Methodological Report on Profiling: “Methodology for ...ec.europa.eu/eurostat/cros/system/files/essnet-esbrs1_del-wp3-a1.1... · 2.0.p1 22/07/2013 Commented on chapter VI Simone

EUROPEAN COMMISSION – EUROSTAT ESSNET ON A EUROPEAN SYSTEM OF INTEROPERABLE

STATISTICAL BUSINESS REGISTERS – PHASE 1 (2014 – 2016) MBGA N° 11172.2013.007-2014.329

Deliverable No A1.1, WP3

Methodological Report on Profiling:

“Methodology for Manual European Profiling”

Update on the report on “Methodology of Profiling” of the ESSnet on

Profiling Large and Complex MNEs, Version 3.0 of January 2014

Task: WP3, Block 2 Author: Irene Salemink, CBS Netherlands Date: April 2016

The content of this deliverable is the result of the work of the ESBRs ESSnet.

The reader should consider that Eurostat might not agree with some of its

content nor is bound by it.

ESSNET ON A EUROPEAN SYSTEM OF INTEROPERABLE STATISTICAL BUSINESS REGISTERS (ESBRS) – PHASE 1 WORK PACKAGE 3, BLOCK 2: STABILISING PROFILING

A project funded by the European Union MBGA No.: 11172.2013.007-2014.329

Methodology for

Manual European Profiling

Update of the report on “Methodology of Profiling”

of the ESSnet on Profiling Large and Complex

Multinational Enterprise Groups (Framework Partnership Agreement N° 30621.2009-2009.470,

Specific Grant Agreement N° 30621.2009.001-2010.456)

Methodology for Manual European Profiling Version: 4.0 ESSnet on profiling large and complex MNEs & ESSnet on ESBRs-Phase 1 Date: 27 April 2016

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Version control

Version Date Description Author ESSnet on Profiling Large and Complex Multinational Enterprise Groups 1.1.p1 07/02/2012 Starting version ESSnet partners 2.0.p1 31/10/2012 Update with small corrections

Comments of Statfin New drafts for chapters 11, 14 and 28 by ISTAT with comments of Statfin and CBS Additional annex related to the chapter 28 (Statfin) First draft of chapter 8 by Insee (Pierre Teillet)

Jean Ritzen

2.0.p1 10/07/2013 Action 18 of the Action Table: update to SPEs and Aux-iliary activities

Pierre Teillet

2.0.p1 22/07/2013 Commented on chapter VI Simone Ambroselli Roland Sturm

2.0.p2 19/11/2013 Revised version including revised chapter VI and insert-ed para 15 (new, on quality), 20 and 21

Irene Salemink

3.0 24/01/2014 Final version including revised chapter 8, 11, 20 and 21. Irene Salemink ESSnet on ESBRS – Phase 1 (2014-2016) 4.0 22/04/2016 Updated version concerning definitions and wording

(MNE, GEG, UCI, GDC), dual coding and reference made to new context due to “Notice of intention of the BSDG and DMES”. Synchronised with updated guide-lines.

Irene Salemink

Version Date Distribution 1.1.p1 07/11/2012 Circa site ESSnet profiling with a copy to ESSnet partners

For discussion in the Berlin workshop December 2012 2.0.p1 22/07/2013 Members ESSnet Profiling for review and ESSnet partners 2.0.p2 19/11/2013 Members ESSnet Profiling for review 3.0 24/01/2014 Pierre Teillet, Dominique Francoz and ESSnet Profiling final versions to accom-

pany Executive report 4.0 22/04/2016 Maryse Fesseau, Norbert Rainer and Harrie van der Ven and the ESSnet on a

European System of Interoperable Business Registers (Phase 1) – Work Package 3.


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Table of content Preface .................................................................................................................1 I Common operational methodology.....................................................................3 1 Exploring references to existing descriptions in the BR manual;

Making clear the differences and/or the deviations .....................................3 2 The units model described in more detail, with focus on the

international dimension ..............................................................................3 3 Statistical units in the model and other related units (observation,

reporting): importance and use ...................................................................6 4 Exploring the concepts of control and proposals for use in the context

of EGR and Profiling; the concepts to be used: UCI, GGH or other ...........8 5 The concept of autonomy in international context, what does it mean? ..... 11 6 Classifications (activity and institutional): which, why, where and

how, single and/or multiple? ..................................................................... 20 7 The core variables and the roles in the BR/EGR context ........................... 29 8 Classification of changes: which, why and how? Continuity rules. ............ 36 9 Analysis of usefulness of units of the new model for SBS, STS, FATS,

Prodcom and NA ....................................................................................... 44 10 The concept of autonomy related to main information and variables:

meaningfulness and availability of necessary information/data. How relates global autonomy to geographical autonomy at GEGs? What are the consequences? ............................................................................... 46

II Consistency and breaks .................................................................................. 47 11 Relationships with used statistical units (ENT/KAU/LKAU) in present

statistics (SBS, STS, FATS, Prodcom, NA) and related to Consistency ESSnet ...................................................................................................... 47

