Characteristics of Special Purpose Entities in Measures of U.S. Direct Investment Abroad Dylan G. Rassier Prepared for the Allied Social Science Associations Annual Meeting San Francisco, CA January 3, 2016

2 Outcomes for Value-Added, 2009 Source: Based on Lipsey (2010)

3 Challenges Measuring Transactions within MNEs ▪ Q = f(L,H)  Shared inputs may have characteristics of public goods  Intangibles  Headquarter services  L > 0 and H ≥ 0 ▪ No market equivalents for transfer pricing  Intangibles unique to the firm  Firm-specific financing arrangements ▪ Structuring for purposes other than production  Residence concept of the SNA and BPM  Economic territory in which production takes place  Legal incorporation or registration  Scope includes transactions within MNEs  Special purpose entities (SPEs)

4 Special Purpose Entities ▪ No universal definition of SPEs  Introduced in SNA and BPM  New accounting recommendations in BD ▪ Characteristics of an SPE  Legal entity  Few or no employees  Little or no physical presence  Little or no production  Affiliated with at least one (usually non-resident) entity ▪ Examples of SPEs  Financing and holding companies  Royalty and licensing companies

5 Special Purpose Entities Country AOE Country BOESPE Country COE Country DOE Source: BD figure 6.1

6 BEA’s Measurement of Transactions within MNEs ▪ Consistent with BPM and the SNA  Residency-based framework  Includes transactions within MNEs  Includes transactions with SPEs  Supplementary ownership-based framework ▪ No separate statistics on SPEs  Relatively low presence of resident SPEs  Evidence of non-resident SPEs in Lipsey (2009, 2010) ▪ Benchmark Survey of U.S. Direct Investment Abroad  Includes U.S. parents and foreign affiliates  Financial and operating data collected under U.S. GAAP  2009 and 2004

7 Empirical Approach ▪ Mean comparison tests between SPEs and OEs  Income statement components  Balance sheet components  Measured value-added  Compensation  Capital consumption allowance (CCA)  Indirect business taxes (IBT)  Net interest paid (IP)  Profit-type return (PTR) ▪ Estimates of reported sales for SPEs and OEs ▪ SPEs = no compensation

8 Sales Weighted Averages U.S. ParentsOE AffiliatesSPE Affiliates Income Statement Total income Total expenses Net income Interest receipts Interest payments R&D expenditures Balance Sheet Assets Liabilities Equity Value-Added Value-added Compensation Capital consumption allowance Indirect business taxes Net interest paid Profit-type return Observations3,69032,01018,726

9 Industry and Location Characteristics OE AffiliatesSPE Affiliates P-Value H 0 : μ OE – μ SPE = 0 MeanStd. Dev.MeanStd. Dev.H A : μ OE – μ SPE ≠ 0 Industry Indicators Accommodation and food Administration Construction Farming, fishing, forestry Finance Health care Information Insurance Management of companies Manufacturing Mining Miscellaneous services Professional, scientific, technical Real estate Retail trade Transportation and warehousing Utilities Wholesale trade Global Region Indicators Africa Asia Canada Europe Latin America Middle East Observations32,01018,726

10 Operating and Financial Characteristics OE AffiliatesSPE Affiliates P-Value H 0 : μ OE – μ SPE = 0 MeanStd. Dev.MeanStd. Dev.H A : μ OE – μ SPE ≠ 0 Income Statement Total income Sales Equity income Holding gains Total expenses Net income Interest receipts Interest payments R&D expenditures Own account Others Royalty receipts Royalty payments Balance Sheet Assets315.25, , Liabilities220.84, , Equity , Observations32,01018,726

11 Operating and Financial Characteristics OE AffiliatesSPE Affiliates P-Value H 0 : μ OE – μ SPE = 0 MeanStd. Dev.MeanStd. Dev.H A : μ OE – μ SPE ≠ 0 Total Sales to: All sources U.S. parents Local affiliates Other foreign affiliates U.S. non-affiliates Local non-affiliates Other foreign non-affiliates Observations32,01018,726

12 Production Characteristics OE AffiliatesSPE Affiliates P-Value H 0 : μ OE – μ SPE = 0 MeanStd. Dev.MeanStd. Dev.H A : μ OE – μ SPE ≠ 0 Value-added Compensation Capital consumption allowance Indirect business taxes Net interest paid Profit-type return Net income Equity income Holding gains Foreign taxes paid Observations32,01018,726

13 Production Characteristics (1)(2) CoefficientP-ValueCoefficientP-Value Value-added Value-added × SPE indicator Constant60, , SPE indicator - 68, F test for fixed effects Within R Observations21,931 Groups6,851

14 Production Characteristics (1)(2) CoefficientP-ValueCoefficientP-Value Compensation Capital consumption allowance Indirect business taxes Indirect business taxes × SPE indicator Net interest paid Net interest paid × SPE indicator Profit-type return Profit-type return × SPE indicator Constant37, , SPE indicator - 24, F test for fixed effects Within R Observations21,931 Groups6,851

15 Production Characteristics (1)(2) CoefficientP-ValueCoefficientP-Value Compensation Capital consumption allowance Indirect business taxes Indirect business taxes × SPE indicator Net interest paid Net interest paid × SPE indicator Net income Net income × SPE indicator Equity income Equity income × SPE indicator Holding gains Holding gains × SPE indicator Foreign taxes paid Foreign taxes paid × SPE indicator Constant38, , SPE indicator - 31, F test for fixed effects Within R Observations21,931 Groups6,851

16 Preliminary Conclusions ▪ Large numbers of SPEs. ▪ SPEs are not isolated to a few industries or a single global region. ▪ Significant differences exist between SPE affiliates and OE affiliates in income statement components, balance sheet components, and measured value-added. ▪ Variation in measured value-added does not appear to generate adequate variation in consequent sales for SPE affiliates. ▪ Value-added is over-attributed to SPE affiliates, which is driven by the profits component of value-added. ▪ Results for value-added are consistent with Lipsey (2010).