EFTA/UNECE/SSCU Seminar “Economic Globalisation: A Challenge for Official Statistics" 3-6 July 2007, Kiev, Ukraine The Irish approach towards treatment of merchanting and related transactions by John Fitzpatrick, CSO, Ireland 1

Previous Paper l Described the significance of FDIEs in Ireland l Examined some CSO statistical compilation issues: »structures »activities »trading and accounting practices »BoP/FDI reporting arrangements l CSO’s treatment of merchanting and related transactions 2

Merchanting Definition of merchanting (IMF’s BPM5 ) Merchanting is defined as the purchase of a good by a resident trader from a non-resident and the subsequent resale of the good to another non-resident, without the good entering or leaving the economy of the merchanting trader. The difference between the value of the good when acquired and its value when sold is recorded as the value of the (merchanting) service provided by the merchant trader 3

CSO Considerations l Treatment of goods »as per BPM5 recommendation l Treatment of associated services outsourced abroad and delivered abroad »treated in same way as merchanted goods l Treatment of services outsourced and delivered abroad (i.e. services not associated with goods) »treated in same way as merchanted goods 4

CSO Approach l In the three scenarios: » goods and services supplied not produced in Ireland » sourced abroad » delivered to a foreign third party customer by non- resident affiliates (or even by 3rd parties) l CSO approach involves modifications to IMF’s definition of merchanting l Net treatment applies to all three 5

Example 1: Goods and Associated Services 6

Transactions involved B (FDIE in Ireland) l Payment to Company E (in DE) for goods supplied to customers (C)€2000m l Payment to Company D (in FR) for services supplied to customers (C)€3500m l Receipts from Customers (C) for goods supplied€2200m l Receipts from Customers (C) for services supplied€3800m 7

Recommended Recording Treatment l BPM5 and other international recommendations » the transactions would (normally) be recorded in the BoP statement under service imports and exports » in the case of the goods element, only the net margin (€0.2 billion) recorded as a merchanting service credit » the related service transactions would appear gross under services: a credit of €3.8 billion and a debit of €3.5 billion 8

Recommended Recording Treatment 9

CSO Recording Treatment Both the goods and associated service elements recorded on a net basis under merchanting i.e. €0.5 billion recorded as a merchanting service credit 10

CSO Rationale l To reduce potential for statistical distortion arising from very large transactions in both goods and services sourced and delivered abroad l Does not seem appropriate or meaningful to inflate the services exports and imports data for such transactions l Such large aggregate flows in the statistics presented are not compatible with employment levels in Ireland Net recording by one compiler can lead to asymmetries - counterpart compilers may have no option but to record the transactions on a gross basis in their BoP statistics 11

Example 2: Services Partly Supplied by Affiliates Abroad 12

Transactions involved A (IE located entity) l Expenditure for direct services from abroad (3rd parties)€300m l Receipts for services directly supplied abroad€500m l Expenditure for services supplied (3rd parties) to affiliates (B,C,D) €900m l Receipts for services supplied abroad by affiliates B,C,D €1,500m l Commission fees paid to B,C,D€350m 13

Recommended Recording Treatment l BPM5 and other international recommendations » Gross recording in the BoP statement under relevant service imports and exports 14

CSO Recording Treatment l All outsourced services delivered abroad recorded on a net basis under merchanting i.e,. €250m l Other services recorded gross i.e, credit of €500m and debit of €300m 15

CSO Rationale l Rationale as stated before: » To reduce potential for statistical distortion arising from very large transactions in services sourced and delivered abroad » Does not seem appropriate or meaningful to inflate the services exports and imports data for such transactions » Such large aggregate flows in the statistics presented are not compatible with employment levels in Ireland Can lead to asymmetries - counterpart compilers may have no option but to record the transactions on a gross basis in their BoP statistics 16

Concluding Remarks l CSO departure from international recommendations l Pragmatic statistical reasons for CSO approach l No clear rationale for gross treatment for outsourced services recommended in current international standards l Merchanting treatment being addressed in the IMF’s BPM revision but only for goods l Clear guidance needed on treatment of: » ‘merchanted’ services » booking by resident entity of receipts and expenditure of affiliates abroad 17

THE END DISCUSSION 18