12 Analysis of potential breaks in time series in changing the used units, aspects of continuity and consistency; implications of changing ................ 49

III Consolidation aspects .................................................................................... 53 13 Description of basic organisational principles of large GEGs and the

appearances of these ................................................................................. 53 14 How relates consolidated information at the (global) group-level to

required geographical statistics? How to decompose and how to deal with internal flows of goods and services within global groups, including the aspect of transportation? ..................................................... 55

IV Modes in profiling ......................................................................................... 58 15 The standard and basic steps in profiling large and complex GEGs .......... 58


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16 Quality in profiling: what information should be available at the end of the profiling process .............................................................................. 59

17 Description of the general principle approach ........................................... 64 18 The difference between top-down and bottom-up profiling and how to

combine these modes? ............................................................................... 65 19 The different intensities of profiling (Intensive, light, manual,

automatic) ................................................................................................. 67 20 The selection of groups to be distinguished (criteria and numbers) ........... 68 21 Priorities and follow up strategies: which group in which intensity

with which frequency? .............................................................................. 76 22 Relationship with updating strategy of the EGR ....................................... 77 V EU-parts of non-EU GEGs .............................................................................. 78 23 Description of the problem ........................................................................ 78 24 The impact of partly profiling on the statistical units model ..................... 79 VI SPEs, Holding Companies (HCs), Head Offices (HOs) and “other special

cases” ........................................................................................................ 80 25 Special Purpose Entities (SPEs) ................................................................ 80 26 SNA principles and requirements of Special Purpose Entities (SPEs) ....... 81 27 Treatment of SPEs in profiling; the global and national perspective ......... 88 28 Auxiliary activities and R&D according to SNA ....................................... 93 29 The treatment of R&D and auxiliary activities, with focus on crossing

border services .......................................................................................... 95 30 Branches and the question of VAT positions ............................................. 95 List of abbreviations ........................................................................................... 97 ANNEX I: BR recommendation manual 2010 chapter 21, the points

21.31to 21.46 ............................................................................................. 99 ANNEX II: Background information related to autonomy .......................... 104 ANNEX III: Variables for reconciliation with SBS statistics, NA use and

their links with accounting standards. ..................................................... 108 ANNEX IV: SPEs - classification tables ........................................................ 112 Decision tree for the identification of SPEs ....................................................... 114 ANNEX V: R&D problem statement examples ............................................ 115 ANNEX VI: Example of VAT position case .................................................. 120 ANNEX VII: Example of profiled GEG and the impact on business

statistics ................................................................................................. 122 ANNEX VIII: Manual European profiling strategy paper for

communication with MNE’s. ................................................................... 130


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Preface of version 3.0 of the Profiling Report by the ESSnet on Profiling Large and Complex Multinational Enterprise Groups

The ESSnet on profiling large and complex Multinational Enterprise groups started at the end of 2009. One of the work packages (WPs) is on methodology, the WPB. The objectives of the Work Package B are:

• To describe the theoretical background on statistical units (enterprise, en-terprise group, reporting unit, observation unit, analytical unit), the rela-tionships between units, the core variables (employees, turnover, value added, economic activity) and their relevance to consistency as well as to the concepts of control (ultimate controlling institution1 vs. group head), country of ‘decision making centre’, continuity and other ‘coordinating’ characteristics.

• To develop a common operational methodology for profiling that is based on the theoretical foundation and takes into account practical is-sues like availability of information in different countries.

• To define different approaches to profiling like top-down and bottom-up, the selection of relevant units (cut-off-criteria).

• To delineate the non-financial sector (at this stage, profiling will focus on the non-financial sector as far as possible).

• To describe the treatment of specific cases like joint ventures, financial vehicles, holdings, auxiliary activities and units, R&D, SPE, families, funds, foundations, associations, co-operatives etc. and also the treatment necessary to profile the EU truncated part of non EU MNEs (named now and for the future GEGs (Global Enterprise Groups)).

The main 2010 result of this work package is the report on statistical units. The proposals done in this report provides a fundament for the chosen approach in the start of profiling in 2011. A further methodological foundation had the atten-tion in 2011, 2012 and 2013. This is described in this final report.

1The naming UCI has been under review during the on-going profiling exercises: when the GGH differs from the main decision centre of the GEG, it is proposed to limit profiling to the Global Decision Center and its managed affiliates (and not to treat in profiling the ownership line from the GDC upwards to the GGH). See the revised Guidelines for manual European Profil-ing_v7_Apr_2016, chapter 9, on the explanation for using the GDC instead of UCI concept when referring to European Profiling.


