1. Services Account Workshop on International Trade in Services Beirut April 18-20, 2011

2. Overview General Borderline issues Components of services

3. What Are Services Results of the production process that change the condition of the consuming units Facilitate the exchange of products or financial assets Not generally separate items over which ownership rights can be established Cannot generally be separated from their production

4. Intangible vs. tangible? Non-transportable vs.transportable? Non-storable vs. storable? Distinctions may not be clear-cut and unambiguous. What are services

5. What the BOP Services Classification Represents The increasing global importance of communication and financial services. Better linkages between the BOP and CPC classifications. Increased analytic value of classifications to users. High degree of compatibility with similar classifications of other international organizations, including those required for multilateral negotiations on international services (e.g., by the WTO). A framework that is flexible enough to accommodate the widely varying importance of specific service activities in countries, the rapid pace of change, and varying data availabilities.

6. Services Classification Manufacturing services on physical inputs owned by others Maintenance and repair services, n.i.e. Travel Transport Construction Insurance and pension services Financial services Charges for the use of intellectual property, n.i.e. Telecommunications, computer, and information services Other business services Personal, cultural and educational services Government goods and services, n.i.e.

7. Services: Standard Components Services classification is mainly product-based Transactor-based for travel, construction, and government goods and services n.i.e. These items include elements of goods and services

8. Borderline Issues acquisition of services from payment of taxes Is the payment in connection with a regulatory function of government? Conduct safety checks on equipment; competence and qualifications checking Carrying out function that government would otherwise not be obligated to do Then, considered a payment for services provided by government Unless: Payment is out line with service received.

9. Borderline Issues acquisition of services from payment of taxes By convention, amounts payable by households for licenses to own or use equipment; recreational, hunting, licenses etc. are treated as taxes All other licenses and fees such as passport fees, birth certificate fees, etc. treated as payments for services

10. Borderline Issues provision of services from provision of labor Does an employer-employee relationship exist? Then classified as compensation of employees If individual is contracted to produce a given result then implies a service contract How do you determine an employer- employee relationship?

11. Outsourcing of Services Company A contracts Company B (a specialist) to provide service that was previously an internal function Services supplied by call centers classified according to the type of service E.g. computer support (computing services)

12. Manufacturing Services on Physical Inputs Owned by Others Major change from BPM5 (goods for processing) Covers processing, assembly, labeling, packing, etc. undertaken by enterprises that do not own the goods concerned No change of ownership of goods Covers the transaction between the owner and the processoronly the fees for the service are included in this item

13. Manufacturing Services on Physical Inputs Owned by Others Examplesoil refining, clothing and electronic assembly, other assembly, labeling, packing Excludes: assembly of prefabricated construction and packing activities incidental to transportation

14. Manufacturing Services on Physical Inputs Owned by Others Recording of sales and purchases of goods Goods acquired from residents of same economy as ownerno BOP transaction Goods acquired from residents of economy of processor or third economyimports by owner

15. Manufacturing Services on Physical Inputs Owned by Others Recording of sales of finished goods Goods sold to residents of economy of ownerno BOP transaction Goods sold to residents of economy of processor or third economyowner of goods records sales as merchandise exports

16. Manufacturing Services on Physical Inputs Owned by Others Example: Goods owned by A Processing takes place in B No change of ownershipnot recorded in goods Processing service exported from B to A If goods sold to resident of B after processing then recorded as exports of A to B

17. Manufacturing Services on Physical Inputs Owned by Others Issues: Difference in recording of merchandise trade statistics Distinction with manufacturing of goods on own account

18. Maintenance and Repair Services, n.i.e. Now included under services rather than goods Covers maintenance and repair work undertaken by residents on goods owned by nonresidents. Includes value of repair work (including parts and materials supplied by repairer Does not include the value of goods for repair Excludes: Construction repair and maintenance Maintenance and repair of computers

19. Construction Covers goods and services related to construction work done on buildings as well as installation and assembly Work provided outside the country of residence of the enterprise performing the work However, if the operations are substantial, may constitute a resident branch in country

20. Construction The following conditions should be met for such an enterprise or site office to be deemed resident in the host country: The construction activities takes more than twelve months to complete. The enterprise maintains complete and separate sets of accounts of local activities, be subject to income taxes, and have a substantial physical presence.

