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BOPCOM-05/21EighteenthMeetingoftheIMFCommitteeonBalanceofPaymentsStatisticsWashington,D.
C.
,June27–July1,2005GoodsforProcessingPreparedbytheStatisticsDepartmentInternationalMonetaryFundBALANCEOFPAYMENTSTECHNICALEXPERTGROUP(BOPTEG)OUTCOMEPAPER(BOPTEG)#14BJUNE2004(1)Topic:GoodsforProcessing(2)Issues–seeBOPTEGIssuesPaper#14B(3)Recommendations:(i)Thegroupagreedthatthegoodsforprocessingshouldbetreatedininternationalstatisticalguidelinesasservicesonbothconceptualandpracticalgrounds.
Thereisnochangeofownershipofgoodsforprocessing.
Thecurrenttreatmentofgoodsforprocessingdiffersfromthatforgoodssentabroadforprocessingandsoldtononresidentsafterprocessing.
Therecordingonagrossbasisforgoodsforprocessinginvolvesimputationsofcontraentriesinfinancialaccounts.
Theidentificationandmeasurementofgoodsforprocessingisdifficult.
(ii)ItwasnotedthatBPM4treatedthevalueaddedingoodsforprocessingasaserviceandthatgrossrecordingofgoodsforprocessinginBPM5wasanefforttobeconsistentwiththenationalaccounts.
Itwasalsomentionedthat,withinthenationalaccountscommunity,morefocusisbeinggivennowtothetreatmentofgoodsforprocessingasservices.
Ontheotherhand,thereweresuggestionsthatthereshouldbeapresumptionaboutreversingchangesmadeforBPM5fromBPM4.
Thegroupindicatedaneedforconsultationwithnationalaccountsandinternationalmerchandisetradestatisticians.
(4)RejectedAlternatives:Thegroupdidnotrecommendtocontinuethecurrenttreatmentofgoodsforprocessingonagrossbasisasexportsandimportsofgoods.
(5)QuestionsfortheCommittee:(i)DoestheCommitteeprovisionallyagreewiththerecommendationthatthegoodsforprocessingshouldbetreatedasservicesSee3(i)above.
(ii)DoestheCommitteeagreethatitsfinalviewshouldaccounttheresultsofconsultationwithnationalaccountsandinternationalmerchandisetradestatisticiansIMFCOMMITTEEONBALANCEOFPAYMENTSSTATISTICSBALANCEOFPAYMENTSTECHNICALEXPERTGROUP(BOPTEG)ISSUESPAPER(BOPTEG)#14BGOODSFORPROCESSING—IMPLICATIONSFORBALANCEOFPAYMENTSANDNATIONALACCOUNTSDATATheviewsexpressedinthisPaperarethoseoftheauthorsanddonotnecessarilyrepresentthoseoftheUKOfficeforNationalStatistics.
UKOfficeforNationalStatisticsMay2004BALANCEOFPAYMENTSTECHNICALEXPERTGROUPISSUESPAPER(BOPTEG)#14BGOODSFORPROCESSING—IMPLICATIONSFORBALANCEOFPAYMENTSANDNATIONALACCOUNTSDATA1.
Background:Somecompaniesintheprocessingindustries,forexamplechemicals,metals,photographic,havemovedawayfromactingsolelyasprincipalwhenprocessingmaterialsandnowactasagent.
Suchcompaniesprovideprocessing/manufacturingservicesforothercompaniesandreceiveavolume-basedfee(toll).
Ownershipoftherawmaterialsandunfinishedproductsremainswiththecustomerfortheprocessingserviceandthefinishedgoodsarereturnedtothatcustomerwithoutanychangeofownershiptakingplace.
Thecustomersforsuchservicesmaybeentirelyseparatecompanies(seekingtheeconomicadvantagesofspecialisedoutsourcing)orcompanieswithinthesamegroup(possiblyseekingtaxminimisationadvantages).
2.