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Proposals are not restricted to the analysis of the statistical structure of the Glob-al Enterprise Groups (GEGs). More precisely, also a description is given how the proposed units can support an efficient data collection for the main business statistics domains; this has led to the definition of core variables (including pri-ority variables such as number of employees, turnover, value added and econom-ic activity) linked through accounting relations. The developed methodology is being tested with a hundred of GEGs. The results are a product of good cooperation between the working and review-ing partners and with Eurostat within the Work Package. The content of the re-port is shown in the table of contents. Some issues are put in annexes, especially the references to other manuals and/or some background descriptions. The approach of profiling and the consequences of it are shown in annex VII. Disclaimer on version 4.0 by the ESSnet on a European System of Interoperable Statistical Business Registers – Phase 1

It may happen that experts refer to different wording to define similar concepts and/or methods. Revising the profiling documents the ESSnet has done its best to harmonize the wording in the text:

• Global Decision Center (GDC) instead of Ultimate Controlling Institute (UCI) • Global Enterprise Group (GEG) instead of MNE (MultiNational Enterprise).

However, it may happen that some wording inconsistencies remain in some schemes or in the text be-cause it comes from other sources than can or may not be altered.

According to the Grant agreement ESSnet on ESBRs WP 3, the guidelines on profiling and methodology document are to be updated if applicable.

Since it is still the current methodology which is under testing the Methodology document is not altered or amended.

The adoption of the “Notice of intention of the BSDG and the DMES on the consistent implementation of Council Regulation (EC) No 696/93 on statistical units” did change the context of the ESSnet programme and does affect the current profiling methodology since the profiling units GEN and TEN were not assigned a statistical unit function. For the future meaningful concepts in the context of a system of 'global ac-counts’ need to be defined and clarity and transparency is needed on the statistical objects and their roles in the ESBRs system; by defining the statistical objects with their characteristics to be included in the ESBRs frames. For now is referred to the “Guidelines for manual European Profilig_v7_apr_2016”, in which Chapter 2 “Units model” and Chapter 3 “Units to be used during profiling” are amended as far as possible considering the changed context.


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I Common operational methodology

Aim: To develop a common operational methodology for profiling that is based on the theoretical foundation and takes into account practical issues like availa-bility of information in different countries. The different levels of statistical units should be considered (Global enterprises (GENs) defined as statistical divisions of the group that can cross the borders, truncated enterprises (TENs) defined at the country level) as well as the feasibility of the collection of information for the enterprise, at least for Option D. An assessment will be done, in this ESSnet, between this proposed type of "enterprise" and the present theoretical or used enterprise unit.

1 Exploring references to existing descriptions in the BR manual; Making clear the differences and/or the deviations 1.1. In the context of the ESSnet on profiling the chapters numbered 5, 19, 21 and 22 of the 2010 BR recommendations manual are very relevant. Parts of the chapter 21 on Enterprise Group are further elaborated in a separate recommenda-tions manual (September 2010) in which the definition of the UCI (Ultimate Controlling Institute) is elaborated in more detail. In this last mentioned docu-ment also other important terms are defined, like Global Group Head (GGH) and Global Decision Centre (GDC). In the BR manual the glossary provides defini-tions of frequently used terms. Of these, the terms are only defined again if the definitions in this report deviate from the definitions in the BR manual. 1.2 The present BR regulation and BR recommendations do not take in account the most recent developments as achieved from the ESSnet on profiling and the EGR modelling of GEGs2. After formal adaptation of the proposed statistical unit’s model the mentioned chapters must be revised and/or adapted. The con-cept of the Global Enterprise (GEN)3 and of the Truncated Enterprise (TEN) must be added, with the units’ definitions and their characteristics.

2 The units model described in more detail, with focus on the international dimension 2.1 In the report on statistical units, prepared in the first year of the ESSnet on profiling, a statistical units model is presented that can be used for compiling statistics in which data of GEGs are included in a consistent way. For these units the delineation of the Global Enterprise (GEN) is essential with its geographical (national) components, the Truncated Enterprises (TEN).

2 The terms MNE and GEG will be used as a kind of synonyms many times in this report, alt-hough MNE is mostly used in the real world and GEG is a more proper statistical term. 3 Abbreviations GEN and TEN are in accordance with the used abbreviations in the EGR


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Because the GENs are the result of the economic and statistical analysis of the structure of the Enterprise Group, and consequently each Truncated Enterprise is viewed purely as the trace of the Global Enterprise in a country in which the GEN is present, a Global Enterprise cannot have more than one truncated enter-prise in one country, just like a Global Enterprise Group (GEG) cannot have more than one truncated enterprise group in one and the same country (on this topic, see also paragraph 3.5). Diagram: The model

2.2 The proposed definition of the enterprise group (see report WPB 2010) is the following: The enterprise group is a set of legal units under common direct or indirect con-trol. It mostly appears as a combination of legal units bound together by legal and/or financial links. An enterprise group is to be constituted regardless national borders. Here we speak of a global group. If the group operates in more than one country, this group is mentioned as a Global Enterprise Group (GEG). The territorial or geo-graphical (mostly national) parts of the GEG are the Truncated Enterprise Groups (TEGs). A global group cannot have more than one truncated group in one defined geographical area, e.g. one country. A distinction can be made in:

- Multinational Global Enterprise Groups (MNE or GEG) and - All resident (or full domestic) Enterprise groups

With all resident enterprise groups the global group and the truncated group are identical. Manual European profiling is then identical to national profiling.

