait. Somewhat fewer countries include purchases and sales of land and buildings by nonresident individuals. Nine countries do not include them in their inward FDI transactions data (including Argentina, Chile, Croatia, Indonesia, Nigeria, and Peru), while nine countries (including Chile, Colombia, Croatia, Kuwait, and Peru) do not include them in their outward FDI transactions data. In addition, two countries (Ecuador and Guatemala) have indicated that these transactions cannot be identified at present.

8.11 Fewer countries exclude the ownership of land and buildings by nonresident enterprises and individuals from their FDI position data, primarily because a number of countries that exclude nonresident ownership of land and buildings from their FDI transactions data do not compile FDI position data. Of those countries that compile FDI position data, only three (including Croatia) do not include the ownership of land and buildings by nonresident enterprises in their inward FDI position data, and three (including Colombia and Croatia) do not include them in their outward FDI position data. Six countries (including Argentina, Croatia, and Peru) do not include the ownership of land and buildings by nonresident individuals in their inward position data; and five (including Colombia, Croatia, and Peru) do not include them in their outward position data.

Activities of Offshore Enterprises

8.12 According to the recommendations of the international standards, the residency of so-called offshore enterprises is attributed, without regard to the special treatment they may receive from the local authorities, to the economies in which they are located. This treatment applies to enterprises engaged in the assembly of components manufactured elsewhere, to enterprises engaged in trade and financial operations, and to enterprises located in special zones. The relevant transactions between the offshore enterprise and its direct investors or affiliated enterprises should be included in the FDI statistics.

Table 8.3.Activities of Offshore Enterprises
Number of CountriesTransactions Between Resident Offshore Enterprises and Affiliated Nonresident EnterprisesTransactions Between Nonresident Offshore Enterprises and Affiliated Resident Enterprises
Included in the inward FDI transactions dataNot included in the inward FDI transactions dataIncluded in the outward FDI transactions dataNot included in the outward FDI transactions data
Total 2001 (61)267355
Total 1997 (61)20152314
Change+6–8+12–9
OECD 2001 (30)113183
OECD 1997 (29)115155
Other 2001 (31)154172
Other 1997 (32)91089

8.13Table 8.3 indicates the number of countries that include in their inward and outward FDI transactions data the activities between offshore enterprises and affiliated enterprises. The table shows that there have been improvements since 1997, especially regarding the inclusion of these activities in the outward FDI transactions data. Table 44 of Appendix I gives the country details for 2001 for the inward and outward FDI transactions and position data.

OECD countries

8.14 Only three of the OECD countries for which offshore enterprises are applicable still exclude from their inward and outward FDI transactions and position data the relevant activities of offshore enterprises—Greece, Hungary, and Switzerland. This represents a decrease of two countries since 1997. However, in the case of Hungary, if an offshore enterprise enters into a direct investment transaction with the sole purpose of transferring funds between different parties, the transaction is recorded in the data, but on a net basis, rather than on the recommended gross basis. Also, in the case of two additional OECD countries, Denmark and the Slovak Republic, the activities of offshore enterprises affecting the outward data cannot be identified at present. The same situation applies to the inward and outward FDI position data.

Other countries

8.15 Only four countries still exclude the relevant activities of offshore enterprises from their inward FDI transactions data, an improvement of six countries since 1997. The four countries are Bolivia, Guatemala, Malaysia, and the Philippines. Only two countries (Malaysia and Peru) still exclude these activities from their outward FDI transactions data—seven fewer countries than in 1997. However, in the case of Bolivia, Guatemala, and the Philippines, the activities of these offshore enterprises cannot be identified at present. The same situation applies for the position data, with the exception that FDI position data are not compiled by Guatemala and the Philippines.

Activities of Special Purpose Entities (SPEs)

8.16 So-called special purpose entities (SPEs) of multinational enterprises are (1) generally organized or established in economies other than those in which the parent companies are resident, and (2) engaged primarily in international transactions but in few or no local operations. SPEs are defined either by their structure (e.g., financing subsidiary, holding company, base company, or regional headquarters), or by their purpose (e.g., sale and regional administration, management of foreign exchange risk, or facilitation of financing of investment). Since these SPEs are an integral part of the organizational structure of a multinational enterprise, the international standards recommend that their transactions that arise from direct investment relationships should be reflected in the FDI statistics. In the case of SPEs that have the sole purpose of financial intermediation, the international standards recommend that transactions with affiliated banks and with affiliated financial intermediaries, except transactions in equity capital and permanent debt, be excluded from the FDI statistics.1

Table 8.4.Inclusion of Activities of Special Purpose Entities (SPEs) in the FDI Transactions Data
Number of CountriesTransactions Between Resident SPEs and Affiliated Nonresident EnterprisesTransactions Between Nonresident SPEs and Affiliated Resident Enterprises
Included in the inward FDI transactions dataNot included in the inward FDI transactions dataIncluded in the outward FDI transactions dataNot included in the outward FDI transactions data
Total 2001 (61)355393
Total 1997 (61)27112713
Change+8–6+12–10
OECD 2001 (30)201230
OECD 1997 (29)154164
Other 2001 (31)154163
Other 1997 (32)127119

8.17Table 8.4 shows the results of the 2001 SIMSDI update compared with the results of the 1997 survey regarding the inclusion of activities of SPEs in the inward and outward FDI transactions data. Table 8.4 indicates that there have been significant decreases in the number of countries for which the activities of SPEs are applicable that do not include these activities in their inward and outward FDI transactions data. Tables 45 and 46 of Appendix I give the details by country for 2001 for the FDI transactions and position data, respectively, as well as details of the treatment of SPEs that have the sole purpose of financial intermediation.

