Economic Territory, Units, Institutional Sectors, and Residency

Course on Balance of Payments and International Investment Position Manual

(BPM6)

IMF-PFTACNadi

November 22-December 1, 2010

BP04

A. Introduction

A. Introduction B. Economic Territory C. Units D. Institutional Sectors E. Residence F. Associated Issues Reference: Chapter 4 of BPM6

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A. Introduction

Basic concepts for all macroeconomic statistics

International accounts are defined as transactions and positions between residents and nonresidents.

Identical concepts of residence are used in the BPM6, MFSM, GFSM, and the SNA.

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A. Introduction

Three questions: What is the economic territory? What is the statistical unit?

Institutional unit = entity that has transactions and positions.

Which territory is the unit most closely connected with?

Residence.

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B. Economic Territory/Economy

The economic territory of a country is the relevant geographical area to which the concept of residence is applied.

An economy consists of all the institutional units that are resident in the economic territory

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B. Economic Territory

Consists of the geographic territory administered by a single government;

Usually a country, but not necessarily. Economic and currency unions. Special zones, total excluding special zones

May have different laws and policies with “free trade zones” or other special zones.

National total still needed for global totals and for bilateral comparisons.

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B. Economic Territory includes:

The land area Airspace Territorial waters Islands Territorial enclaves within other countries

(embassies, military bases, aid agencies, etc)

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B. Economic Territory (ctd)

The concepts of territory and residence ensure any statistical unit is resident of only one territory

A legal unit may need to be considered as more than one unit for statistical purposes

Special zones – offshore financial centres, free trade zones…

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B. Economic Territory

A special type of economic territory is that of international organizations. Not subject to laws of host country.

Not useful to consider as part of host economy.

IMF and UN not US residents. However, they have transactions with host economy.

Both global and regional organizations. Governmental-type functions, not businesses.

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C. Units

Institutional units are the entities that own assets, incur liabilities, make contracts.

Because they are decision-making units, they should have, or be capable of having, their own accounts.

Reference 2008 SNA Two main types: households and other

(corporations, NPIs, government units) 10

C. Units

Types of institutional units: I. Households

including the individuals who make up a household may include household businesses

II. Corporations financial corporations nonfinancial corporations

unincorporated businesses that are separate from their owners (quasicorporations) including branches

government-owned enterprises included in corporations sector, but may wish to show separately

III. Nonprofit institutions serving households (NPISHs) IV. General government

V. International organizations not a resident of any national economy 11

C. Units

Enterprise An institutional unit that engages in production. Normally a single legal entity, but occasionally need to

split entity that operates in two or more economies. May sometimes combine legal entities under common

ownership. But never across international boundaries or institutional

sectors.

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C. Units

Quasicorporations Not incorporated, but behave as if incorporated:

Branches Multiterritory enterprises Notional units for natural resources Some joint ventures Quasicorporations for set-up costs incurred prior to incorporation

of direct investment enterprise (permits, legal, etc.) Trusts Flexible corporate structures with little or no physical presence

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C. Units

Branches Where a single entity operates in more than one economy: Divide operations –

branch is identified as a separate institutional unit.

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C. Units

Branches – Criteria: Separate accounts, to balance sheet

and usually one or both of:

Substantial production for one year or more Location, if there is a physical presence Otherwise based on registration or legal domicile, if no physical

presence such as in finance, insurance virtual manufacturing, etc),

Subject to income tax system (Even if tax exempt)

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C. Units

Branches – Construction Projects: Some projects done by non-resident contractor. May give

rise to a branch. No local legal entity established

Major projects (e.g., bridges, power stations) taking more than one year and managed through a local site office = branch if also fits standard branch criteria

Short term or based from home territory and doesn’t meet standard branch criteria = imported service

Production delivered from base (eg, consulting, training, TA) – depends on criteria.

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C. Units

Single entity operating in more than one economy ctd. Occasionally, a seamless, indivisible operation, e.g., SAS

Scandinavian Airlines, hydroelectric schemes on borders, also entity in joint sovereignty zone: Split based on headquarters and branches, if possible; Otherwise, prorate.

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C. Units

Ownership of natural resources located within a country’s economic territory Notional unit as owner (direct investment). Purpose is to maintain natural resources as always being an

asset on national balance sheet But has corresponding liability (direct investment).

Notional resident unit can generate rent, rental, or operating leasing services

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C. Units Other types of units besides institutional units:

Establishments An enterprise operating in several locations or industries may be

broken up into establishments. Local enterprise groups

Useful for direct investment statistics. Global enterprise groups

Multinational enterprise. Economy 1

50 (100 percent of equity) 75 loan from A to C Economy 2 25 (100 percent of equity)

A

B C

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D. Institutional Sectors Central bank*1 Deposit-taking corporations except the central bank*2 General government Other sectors Other financial corporations Money market funds (MMFs)*2

Non-MMF Investment funds*2

Other financial intermediaries except insurance corporations and pension funds (ICPFs)*2 Financial auxiliaries*2

Captive financial institutions and money lenders*2 Insurance corporations*2

Pension funds*2

Nonfinancial corporations, households, and NPISHs Nonfinancial corporations*2 Households NPISHs (nonprofit institutions serving households; may be combined with households) Additional sectors for counterpart data: International organizations International financial organizations Central bank of currency union Other international organizations 20

D. Institutional Sectors

Central bank and other deposit-taking corporations allow links to monetary statistics Monetary authorities sector (as in BPM5) compiled when

relevant (i.e., when some or all reserves held outside the central bank; the concept of monetary authorities underlies reserves assets)

General government allows links with government finance statistics.