Economic/statistical

Global Enterprise group

Legal Unit

Legal/administrative

Local (legal) unit

Global Enterprise

Local unit

Economic/statistical

Truncated Enterprise group

Truncated Enterprise

Local unit

Legal/administrative

Legal or operational unit (sub global)

Local unit legal or operation-al

SPE SPE


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According the 2008 BR Regulation enterprise groups can be identified through the links of control between their legal units. In order to delineate enterprise groups, the definition of control set out in point 2.26 of Annex A to Regulation (EC) No 2223/96 shall be used4.

“Control over a corporation is defined as the ability to determine general corpo-rate policy by choosing appropriate directors, if necessary. A single institutional unit (another corporation, a household or a government unit) secures control over a corporation by owning more than half the voting shares or otherwise controlling more than half the shareholders' voting power. In addition, government secures control over a corporation as a result of special legislation decree or regulation which empowers the government to determine corporate policy or to appoint the directors. In order to control more than half the shareholders' voting power, an institu-tional unit need not own any of the voting shares itself. A corporation C could be a subsidiary of another corporation B in which a third corporation A owns a majority of the voting shares. Corporation C is said to be subsidiary of corporation B when: either corpora-tion B controls more than half of the shareholders' voting power in corporation C or corporation B is a shareholder in C with the right to appoint or remove a majority of the directors of C.” The concept of control is further elaborated in the chapter 5.

2.3 The proposed definition of the enterprise (see report WPB 2010) is: The enterprise can be either:

- A single legal unit (including a natural person) if this LeU is “inde-pendent” or sufficiently autonomous within the enterprise group, or

- The whole of an enterprise group as a set of legal units under com-mon control if the group is managed globally and not more autono-mous segments can be distinguished, or

- An “autonomous” part of an enterprise group, producing goods or services.

It benefits from a certain degree of autonomy in decision-making, especially for the allocation of its current resources5. The enterprise will mostly appear as an organisational unit that can provide meaningful data for statistics. The enterprise group is the starting point to derive or establish enterprises. The enterprise group can be split into more enterprises if there are more autonomous decision centres. In the case of not two or more legal units under common con-trol, the enterprise is equal to the single legal unit (including a natural person).

4 Council Regulation (EC) No 2223/96 of 25 June 1996 on the European system of national and regional accounts in the Community 5 From this definition it may be clear that an enterprise can be a single legal unit


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The appearance as an organisational unit also indicates having its own manage-ment. From this definition, the distinction between the global enterprise and the trun-cated enterprise is:

• The global enterprise may be part of an all-resident enterprise group or be a single legal unit, if it is not part of a set of legal units under common control.

• The truncated enterprise is the national part of the global enterprise. This belongs to the “truncated enterprise group” of the “global enterprise group” (GEG).

Within an all-resident enterprise group, the global enterprise and the truncated enterprise are one and the same unit.

It is very important to stress that the truncated enterprise is not the result of an independent profiling action or analysis of the truncated enterprise group, but it is the national part of a global enterprise, that then automatically is a part of the truncated enterprise group. In profiling this is the most important change in the derivation the statistical structure of a GEG. If a Group is all resident or fully domestic, the global enter-prise and the truncated enterprise are equal. To get internationally consistent statistics also the belonging characteristics to be assigned to the global enterprise and to the truncated enterprise are qualifying. For this see chapters 6 and 7.

3 Statistical units in the model and other related units (observation, reporting): importance and use 3.1 In the model of the “diagram 1” three types of statistical units are presented, the Enterprise Group, the Enterprise and the Local Unit. These three units are apparently the same than those to be registered in the statistical business regis-ters according the 2008 BR Regulation. But this new model is introducing the international dimension, what is of grow-ing interest in the context of increasing globalisation. Statistics that are internationally consistent need to be based on relevant (changed from the presently used) concepts. Because many European statistical concepts are prescribed from regulations, these regulations should be adapted too. An example is the Structural Business Statistics Regulation. In this domain, the enterprise statistical unit is the prescribed basic unit for national collection and statistics compilation. It should be changed into the truncated enterprise. The change has no conceptual consequences for the registering of the local unit6.

6 Nevertheless, for statisticians using legal units, one local unit refers to one LeU. In the BR regulation, the local unit is linked to an enterprise => it mostly results then from the merging of all the local units of the legal units which are included in the same “enterprise”.