Goodsforprocessingisoftencalledtollprocessing,butalsoknownastollmanufacturing,tolling,tollconversionandcustommanufacturing.
Itiscommonpracticeandlikelytobecomemoreprevalent,especiallywithinmultinationalcompanies.
Thispaperdescribestheimplicationsofitstreatmentonthereliabilityofbalanceofpaymentsandnationalaccountsstatistics.
Thereissomeuncertaintyaboutthenature,definitionandimplicationsoftollprocessing,andthemotivationsbehindtollprocessingactivity.
Itisimportantthattherevisedmanualsclarifyconsistenttreatmentonclassificationandvaluation.
Currentinternationalstandardsforthetreatmentoftheissue3.
Goodsforprocessingismentionedinanumberofofficialsourcesofguidancebutnoneareparticularlyclearorspecificaboutitstreatment.
Referencesinclude:4.
BPM5,ChapterX,Goods:Paragraph195statesthatchangeofownershipistheprinciplebehindtherecordingoftransactionsingoods.
Paragraphs197and198describegoodsforprocessingasanexceptiontothisruleandconcludethatsuchtransactionsshouldbetreatedastransactionsingoodsandvaluedaccordingly,becausemostinternationalprocessinginvolvessubstantialphysicalchange.
ThereareexceptionsdescribedinParagraph199:goodssentabroadforprocessingandsubsequentlysoldtotheprocessingeconomy.
Herechargesforprocessingaretreatedaschargesforservicesandtheoriginalexportre-valuedatfullcost.
goodssentabroadforprocessingandthensoldontoanothereconomy.
Aservicepaymentfromtheoriginaleconomyisenteredundermerchantingandtrade-relatedservices.
Paragraphs203/4andSection205indicatethattransactionsbetweenaffiliatedFDIcompaniesshouldberecordedasifchangeofownershiphadtakenplace.
OverallBPM5indicatesthatcross-bordermovementsundertollprocessingarrangementsshouldbetreatedastradeingoods,ratherthanservices,andvaluedaccordinglyonagrossbasis.
5.
SNA93,ChapterXIV,RestofWorldaccount:SNAdescribesgoodsforprocessinganditstreatmentinParagraphs14.
61-14.
64.
Paragraph14.
61distinguishesbetweengoodssentabroadandreturnedinmoreorlessthesamecondition(sodonotincludeintradeingoods)andgoodssentabroadformajorprocessingwhichhavelosttheiridentityonreturn(include-2-thegrossexportandimportflowsintradeingoods).
Paragraph14.
62specifiesthatthedifferenceinexportandimportvalueshouldbethecostoftheprocessing.
Paragraph14.
63notestheimpactonnationalaccounts-thegoodsreturningaredifferenttothoseoriginallyexported-andthatgoodsforprocessingcannotoftenbedistinguishedfromothermerchandisegoodsinmanycountriesrecordsoftradeflows.
Paragraph14.
64repeatsthatminorprocessingshouldberecordedasaservice,butrecognisesthatobjectivecriteriaforminorandmajorprocessingaredifficult.
Itsuggeststhatthe3-digitCPCcanbeused(nochangemeansminorprocessing,changeofCPCmeansmajor).
6.
EuropeanSystemofAccounts(ESA95),Paragraphs3.
120,3.
132-133,3.
136,1.
139:ESA95doesnotreferspecificallytotollprocessingalthoughseveralsectionsdealwithitsimplications.
ESAfollowsSNAtreatmentbutdoesnothavesomuchdescription,forexampleonthedifferencebetweensignificantandminorprocessing7.
NACERev.
1,Section59,Paragraph2indicatesthattollprocessingactivityshouldbeclassifiedasmanufacturing.
ISICRev.
3.
1-CodeD(Manufacturing)Paragraphs3,4and11indicatethatsuchactivityshouldgenerallybeincludedinmanufacturing.
Concerns/shortcomingsofthecurrenttreatment8.
Theadvantagesoftollprocessingfortheprocessingcompanyincludeavoidanceoftheriskofholdingstocks.