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D. Institutional Sectors

Other sectors Other financial corporations:

Insurance, pension funds, other financial intermediaries, captives, financial auxiliaries.

Nonfinancial corporations, households, and NPISHs.

Other splits to be consistent with SNA (e.g., balance sheet approach).

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D. Institutional Sectors

International organizations a special type of unit, resident in its own economic territory,

not part of any national economy global or regional financial (IMF, World Bank Group, regional development

banks, ECB) and nonfinancial (UN, EU) discussion of central bank of a currency union in Appendix

3.

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E. Residence – General

Concept of residence Economic connections of a unit to an

economic territory. Not based on nationality or legal criteria. Not based on currency used.

Expressed as an economic unit’s center of predominant economic interest.

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E. Residence - General

Center of predominant economic interest Dwelling, place of production, or other

premises, within the economic territory of the country on, or from, which the unit engages, or intends to engage, in economic activities and transactions on a significant scale, for an indefinite or long period.

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E. Residence - Households

Households and individuals A household has a center of economic

interest when members of that household maintain, within a country, a dwelling or succession of dwellings that the members treat and use as their principal residence.

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E. Residence - Households

Households and individuals

The guideline for determining residence is presence or the intention to be present; for a period of one year or more.

In practice, tends to be identified in groups, rather than individuals.

.

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E. Residence - Households

Special cases: Diplomatic representatives

But: non-diplomats, locally engaged staff; international organization staff.

Members of the armed forces Students Medical patients Ship’s crew

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E. Summary of effect of residence of households

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E. Summary of effect of residence of households

Note: net effect of residence of guest worker on the current account balance may be limited, due to offsetting transactions Compensation of employees less living expenses (travel

services) for nonresident temporary worker

may be similar in value to Personal transfers sent by resident temporary worker

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E. Residence - Enterprises

Enterprises An enterprise has a center of economic interest and is a

resident unit of a territory when the enterprise is engaged in a significant amount of production and plans to do so over an indefinite or long period of time.

Normally enterprises will have a location in a single economy because of: Companies law; Taxation law.

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E. Residence - Enterprises

Particular types of enterprises Operators of mobile equipment

For example, airline, railway, trucking, shipping. Based on residence of the operating enterprise,

rather than location of the equipment. Shipping not based on registration.

NPISH – e.g., Red Cross not international organisation – if substantial and

ongoing may be a branch32

E. Residence - Enterprises

Shelf companies, shell companies, special purpose vehicles (SPVs), special purpose entities (SPEs): No physical location. Residence according to country of

incorporation/registration. Not according to location of assets, owners, or

administering office.

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E. Residence - Enterprises

Special zones or legislative exemptions for particular enterprises: Manufacturing (e.g., free trade zones); Financial or other services (e.g., “offshore

financial centers”).

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F. Other Issues Associated with Residence - Data by Partner Economy

BPM6 provides a detailed discussion of data by partner economy (Para 4.146-4.167)

Issues for: CDIS (Coordinated Direct Investment Survey)

CPIS (Coordinated Portfolio Investment Survey)

BIS international banking statistics

Goods (country of origin, consignment, destination)

Freight and insurance

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F. Other Issues Associated with Residence - Data by Partner Economy

Issues for financial instruments: Basic principle is based on the economy of residence of the

counterparty to the transaction or financial position

For BOP, partner attribution for financial account could be on “transactor” or “debtor/creditor” approach(Para 4.154)

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F. Other Issues Associated with Residence - Data by Partner Economy (3)

For direct investment

As a basic principle, transactions and positions by partner economy should be reported according to immediate host/investing economy (Para 4.156)

Supplementary data on “ultimate host economy” and “ultimate investing economy” or “ultimate controlling parent”

Implications for Coordinated Direct Investment Survey

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F. Other Issues Associated with Residence

Change in residence of units Migration of person Migration of corporation

Rare, but euro-companies can migrate within EU. What is called corporate inversion or restructuring

usually involves moving assets and liabilities between related companies, rather than a single company changing its residence.

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F. Other Issues Associated with Residence

Globalization Individuals and money more foot-loose. What is the future of residence-based statistics?

Alternatives to residence-based statistics: Consolidated statistics (BIS banking data based on

headquarters) Foreign Affiliates Statistics (FATS/AMNE)

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Main Changes from BPM5 Discussion on units Requirements for recognising a branch

amended No imputed institutional unit for employing

staff of non-resident enterprises New idea of multi-territory enterprises and

special purpose entities

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Main Changes from BPM5 Adopts SNA institutional sector classification Residence defined as centre of predominant

economic interest Residence criteria specified for mobile

individuals Residence of entities with little or no physical

presence determined on jurisdiction of incorporation or registration

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