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3.2 In the definition of the enterprise no links with legal units are mentioned. The enterprise structure should show the real economic situation to be described in statistics. The global enterprise structure is the result of an analysis of the real economic and operational structure of the Enterprise Group. Most logic starting point in the analysis is the presentation of the group itself in its components. We can find the basis of this analysis in the way the group has organised itself in Group Operating Divisions7 (GODs). These are operational segments displayed in its financial reports. For management reasons, it is ex-pected that the operational segments will have internal supporting information systems for all kinds of product and process information. These are to be used in the analysis of the structure, if these are available for these purposes. 3.3 Next to the statistical units structure of a group we must know the units that can report for the established statistical units. These units are called “reporting units”. These units can be inside or outside the group, e.g. an accountant. 3.4 For some kind of information, the requested data cannot be directly collected for the target statistical unit, but the data may be available from aggregation of underlying (sub) units, e.g. legal or local units of enterprises. These subunits are then called “observation units”. The data of the observation units must be aggre-gated into data of the statistical unit thereafter. For some physical data the col-lection must be done at the physical local places, nevertheless this is done by the reporting unit itself or by the statistical institute according to agreements passed with the group. 3.5 When studying the “feasibility” of profiling, we met what we called the “classification dilemma”: a Global Enterprise which main activity is manufactur-ing industry could at first glance have two activities in a non-GDC country: e.g. one manufacturing and one trading (retail or wholesale); we can classify them either according to the principal activity of the GEN they belong to or according to their own. If we would interpret the two activities as two different TENs, this might lead to a contradiction to the principle included in § 2.1 according to which there is only one TEN per GEN and country. We propose to solve this double dilemma (de-lineation and classification of units) by sticking to the 2.1 choice and either to refer to the detailed data found in surveys (e.g. on products) to get the required information or to allow creating two KAUs (kind of activity units) in the con-cerned country8. As in the 3.4 case, the statistical results can be obtained directly

7 The operating divisions can in practice be named “segments”, product lines, production fields etc. by the GEGs 8 The list of statistical units that are going to appear in the future FRIBS regulation is still under review; KAU is a discussed item of the list. Contrary to the abolition of KAUs that what was foreseen in 2012 , the present “state of the art” tends to enlarge the use of KAUs to trade, con-


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from the TEN reporting unit, or re-built by the statistical institute from other “reports”. This issue will be elaborated further in the paragraph 6.1 3.6 In profiling we should keep in mind a very important basic principle related to units classification. First of all the statistical unit must be established or con-stituted according to the criteria mentioned in the definition. After establishing the statistical units, these are to be classified according to the appropriate classi-fication systems like size-class and NACE. 3.7 The most important criterion in the definition of the GEN is that of the au-tonomy in decision making, especially for the allocation of its current resources. Activity homogeneity is not mentioned as a criterion as this is also not in the definition of the Enterprise in the 1993 Statistical Units Regulation. Neverthe-less, it can be mentioned that operational divisions within Enterprise Groups may appear strongly correlated with activity homogeneity in many cases, but not in all. So: first the unit and after that the classification of the unit! 3.8 The relationships with the other statistical units defined in the 1993 Statisti-cal Units Regulation will be dealt with in the beneath paragraph 11.

4 Exploring the concepts of control and proposals for use in the context of EGR and Profiling; the concepts to be used: UCI, GGH or other 4.1 In the BR recommendation manual 2010 a separate chapter 21 deals with enterprise groups. The content of this chapter is very useful and can stay un-changed for the description of the concepts of control. All these are based on the general definition of control as mentioned in the paragraph 2.2 before. A part of the chapter 21 is attached in the ANNEX I of this report, the points 21.31 to 21.46, and most parts will not be repeated here. 4.2 In the section 21.45 of the BR manual chapter 21 is mentioned that “the statistical concept of the enterprise group is different from the accounting concept, as can be derived from the Seventh Council Directive (see the Annex). In fact, as it is stated in explanatory note 3 of section III C of the Annex to the SU Regulation “this definition (of accounting groups …) is not suitable for statistical analysis because they do not constitute mutually exclusive, additive groups of enterprises. A statistical unit known as ‘enterprise group’ based on the ‘accounting group’ concept must be defined by applying the following four amendments:

struction and services and thus to make it an universal unit. This new position makes it possible to complete, if wished or requested, the national use of TENs by more detailed and homogeneous information through KAUs


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- Consider accounting group at the highest consolidation level (group head or group decision centre);

- Include in enterprise group units whose accounts are entirely integrated in those of the consolidating company9;

- Add majority-controlled units whose accounts are not included in the overall consolidating by virtue of application of one of the criteria allowed by the Seventh Directive, i.e. difference in the type of activity or small relative size;

- Discount temporary links of less than a year.” 4.3 These four amendments are very important and are confirmed with all IN-SEE 2011 tests with 3 remarks to be added:

- The highest displayed (displayable) consolidation level is not always the Global Group head (GGH): this is the case for many “family groups” in which the “family holding” does not reveal any data; this is also the case for state-owned groups, the National State defining several Groups and not consolidating them all; in this type of cases we take the highest dis-played level of consolidation as the basis of the delineation of the GEG we intend to profile.