Forthecustomertheadvantagesincludeavoidanceoftherisksofhavingtomaintainaprocessingestablishment.
Costbenefitstomanufacturerscomefromusingspecialisedprocessingcompaniesforspecificprocesses.
Economiesofscaleofthetollprocessingcompaniesarepassedontotheircustomers.
Tollprocessinghasbeenidentifiedwithinindustriessuchaschemicals,pharmaceuticals,metals(galvanising,rollingetc),carmanufacturingandcomputermanufacturing.
9.
Forintra-groupprocessingtheadvantagesmaydependonwheretheownershipofstocksandhenceprofitsarereported.
Thereisevidencethatthepracticeisparticularlyprevalentamongstmultinationalcompanies.
Tollprocessingarrangementsallowcompaniestomovegoodsaroundwithouttransferoflegalownership.
Thismaymaketaxlawsontransferpricingdifficulttoapplyorenforce.
Agroupmaybeabletomoveprofitsaroundcountriesandthereforetoselectthemostfavourableratesatwhichtobetaxedsimplybysettingnon-marketratesfortollingfees.
Thisisageneralissuefordatacollection-agroupmakinguseoftollprocessingforthispurposemaybereluctanttoreporttherequireddatatothecompiler.
10.
Themanualsindicatethattollprocessingoutputshould,inmostcases,betreatedasmanufacturingactivityandthatanyassociatedcross-bordermovementofmaterialsshouldbetreatedastradeingoods.
Theissuesconcernthewayinwhichboththecustomerandtheprocessorviewthearrangementandwhethercontributors(particularlytheprocessingcompany)wouldhaveaccesstotheconsistentgrossdatarequiredtoreportonthisbasis.
11.
Tollprocessingpresentsapotentialthreattodatareliabilityandcontinuityifconsistentandcorrectrecordingandclassificationofassociateddataarenotensured.
Thehybridnatureoftollprocessing,effectivelya"manufacturingservice",hasimplicationsforthecollectionofdatafromcompaniesinanumberofways,outlinedbelow.
definingtollprocessingsothatallcompaniescanvalueitinaconsistentwayrecognisingdatainconsistenciesinthefinancialreturnsfromcompaniesmovingtotollprocessing:thesemayshowsignificantvariationsinturnover,stock,etcdatacomparedtoearlierperiods-3-avoidingclassificationandcompletenesserrorsbecausesomebusinessesthatpreviouslyconsideredthemselvestobemanufacturersmayconsiderthattheyhavebecomeprovidersoftollprocessingservices.
Possibleimplicationsinclude:-inconsistentclassificationofactivity-inconsistenttreatmentofdatacollected-contributorsmissedclarifyingbestpracticeandstandardisingrequirementsacrosstherangeofdatacollectioninquiriesavoidinginconsistentclassificationoftheproductsbeforeandafterprocessing,especiallyifthisisusedasthecriteriaforidentifyingmajorprocessingPossiblealternativetreatments12.
Basicallytherearetwoalternativetreatments:(i)grossrecordingofexportandimportofgoodsor(ii)netrecordingofimportorexportofaservice.
13.
Theassumptionsfortreatmentasgoodsincludetheproductisdifferentafterprocessingthanbefore,soaneconomiceventhashappenedthecustomerandtheprocessorbothknowthe"faireconomicvalue"ofthegoodsbeforeandafterprocessing,whetherthetwocompaniesareentirelyseparateorpartofthesamegroup,andthatthedataarereportedaccuratelythevaluesandallotherdataitemscanbeseparatelyidentifiedandcollectedviamerchandisetraderecordingsystemsconsistentlyandsymmetrically14.