21. Construction Comprises work performed on construction projects by an enterprise or site office that is nonresident in the host country. Generally the work is of a short-term nature (note the one year guideline for residence). The value of the construction service should equal the full value of the construction project.

22. Construction Disaggregated and recorded on a gross basisconstruction abroad in and construction in compiling economy Allows for recording of both construction work in host and goods and services acquired Construction abroad Creditconstruction work abroad by enterprises resident in compiling economy Debitgoods and services acquired from host economy by enterprise

23. Construction Existing buildings Transactions included in construction (similar to new and second hand goods in merchandise trade) Land and buildings recorded differently Transactions in land component recorded in capital accountif it is possible to separate the components

24. Charges for the Use of Intellectual Property n.i.e. Covers transactions included under royalties and license fees in BPM5 Includes: Charges for use of proprietary rights arising from R&D, marketing; Charges for licenses to reproduce and/or distribute IP embodied in originals, prototypes Related rights for live performances etc.

25. Charges for the Use of Intellectual Property n.i.e.(2) What is intellectual property? As defined by the World Intellectual Property Organization (WIPO) creations of the mind: inventions, literary and artistic works, and symbols, names, images, and designs used in commerce. 25

26. Charges for the Use of Intellectual Property n.i.e. (3) WIPO identifies two categories: Industrial property: includes inventions (patents), trademarks, industrial designs, commercial names and designations, geographic indications of source; Copyright, which includes literary and artistic works such as novels, poems and plays, films, musical works, artistic works such as drawings, paintings, photographs and sculptures, and architectural designs. 26

27. Charges for the Use of Intellectual Property n.i.e.(4) Copyright relates to artistic creations, such as poems, novels, music, paintings and cinematographic works. Rights related to copyright include those of performing artists in their performances, producers of phonograms in their recordings, and those of broadcasters in their radio and television programs. 27

28. Charges for the Use of Intellectual Property n.i.e. (5)

29. Charges for the Use of Intellectual Property n.i.e. Practical issues: Should follow accrual principle and charges should be spread over period of use In practice: may only be able to record when payments are made May include aspects of property incomeproperty income should be recorded separately In practice: may not be feasible

30. Financial Services Services provided by financial intermediaries and auxiliaries (except those of insurance and pension funds). Charged through: i) Explicit charges loan application fees, commissions and brokerage fees, account charges, etc. Early/late repayment fees But excludes increase in interest rates as a result of late payment

31. Financial Services Charged through: ii) Margins on buying and selling transactions Dealers in foreign exchange, bonds, notes, financial derivatives, etc. (BPM5 only included dealers in foreign exchange.) Not distinguishable from underlying financial transactions Estimated Sellerdifference between reference price and dealers buying price Buyerdifference between reference price and dealers selling price Reference priceusually mid-point price

32. Financial Services Charged through: iii) Asset management costs deducted from property income receivable iv) Margins between interest and the reference rate on loans and deposits (FISIM)

33. Financial Services Financial Intermediation Services Indirectly Measured Actual interest includes element of income as well as charge for service Units not charged explicitly for service hence need to be indirectly measured Interest margin used to defray cost of service and provide operating surplus Need to distinguish between pure interest charge and the service

34. Financial Services FISIM Only arises from loans and depositsincluding from lending of own funds But: Only financial intermediaries can give rise to FISIM Reference rate represents pure cost of borrowing funds Risk free with no service component Single rate for local currency transactions Actual interest (loans) =pure interest plus FISIM Important for debt sustainability analysis (recorded as memo item)

35. Financial Services Example: Calculation of FISIM Inter-bank interest rate 5% per annum. Average value of loans during the year1000 Actual interest receivable by the deposit-taking corporations 70 partitioned into: 50 pure interest receivable (derived as 1000 at 5%) 20 FISIM receivable (derived as 70 - 50) Average value of deposits during the year500 Actual interest payable by the deposit-taking corporations10 partitioned into: 25 pure interest payable (derived as 500 at 5%) 15 FISIM receivable (derived as 25 – 10) Total FISIM receivable by the deposit-taking corporations35 (20+15)

36. Financial Services FISIM Negative FISIM? Possible. Assume FISIM is zero.

37. Telecommunications, Computer, and Information Services New grouping of various items previously classified separately BPM5 included communications Telecommunications and computer services defined in terms of the nature of the services not the mode of delivery