- In the present uses of the Directive, “proportional integration” does exist, according to which a Joint Venture is split 50%/50% between 2 GEGs; it is then very difficult to understand which of the 2 GEGs, if any, has the real control; and it is very difficult to obtain separate information for the JV; but this exception should disappear in 2013, so that we will not try to find a long-term solution for all the related cases.

- A concrete criterion for “small size” has still to be defined 4.4 In the paragraph 2.46 of the BR manual operational rules are described for identifying control links: “Control is a complex concept in economic terms. Statistical operational rules need to rely on observable criteria: Proof of control. Therefore it is sufficient that at least one of the following applies, in order to identify a link of direct or indirect control between two legal units: 1) A legal unit directly owns more than 50 % of the voting rights of another

legal unit (direct control);

9 in accounting standards this concept: - Refers to full consolidation = FC; - But until 2013, the GEGs sometimes also include proportionate consolidation = PC in

their main accounts and it is very difficult for statisticians to exclude it. Proportionate consolidation appears for including the GEG share of its joint-ventures without explicit consideration of what is done by the partner of the remaining share. As the concerned IFRS standard has been changed the PC should disappear from 2014, but we are not yet completely sure of what the GEGs are going to do.

Up to us the “equity method” used for Legal units in which the GEG has an “interest” (the reference is from 20% to 49% share of ownership) is not consolidation.


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2) A legal unit indirectly owns more than 50 % of the voting rights of another legal unit, through subsidiaries (indirect control);

3) Existence of special legislation decree or regulation, which empowers the government to determine corporate policy or to appoint the directors of the legal unit;

4) A legal unit fully consolidates the accounts of another legal unit, according to the criteria of the Seventh Directive, and no other legal unit consolidates the same legal unit (control by virtue of full consolidation);

5) Administrative sources, collecting declarations in application of specific laws for market regulation, provide the information that a legal unit controls one or a set of legal units, even though it owns less or 50 % of its voting rights (effective minority control) and no other legal unit own more10.

Note: It may be possible that two rules, e.g. both cases 1 and 4, could apply simultaneously. As one unit cannot be controlled by two different units, the de facto controlling unit should then be chosen. Case 4 can in general be considered as weaker than 1, because there can be consolidation situations with less than 50% ownership and situations with over 50% ownership without consolidation.” End of quotation out of the BR recommendations manual. In manual European profiling, the concept of control is not restricted to national borders, but is globally border crossing. This solves the problem of identifying relationships of separate domestic sub holdings or subsidiaries which are linked together by a common foreign control and so belong to one and the same global and truncated enterprise group. 4.5 More and different appearances of GEGs can be distinguished. In the chapter 13 most frequent appearances are described. The way a GEG is organised, appears and presents itself can influence the resulting way of approaching in profiling. It can be concluded that in specific cases it can be advised that consolidation and/or control is to be related to autonomous subgroups, e.g. for only financially related groups.

10 Includes also the control resulting from a shareholders agreement (as well given by the majori-ty to a minority owner, as joint control by several minority owners).


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5 The concept of autonomy in international context, what does it mean?

5. A. Introduction 5.1 Autonomy is a crucial criterion in the delineation of the enterprise statistical unit. This criterion must be elaborated further therefore. Autonomy can be ap-plied at several levels, e.g. at the Enterprise Group level and at the Enterprise level. 5.2 From a semantic point of view autonomy (from αυτο – auto, "self" + νόμος - nomos, "law") means "one who gives oneself its own law11“. Autonomy is not a synonym of the word “independence”, its broadness is re-stricted within the constraints defined by the owner and/or the controller. It more relates to the use of a “broad mandate” regarding defined aspects. The best trans-lation of the term autonomy is in the context it will be used here is: the power of self-government. Kant develops in his philosophical theories12 the concept of autonomy in terms of relations of a person and his freedom: a person is free when bound only by her own will and not by the will of another; her actions then express her own will and not the will of someone or something else. 5.3 In a similar fashion, we may think of a person (physical or juridical), en-gaged in economic activities, as autonomous when it may take decisions (eco-nomic - productive – financial – organisational) in its own will and free from external influences. A general definition of autonomy could be the following:

DEFINITION 1 - A person (physical or juridical) is defined as autonomous when he (or it) has the control of the use (it may not be the owner from a legal point of view) of the whole productive means, of the whole productive process, of the whole productive outputs of the economic activities in which it is en-gaged.

5.4 This concept of autonomy is too general to be applied to the complex reality of the economic operators. It is necessary to face with a range of issues:

1. The boundary of the “autonomous person” especially in the global market. 2. The area (domain) in which the autonomy is applied (financial area, eco-

nomic area, organisational area). 3. The interactions between the legal constrains and the economic deci-

sions. 4. The time period in which decisions are valid (short, medium, long).