Theassumptionsfortreatmentasaserviceincludethecustomerandtheprocessorbothconsidertheactivityasatrade-relatedservicethecustomerandtheprocessorbothknowthefaireconomicvalueoftheprocessing,thatisthevalueoftheservice,andreportthedataaccuratelythereisnochangeofownership,andtollprocessingissimplyamoreefficientwayforthecustomercompanytomaketheirproductthandoingalltheworkthemselvestollprocessingcanbedefined,andexcludedfrommerchandisetradedata:figureswouldbecollectedviatradeinservicesdatacollectionusersoftradeingoodsstatisticsdonotneedorwanttoanalysefigureswhichincludegoodsforprocessingQuestions/pointsfordiscussion15.
Tollprocessinghasimplicationsforseveralaspectsoftheactivitiesofabusinessthatmayaffectthedecisionontreatment:treatingtollingoutputasgoodsorservicesdirectlyaffectsthevalueofturnoverreported.
Iftollingfeesareartificiallyadjusted,thenreportednationalturnovermayvarysignificantlyforacustomeroftolling,thevaluemaydependontheclassificationoftollingoutputs.
Atollingfeecouldbetreatedforexampleasapurchase,asub-contractcostorafeepaid-4-tollprocessingmayaffectthesizeandlocationofreportedprofits.
Amovetowardstolling,andthedecisiononwhereprofitsarelocated,maythereforeaffectthesizeofacompany(intermsofturnover,profitsetc)fortaxandotherlegislativepurposesthesizeofreportedinternationalbusinessandcross-borderflowsmaybeaffectedbythetreatmentoftolling,aswellas,forexample,thevalueofprofitsownedinforeignsubsidiariesandinternationalintra-groupaccountbalancesagroupismovingtowardsatollprocessingset-upmaytransferassets(legally)tothecountry/companyinwhichtheprocessingtakesplace.
Thereforethelocationandclassificationofuseofthoseassetsmaychange,asmightthemethodofvaluationofthoseassetsthereareimplicationsfordatacollectedwithinawiderangeofstatisticaldata,dealingwithstructuralbusinessdata,FDI,ITIS,stocks,R&Detccompaniesmayundertakebothtollingandtraditionalmanufacturing.
Thiscouldresultindataonmerchandisetradeanddataontollingfeesbeingwronglyreported16.
Ifapreviously'manufacturingcompany'statesthatithasbecomea'tollprocessor',onwhatbasiswillitsindustrialclassificationbedecidedIsitstillamanufacturerinrealityorhasitgenuinelychangeditsnatureWhatifitundertakesamixofmanufacturingandtollprocessingactivitiesHowisits'size'measuredforinclusionwithinsurveysamples17.
WhereareprofitslocatedineconomicrealityTollprocessingmayalterthelocationofprofitsforaccountingpurposes,butthismaynotrepresenttheeconomicreality,forexamplewheretheactivitieswithinamultinationalgrouparephysicallyidenticaltothosebeforetoll-processing.
Also,wherearestockslocatedUndertollprocessingthestocks(ofsemi-processedgoods)remainwiththecustomer.
Undertraditionalmanufacturing,legalownershipiswiththeprocessingcompany.
Supplementaryinformation18.
ResearchinUKsuggestsstronglythatitisunlikelythatthereisconsistent,symmetricrecordingofgoodsforprocessing.
Webelievesomedataareincludedindistinguishablywithinthemerchandisetradedata,butwearenotconfidentaboutthecoverageorvaluation.
19.
AcurrentIASBprojectonRevenueRecognitionmaygiveadditionalguidanceontheinformationgroupsofcompaniesshouldrecordaboutgoodsthataretransferredbetweenthecompanies.
Otherrelevantdocuments20.
TheAnnotatedOutlineofRevisionstoBPM5hasrelevanttextontheissueatChapter9,Paragraphs9.
9,9.
15and9.
16.
Hereisanexample,fromKPMG,ofthesortofinformationaboutoutsourcing,sub-contracting,etcavailableontheinternet:http://us.
kpmg.
com/microsite/FSLibraryDotCom/FrontLine.
htmContact:StuartBrownTel:44-207-533-6060Fax:stuart.
brown@ons.
gov.
uk