1. CZECH STATISTICAL OFFICE | Na padesátém 81, 100 82 Prague 10 | czso.cz1 PROPERTY INCOME OF NON-RESIDENTS IN THE CZECH REPUBLIC Vítězslav Ondruš, Czech Statistical Office Group of Experts on National Accounts, Geneva, 6-9 May 2014

2. CZECH STATISTICAL OFFICE | Na padesátém 81, 100 82 Prague 10 | czso.cz2 PRESENTATION OUTLINE Two important inconsistencies between National Accounts and Balance of Payments approaches: 1.Dividends arising from the hidden economy 2.Reinvested earnings on foreign direct investment Is conceptual compliance between SNA2008/ESA2010 and BOPM6 realizable in practice?

3. CZECH STATISTICAL OFFICE | Na padesátém 81, 100 82 Prague 10 | czso.cz3 DIVIDENDS ARISING FROM THE HIDDEN ECONOMY (1) Non-observed economy recorded in NA represents almost 12% of GDP for the Czech Republic  the biggest part = intentional misreporting of officially declared data (N6) The estimates for natural persons:  made for all units  based on the balance of work, comparing labour productivity and rates of over-declared expenditure and under- declared revenues in official surveys. The estimates for the legal persons:  made for the small and medium units only (not for big, not for public)  based on the rates only

4. CZECH STATISTICAL OFFICE | Na padesátém 81, 100 82 Prague 10 | czso.cz4 DIVIDENDS ARISING FROM THE HIDDEN ECONOMY (2) The rates of intentional misreporting of officially declared data:  derived from an anonymous enquiry among accountants and tax advisers about their opinion on the degree of overestimation of expenditure and the under-estimation of incomes  differentiated by size of units,  by activity  the results from the latest survey conducted in the year 2009: see next table (a similar survey was made also in 1999, then in 2006)

5. CZECH STATISTICAL OFFICE | Na padesátém 81, 100 82 Prague 10 | czso.cz5 DIVIDENDS ARISING FROM THE HIDDEN ECONOMY (3) Rates of distortion in officially reported data by NACE: Revenues Number of employees/ CZ-NACEA+BDFGHIKM+N 1-196,672,789,594,2621,311,250,686,77 20-991,800,207,230,351,751,770,141,43 Material Number of employees/ CZ-NACEA+BDFGHIKM+N 1-194,502,887,614,265,921,650,414,09 20-990,450,835,450,231,151,350,171,65 Services Number of employees/ CZ-NACEA+BDFGHIKM+N 1-191,502,538,634,266,794,300,664,09 20-990,451,177,390,140,702,020,403,99 Non-reported wages Number of employees/ CZ-NACEA+BDFGHIKM+N 1-194,471,688,619,3315,1214,102,114,99 20-990,452,009,134,147,7511,001,665,16

6. CZECH STATISTICAL OFFICE | Na padesátém 81, 100 82 Prague 10 | czso.cz6 DIVIDENDS ARISING FROM THE HIDDEN ECONOMY (4) Recording of the estimates for legal business entities: Recording in National Accounts:  Value added ( under-declared revenues and over-declared expenditure) is distributed between:  employees - as undeclared wages and salaries  owners - as undeclared dividends (operating surplus)  If owners are non-residents = cross border flow Recording in Balance of Payments:  undeclared dividends are not recorded Reason of differences bw NA and BoP – different purpose:  NA - priority is a completeness of capturing  BoP - priority is a targeting (territorial identification of flows ) Recording

7. CZECH STATISTICAL OFFICE | Na padesátém 81, 100 82 Prague 10 | czso.cz7 REINVESTED EARNINGS ON FOREIGN DIRECT INVESTMENT (1) Two approaches to the calculation of the RIE are/will be applied in the Czech Republic:  based on business accounting principles (our present method -> will be still used for BoP)  based on national accounting principles (our new method -> will be newly used for NA) Both of them gives very different results

8. CZECH STATISTICAL OFFICE | Na padesátém 81, 100 82 Prague 10 | czso.cz8 REINVESTED EARNINGS ON FOREIGN DIRECT INVESTMENT (2)  Approach based on business accounting principles:  for each reporting unit is applied the formula: RIE = Profit after taxation – extraordinary profit – (Dividends – super Dividends)  Advantages – direct information, direct territorial structure  Disadvantages - not consistent with national accounts, mainly doe to definition of profit (BA profit includes financial profit), consumption of fixed capital vs. amortization by national legislation, excluding of holding gains and other conceptual differences (and now moreover capitalisation of R&D)