OECD countries

8.18 Only one OECD country, the Netherlands, now excludes the activities of SPEs from its inward FDI transactions data, a decrease of three countries since 1997. Although no OECD countries now exclude the activities of SPEs from their outward FDI transactions data, in the case of two countries (the Slovak Republic and Turkey), the activities of these SPEs cannot be identified at present. Two OECD countries (Luxembourg and the Netherlands) do not include the activities of SPEs in their inward FDI position data. Only one OECD country, Luxembourg, does not include these activities in its outward FDI position data. However, in the case of the Slovak Republic, the activities of these SPEs cannot be identified at present. Four OECD countries (Belgium, Finland, France, and Germany) do not follow the recommendations of the international standards regarding the treatment of SPEs with the sole purpose of financial intermediation in their inward and outward FDI transactions and position data. In addition, two OECD countries (Canada and the Netherlands) do not follow the international standards regarding the treatment of SPEs with the sole purpose of financial intermediation for their outward FDI transactions and position data.

Other countries

8.19 Only four countries (including Bolivia, Malaysia, and Tunisia) for which SPEs are applicable now exclude the activities of SPEs from their inward FDI transactions data, a decrease of three countries since 1997, and only three (including Bolivia and Malaysia2) now exclude these activities from their outward FDI transactions data, a decrease of six countries since 1997. The same situation applies for the inward and outward FDI position data. Only two non-OECD countries (Argentina and Chile) do not follow the recommendations of the international standards regarding the treatment of SPEs with the sole purpose of financial intermediation in their inward and outward FDI transactions data, and only one country (Argentina) does not follow the international recommendations for its inward position data. (Chile does not compile FDI position data.)

Table 8.5.Inclusion of Expenditure on Natural Resources Exploration in the FDI Transactions Data
Number of CountriesCountries That Include in Their FDI Transactions Data Expenditure on Natural Resource Exploration
InwardOutward
Total 2001 (61)3734
Total 1997 (61)2624
Change+11+10
OECD 2001 (30)1817
OECD 1997 (29)1214
Other 2001 (31)1917
Other 1997 (32)1410

Expenditure on Natural Resources Exploration

8.20 When a direct investment enterprise is set up for exploration for natural resources, expenditure related to that exploration is treated as capital expenditure in the System of National Accounts 1993 (SNA93). Inward investment flows from the nonresident investor for such expenditure are recorded in the balance of payments statistics as FDI. If the exploration proves unsuccessful and results in the closure of the enterprise, the BPM5 and the Benchmark recommend that no further balance of payments entries be recorded and that a negative stock adjustment be made in the IIP statement of the two economies involved. Although this last recommendation differs from the SNA93, which recommends that the residual capital stock be amortized using the average service lives similar to those used by mining and oil corporations in their own assets, the difference in the methodology was reviewed and reaffirmed by the IMF BOP Committee in October 1999 and by the OECD member country FDI experts in November 2000.

8.21Table 8.5 shows the results of the 2001 SIMSDI update and the 1997 survey regarding the inclusion of expenditure on natural resources exploration in the inward and outward FDI transactions data. Table 47 of Appendix I gives the details by country for 2001 for the inward and outward FDI transactions and position data. Table 8.5 indicates that there have been significant improvements since 1997 affecting both the inward and outward FDI transactions data in the number of countries that include expenditure on natural resource exploration—an additional 11 countries now include this expenditure in their inward FDI transactions data, and an additional 10 include it in their outward FDI transactions data.

OECD countries

8.22 Eighteen, or 75 percent, of the 24 OECD countries for which expenditure on natural resources exploration is applicable now include this expenditure in their inward FDI transactions data, an increase of 6 countries since 1997. Seventeen, or 71 percent, now include this expenditure in their outward FDI transactions data, an increase of 3 countries since 1997. Only six OECD countries (Belgium, Finland, Hungary, Italy, Sweden, and Turkey) still do not include this expenditure in their inward and outward transactions data. However, in addition, the Czech Republic does not include this expenditure in its outward FDI transactions data, and expenditure on natural resources exploration in Korea cannot be identified at present. A similar situation exists for the position data, with the exception that Korea and Turkey do not compile FDI position data, and Luxembourg does not include this expenditure in its outward FDI position data.

Other countries

8.23 Nineteen, or 73 percent, of the 26 other IMF member countries that participated in the 2001 SIMSDI update for which expenditure on natural resources exploration is applicable now include this expenditure in their inward FDI transactions data, an increase of 5 countries since 1997. The seven countries that still do not include this expenditure in their inward FDI transactions data include Costa Rica, Guatemala, Indonesia, Israel, and Slovenia. Seventeen, or 77 percent, of the 22 countries for which this expenditure is applicable now include expenditure on natural resources exploration in their outward FDI transactions data, an increase of 7 countries since 1997. Five countries (Botswana, Costa Rica, Guatemala, Israel, and Slovenia) do not include this expenditure in their outward FDI transactions data. (Indonesia does not compile outward FDI statistics.) A similar situation exists for the FDI position data, with the exception that Costa Rica, Guatemala, and Indonesia do not compile FDI position data.

In 2002, this recommendation was amended to cover SPEs that have the primary function of financial intermediation, not just those with the sole purpose of financial intermediation.

SPEs are not applicable for Tunisia’s outward FDI data.

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