11 Wikipedia 12 Stanford Encyclopaedia of Philosophy: Kant Moral Philosophy, 2004


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5.5 More complex aspects have to be taken in consideration when we need to apply the concept of autonomy to the statistical data collection:

1. Concepts of observational/non-observational unit (identification issue), 2. The coherence of data acquired in different contexts – e.g. short term,

structural and national account statistics (statistical coordination issue), 3. Temporal unit continuity and temporal data consistency (stability issues), 4. The data coherence between different territorial boundaries, e.g. regional

(international), national, EU 13 (geographical or spatial issue). 5.6 Last but not least, in the scope of the European Statistical System, the devel-opment of practical and consistent criteria (and not only theoretical definition) to identify the autonomy of a global economic actor has to face with the present Statistical European Regulations, and especially those that were recently ap-proved, like the new System of National Account and the NACE rev.2. and to compare and confront them with the practical use of “operating segments” (GODs) as basis for delineating the “enterprises” (see also the chapter 6). 5.7 This chapter, after considering some short elements on the present European Statistical Regulation (see ANNEX II) and presenting some reflections on the concept of autonomy in the global economy (paragraph 5.B), focuses the atten-tion on the operational criteria to identify autonomy in case of complex multina-tional (and national) units (paragraph 5.C). Further aspects dealing with the global/national points of view (paragraph 5.D) and the set of minimum infor-mation needed to guarantee “meaningfully statistical data” are proposed. 5. B. The concept of autonomy in the globalisation world 5.8 In the modern economic world the enterprises have increasingly chosen to organize and conduct their business operations in the form of a cluster of vari-ous separate corporations (legal units), rather than as a single corporate entity (legal unit)14. The largest enterprises typically evolve as a complex, large-scale business network, where the different parts of the business are allocated to a group of affiliated corporations (subsidiary corporations); global co-ordination is obtained through the submission of such “legally independent” parts to a com-mon economic strategy. The management of the whole is exercised by a central decision centre (headquarters). “The globalisation describes a process by which regional economies, societies and cultures have become integrated through a global network of communica-tion, transportation and trade of goods and services” (ESSnet on International profiling, WPA report 2010).

13 In the published Annual report or Reference Document MNEs refer also to “regions” as over-national zones such as Latin America or EMEA (Europe Middle-East Africa). It is the same when reports on globalisation are concerned. 14 On this topic see also chapter 13 on basic organisational principles and appearances of Global enterprise Groups


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5.9 The main element characterising the global economy is the “speed”. Not only in transfer and allocation of financial resources but also as regards the phys-ical ones. The transfer of capital, labour and technology takes place with increas-ing speed. Consider, for instance, as the transfer of entire production plants take place relatively quickly (in less than a year) unthinkable only at the end of the last 20th century. Also the very rapid developments of the Information and Communication Technology heavily contributed to this and created many neces-sary conditions. The decisional processes have necessarily to be accelerated. For this reason the new organisational systems of the complex and global enterprise are the so called “short chain organisation”, that permits to the top management to collect all needed information in short time to take its decisions. In this situation the control of Parent Corporation over the subsidiaries is not limited on the “financial or strategic” aspects but focuses more on decisions of resources allocations, markets where to produce and sell goods, price strategies, communication and advertising strategies. 5.10 In the global economy the short/medium/long time and strategic/current decision lose their meaning: by definition the speed reduces the time. In this way there may be an increasing reduction of autonomy (and responsibil-ity) of the subsidiary corporations in favour of the headquarters or of higher but intermediate hierarchical levels of the group where the decisions (at short/medium/long time) are being taken. In case of global enterprise group (or national enterprise group) the headquarters of the EG are the only decision centre that may take all types of decisions – stra-tegic and current - in own will and free from external influences, because it has the control of the whole productive means, of the whole productive process, of the whole productive outputs and of the whole financial processes of the eco-nomic activities in which it is engaged. 5.11 This cluster vision (instead of the atomistic one) of the economic actors it is not only a “common sense” in a theoretical and economical point of view, but above all, it is a reality that must be governed by laws and regulations. In fact, several European countries in their legislation recognize the validity of the so called “domain contract” or “hierarchical coordination contract”. With these contracts the parent company buys the right to issue directives to the sub-sidiary company also detrimental to the latter and, in some case (or in some na-tional laws) without any need for a compensatory advantage. “These typologies of contract create an alienation of the corporate government characterized by the fact that:

a) A company acquires the right to give directives to the directors of anoth-er (subsidiary) company even if detrimental (and in contrast with the so-


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cial interest of the subsidiary), provided that the interests of the dominant society or of another company of the group are honoured;

b) Members of the governing body of the company (subsidiary) are obliged to execute these directives, going free from liability for damages that may result from their implementation.”15