9. CZECH STATISTICAL OFFICE | Na padesátém 81, 100 82 Prague 10 | czso.cz9 REINVESTED EARNINGS ON FOREIGN DIRECT INVESTMENT (3) Approach based on national accounting principles:  the calculation follows exactly the ESA 2010 § 4.64 by the formula: RIE = Operating surplus of the foreign direct investment enterprise + any property incomes or current transfers receivable - any property incomes or current transfers payable (= B.6n for the FDI part)  the calculation is applied for individual institutional sectors in respect of their part of foreign direct investment  Advantages – the consistency with national accounts principles => the shares and other equity represents real worth of foreign owners  Disadvantages - there is not direct information for individual corporations => the direct territorial structure of RIE is impossible

10. CZECH STATISTICAL OFFICE | Na padesátém 81, 100 82 Prague 10 | czso.cz10 REINVESTED EARNINGS ON FOREIGN DIRECT INVESTMENT (4) Calculation of RIE by new method for non - financial corporations: in three steps: 1st step: calculation of the „net disposable income“ based on individual business accounts data 2nd step: calculation of the ASFDI (approximated share of foreign direct investment on net disposable income) 3rd step: application of the ASFDI on final net disposable income including all conceptual and exhaustiveness’ adjustments

11. CZECH STATISTICAL OFFICE | Na padesátém 81, 100 82 Prague 10 | czso.cz11 REINVESTED EARNINGS ON FOREIGN DIRECT INVESTMENT (5) 1st step: calculation of the net disposable income (B.6n) for total subsector and for „FDI part“ of subsector based on individual business accounts data:  B.6n for total S.11003 = (P.1 – P.2 – D.1 – D.2 + D.3 + D.4r – D.4u – D.5u + D.7r – D.7u – K.1) = 126.344 mill. CZK  B.6n for “FDI part” in S.11003 = [(P.1 – P.2 – D.1 – D.2 + D.3 + D.4r – D.4u – D.5u + D.7r – D.7u – K.1)* (% of share of foreign owners)] = 84.446 mill. CZK

12. CZECH STATISTICAL OFFICE | Na padesátém 81, 100 82 Prague 10 | czso.cz12 REINVESTED EARNINGS ON FOREIGN DIRECT INVESTMENT (6) 2nd step: calculation of the approximated share of net disposable income derived from FDI (ASFDI):  ASFDI(11003) = 84.446/126.344 = 0,668 3rd step: approximated share of FDI is applied on the final net disposable income of the subsector including all NA adjustments (85.984 bill.CZK):  D.43 (11003) = 0,668 x 85.984 = 57.463 mill. CZK

13. CZECH STATISTICAL OFFICE | Na padesátém 81, 100 82 Prague 10 | czso.cz13 REINVESTED EARNINGS ON FOREIGN DIRECT INVESTMENT (7) Institutional sector ASFDI New approach Present approach Difference (%)mill.CZK S.11001Public non-financial corporations0,09%0464-464 S.11002National private non-financial corporations-16,46%-740-5 9055 165 S.11003Foreign controlled non-financial corporations66,80%57 46332 93224 531 S.11Non-financial corporationsX56 72327 49129 232 S. 122Deposit-taking corp. except the central bank75,00%30 47610 41420 062 S. 124Non-MMF investment funds-10,00%-192-71-121 S. 125Other financial intermediaries, except IC and PF42,70%8 871-8 78517 656 S. 126Financial auxiliaries59,60%5 0683664 702 S. 127Captive financial institutions and money lenders64,00%7 93821 621-13 683 S. 128Insurance corporations84,00%-3 103-7 1394 036 S. 129Pension funds26,00%1841 185-1 001 S.12Financial corporationsX49 24217 59131 651 S.1Total economyX105 96545 08260 883 Reinvested earnings by new and present methods, Czech Republic, 2011, (CZK, bill)

14. CZECH STATISTICAL OFFICE | Na padesátém 81, 100 82 Prague 10 | czso.cz14 REINVESTED EARNINGS ON FOREIGN DIRECT INVESTMENT (8) Calculation of RIE by new method for financial corporations is similar like for non - financial corporations, with two exceptions: (1) there are differences in calculation of ASFDI due to differences in data sources and (2) for pension funds from the “FDI net disposable income” has to be subtracted the change in pension entitlements (D8), so there is used “FDI net savings” New method more than doubled present figures => net worth of domestic corporations owned by non-residents is lower and foreign investors/owners are wealthier via their equity

15. CZECH STATISTICAL OFFICE | Na padesátém 81, 100 82 Prague 10 | czso.cz15 CONCLUSIONS:  National Accounts and Balance of Payments are conceptually in compliance  Two examples of important inconsistencies in needs demonstrate that in practice the differences bw. NA and BoP will be save or in our case will be greater Is conceptual compliance between SNA2008/ESA2010 and BOPM6 realizable in practice?

16. CZECH STATISTICAL OFFICE | Na padesátém 81, 100 82 Prague 10 | czso.cz16 Thank you for your attention vitezslav.ondrus@czso.cz