1. www.bea.gov 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. www.bea.gov 2 Outcomes for Value-Added, 2009 Source: Based on Lipsey (2010)

3. www.bea.gov 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. www.bea.gov 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. www.bea.gov 5 Special Purpose Entities Country AOE Country BOESPE Country COE Country DOE Source: BD figure 6.1

6. www.bea.gov 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. www.bea.gov 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. www.bea.gov 8 Sales Weighted Averages U.S. ParentsOE AffiliatesSPE Affiliates Income Statement Total income1.0451.0381.996 Total expenses0.9770.9631.047 Net income0.0680.0750.949 Interest receipts0.0640.0330.168 Interest payments0.0430.0220.123 R&D expenditures0.0230.0090.000 Balance Sheet Assets2.9982.37317.626 Liabilities2.2891.6628.028 Equity0.7090.7109.599 Value-Added Value-added0.2820.2530.115 Compensation0.1730.1120.000 Capital consumption allowance0.0400.0250.029 Indirect business taxes0.0200.0420.012 Net interest paid- 0.003- 0.005- 0.047 Profit-type return0.0530.0790.121 Observations3,69032,01018,726

9. www.bea.gov 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 food0.0080.0920.0090.0960.336 Administration0.0260.1590.0200.1390.000 Construction0.0050.0710.0060.0800.039 Farming, fishing, forestry0.0030.0530.0010.0340.000 Finance0.0550.2280.1760.3810.000 Health care0.0020.0470.0030.0520.280 Information0.0830.2750.0470.2110.000 Insurance0.0200.1410.0250.1560.000 Management of companies0.0100.1000.2710.4440.000 Manufacturing0.4090.4920.1570.3640.000 Mining0.0220.1460.0570.2320.000 Miscellaneous services0.0120.1110.0050.0670.000 Professional, scientific, technical0.1090.3110.0610.2380.000 Real estate0.0120.1090.0570.2330.000 Retail trade0.0230.1510.0070.0820.000 Transportation and warehousing0.0230.1500.0230.1490.890 Utilities0.0050.0680.0060.0790.015 Wholesale trade0.1730.3780.0690.2530.000 Global Region Indicators Africa0.0240.1520.0380.1920.000 Asia0.2780.4480.1980.3990.000 Canada0.0710.2570.0470.2120.000 Europe0.4750.4990.4790.5000.489 Latin America0.1340.3400.2230.4170.000 Middle East0.0180.1330.0140.1190.002 Observations32,01018,726

10. www.bea.gov 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 income137.8753.051.6444.30.000 Sales132.9729.725.9340.40.000 Equity income2.9120.723.2260.90.000 Holding gains- 0.770.1- 0.449.30.639 Total expenses127.9708.727.1338.30.000 Net income9.9162.924.5271.90.000 Interest receipts4.473.24.453.60.919 Interest payments3.048.73.236.20.628 R&D expenditures1.217.20.0 0.000 Own account1.016.10.0 0.000 Others0.01.50.0 0.088 Royalty receipts0.627.80.949.70.515 Royalty payments1.753.30.317.10.001 Balance Sheet Assets315.25,126.6455.93,475.70.001 Liabilities220.84,844.7207.72,900.10.735 Equity94.4841.1248.21,638.80.000 Observations32,01018,726

11. www.bea.gov 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 sources132.9729.725.9340.40.000 U.S. parents8.7132.32.574.50.000 Local affiliates6.5120.34.284.30.022 Other foreign affiliates21.0265.75.7134.60.000 U.S. non-affiliates2.548.30.722.80.000 Local non-affiliates76.1429.78.499.30.000 Other foreign non-affiliates18.1238.64.3149.70.000 Observations32,01018,726

12. www.bea.gov 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-added33.6207.33.096.80.000 Compensation14.967.10.0 0.000 Capital consumption allowance3.326.50.715.40.000 Indirect business taxes5.6111.90.38.20.000 Net interest paid- 0.732.4- 1.241.10.106 Profit-type return10.5110.73.188.70.000 Net income9.9162.924.5271.90.000 Equity income2.9120.723.2260.90.000 Holding gains- 0.770.1- 0.449.30.639 Foreign taxes paid2.640.91.332.50.000 Observations32,01018,726

13. www.bea.gov 13 Production Characteristics (1)(2) CoefficientP-ValueCoefficientP-Value Value-added1.7790.0001.9210.000 Value-added × SPE indicator - 1.4280.000 Constant60,0030.00095,2550.000 SPE indicator - 68,4220.000 F test for fixed effects88.4500.00052.7400.000 Within R 2 0.289 0.310 Observations21,931 Groups6,851

14. www.bea.gov 14 Production Characteristics (1)(2) CoefficientP-ValueCoefficientP-Value Compensation4.1970.0004.1630.000 Capital consumption allowance3.3160.0073.1080.012 Indirect business taxes1.9070.0001.8730.000 Indirect business taxes × SPE indicator 3.8770.005 Net interest paid- 0.5960.200- 0.9450.142 Net interest paid × SPE indicator 0.1180.882 Profit-type return1.0490.0011.3080.000 Profit-type return × SPE indicator - 1.2640.005 Constant37,8090.00050,1380.001 SPE indicator - 24,2590.225 F test for fixed effects25.4000.00030.0900.000 Within R 2 0.370 0.381 Observations21,931 Groups6,851

15. www.bea.gov 15 Production Characteristics (1)(2) CoefficientP-ValueCoefficientP-Value Compensation4.1190.0004.1170.000 Capital consumption allowance3.6890.0033.4940.005 Indirect business taxes1.9620.0001.9590.000 Indirect business taxes × SPE indicator 3.6520.006 Net interest paid- 0.3590.420- 0.2500.687 Net interest paid × SPE indicator - 0.6350.391 Net income1.1820.0011.5700.000 Net income × SPE indicator - 1.6520.000 Equity income- 1.1640.001- 1.5560.000 Equity income × SPE indicator 1.6350.000 Holding gains- 0.6710.132- 0.9590.050 Holding gains × SPE indicator 1.4790.022 Foreign taxes paid0.2240.596- 0.0020.997 Foreign taxes paid × SPE indicator 1.0870.172 Constant38,9250.00053,7640.000 SPE indicator - 31,4770.116 F test for fixed effects18.5400.00020.1700.000 Within R 2 0.376 0.392 Observations21,931 Groups6,851

16. www.bea.gov 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).