38. Telecommunications, Computer, and Information Services Telecommunications services includes transmission of sound, images, etc, by telephone, telex, cable, broadcasting, satellite, electronic mail, facsimile, teleconferencing, cellular telephone services. Does not include the value of the information being transmitted. Excludes installation services for networks and database services

39. Telecommunications, Computer, and Information Services Computer Services Hardware and software related services hardware and software consultancy and implementation maintenance and repair of computer hardware analysis, design, and programming development, production, supply, and documentation of customized software data processing services web page hosting development and management of databases, and dissemination of data provision of web portals (search engines)

40. Telecommunications, Computer, and Information Services Information services News agency services such as the provision of news, photographs, and articles to the media Database servicesdatabase conception, data storage, and data dissemination Nonbulk subscriptions to newspapers, periodicals, etc. Library and archive services

41. Other Business Services Includes R&D Services Professional and management consultancy services Technical, trade-related, and other business services R&D Services The results of R & D are treated as produced assets (unlike in BPM5) and so outright sale transactions in them (e.g., patents, copyrights, and industrial processes) are included under this item In BPM5, considered nonproduced asset and these transactions were included in the capital account

42. Other Business Services Research and development Services associated with research and experimental development of new products and processes Includes outright sales of results of R&D (note: use of proprietary rights intellectual property) Excludes outright sales of existing copyrights

43. Other Business Services Professional and management services Legal, accounting, management, advertising, etc. Technical, trade related, and other business services Includes agricultural, engineering, waste treatment and depollution, operational leasing Commissions on transactions payable to merchants, brokers, agents, etc. Does not include merchanting (now included under goods)

44. Other Business Services Operating leasing (previously operational leasing in BPM5) Renting of produced assets (buildings, machinery, equipment, etc.) but does not involve transfer of bulk of risks and benefits of ownership Excludesnon produced assets (land and other natural resources) Rentclassified as primary income However! What happens if split between buildings and land not possible?

45. Other Business Services Operating Leasing Leasing and charter of ships, aircraft, and transportation equipment (such as railway cars, containers), without operator or crew. leases for other types of goods. but excluding financial leases. also excluded are leasing of telecommunications lines or capacity; rental of ships or aircraft with crew; and rental of cars to nonresident travelers.

46. Other Business Services Compare: Financial lease a method of financing the purchase of an asset: there is an agreement between the owner (lessor) and the entity that has use of the good (the lessee) during the lease period, the owner (lessor) recovers most or all of the costs associated with acquiring and holding the good the lease is for most or all of the economic life of the capital good lessee assumes bulk of the risks and benefits of ownership lease payments consist of both interest and principal elements there may be provision for a final payment, at which time legal change of ownership takes place

47. Other Business Services Other business services, n.i.e. Distribution services for water, electricity, gas, etc. Subcontracting of business services Service merchanting Should be recorded gross as being exported and imported by the service arranger

48. Personal, Cultural, and Recreational Services Audiovisual and related services. services and associated fees related to the production of motion pictures (film or videotape), radio and television programs (live or on tape), and musical recordings. rentals of films, videotapes, etc. fees received by actors, directors, producers etc for productions abroad. fees for distribution rights for a limited number of showings in specified areas.

49. Personal, Cultural, and Recreational Services Other cultural and recreational services other types of services such as those associated with museums, libraries, archives. other cultural, sporting and recreational activities. education services (such as the provision of correspondence courses). health services (services provided in other economic territories) Education and health provided to visiting nonresidents included in travel.

50. Government Goods and Services n.i.e. Residual category Covers supply and acquisition of goods and servicesnot included in other categoriesby governments and international organizations Includes all transactions by embassies, consulates, aid missions, military units, and defense agencies in the country where these agencies are located, excluding transactions with residents of the home country. Includes transactions associated with aid services for which the counterpart entries are current or capital transfers.

51. Note that persons posted to serve in embassies abroad are treated as nonresident of the country to which they have been posted regardless of their length of stay. Hence, their expenditures in the host country are BOP transactions. One or both parties must meet the transactor criterion. Transactions of public enterprises excluded. Government Goods and Services n.i.e.

52. Technical assistance To governments should be classified to relevant service - if possible If not possible, then classify as government services, n.i.e. Technical assistance from resident of Country X to Country Y classified as exports of services from X to Y even if employee is resident of Country Y