Here we also see the appearance of legal constructions to avoid or minimise risks and to minimise other “disadvantages” like tax paying. These constructions are mainly beyond pure real economic reasons. 5.12 Another important area of intervention in national legislation (and in the European Union) is the correct pricing identification in the transfer of production means (goods, services, labour and financial capital) between companies in the same group. Through the “transfer price” mechanism the prices of intra-group transactions are determined on the basis of evaluation parameters anchored to the general needs of the multinational group from a management, organizational and tax viewpoint, instead of under market conditions. Many governments have adopted transfer pricing rules that apply in determining or adjusting income taxes of multinational taxpayers. OECD has adopted guidelines followed, even if in part, by many of its members. Rules are provided to permit the tax authorities to adjust those prices where the prices charged are outside an arm’s length range. The law recognizes and governs the fact that the global economic actors central-ise their decisions and operate transfer of production means between their sub-sidiary units without pure economic evaluation. 5.13 Considering the accounting point of view, the IFRS10 has the objective to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. The definition of consolidated financial statements is: the financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the par-ent and its subsidiaries are presented as those of a single economic entity “The Standard: • Requires a parent entity (an entity that controls one or more other entities) to

present consolidated financial statements • Defines the principle of control, and establishes control as the basis for con-

solidation • Sets out how to apply the principle of control to identify whether an investor

controls an investee and therefore must consolidate the investee • Sets out the accounting requirements for the preparation of consolidated fi-

nancial statements.” [IFRS10:1]

15 U. Tombari - Autonomia privata e gruppi di imprese - http://www.notariato.it/it/primo-piano/studi-materiali/

http://www.notariato.it/it/primo-piano/studi-materiali/

http://www.notariato.it/it/primo-piano/studi-materiali/


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5.14 The main concept to realize the consolidated financial statements is the Control of an investee: “an investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee”. [IFRS10:5-6; IFRS10:8] Where power means: the existing rights that give to the investor the current abil-ity to direct the relevant activities of an investee. Power arises from rights. Such rights can be straightforward (e.g. through voting rights) or be complex (e.g. embedded in contractual arrangements). “A parent must not only have power over an investee and exposure or rights to variable returns from its involvement with the investee, a parent must also have the ability to use its power over the investee to affect its returns from its in-volvement with the investee.” [IFRS 10:17]. The definitions of “control” and “power” proposed by the International account-ing principles show as the subsidiaries (identified as investees) are considered just a way for the investor (the global group headquarter) to affect its returns having the total control of the activities of the group. 5. C. Operational criteria and rules to identify autonomy 5.15 Issues in identification of the statistical “autonomous” units. The ESSnet on profiling (WPB Report on statistical units, 2010) has proposed the following definition of the Enterprise Group: The enterprise group is a set of legal units under common direct or indirect con-trol. It mostly appears as a combination of legal units bound together by legal and/or financial links. And the following definition of the enterprise: “The enterprise is a single legal unit (including a natural person), an enterprise group as a set of legal units under common control, or a part of an enterprise group, producing goods or services. It benefits from a certain degree of autono-my in decision-making, especially for the allocation of its current resources. The enterprise will mostly appear as an organisational unit that can provide mean-ingful data for statistics.”

Two levels of autonomy can be distinguished, one for the Group and one for the Enterprise. The group has full autonomy at the highest level and exercises this mainly and at least for strategic and long term decisions. The group head only needs to give account and to report for its decisions to the owners or to the board of shareholders of the group and in direct contact. A second and lower level of autonomy is that related to the allocation of current resources in the production processes. This is to be understood from a more operational view. If the Enter-prise is a part of the Group the Enterprise management has to give account and to report to Group management


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In terms of statistics: for statistics related to large and strategic, mostly financial, decisions, the Enterprise Group is the most eligible statistical unit and for statis-tics related to current production the Enterprise is the most eligible one. In some countries both kinds of statistics are part of the statistical programs and statistical units are distinguished and applied in this way. The distinction does not appear in the statistical program and regulations of the EU (Eurostat) till now. The European system is based on the enterprise related statistics.

5.16 The main criteria to identify autonomy. On the levels in a (large and com-plex) organisation where the important decisions are taken, the following kinds of decisions are assumed to be relevant and could be considered to be criteria in checking. For the Enterprise Group:

- Mergers and de-concentrations, i.e. the authority to buy (stocks of) other Legal Units (being or not autonomous enterprises) or sell parts of the Group itself;

- Income assessment, i.e. decisions on keeping reserve funds, large unex-pected depreciations, etc.;

- Income distribution, i.e. the allocation of the generated income, e.g. from production, to shareholders, investments or reservations;

- Financing of new projects or termination of on-going ones. For the Enterprise:

- Fixed capital investments within certain limits for the running produc-tion;

- Recruitment or dismissal of personnel; - Raises in salaries and other remunerations; - Choice of the assortment of products; - Size of the production; - Provisions for doubtful debtors; - Pricing of the output/products; - Choice of the suppliers.

The Enterprise Group is market oriented by definition. For the Enterprise market orientation is also a requirement (with some exceptions when quasi-enterprises within a Group must be distinguished) 5.17 It is, of course, to be realised that none of the mentioned criteria are abso-lute. A production manager may be allowed to decide to invest in new machin-ery but he will not be permitted to build a whole new complex. Actual sales prices will, taking into account the market, be set by the sales department of the production unit, but the price policies may be made by the overall management of the production unit as a “strategic” issue. The board of directors of the Group probably has the authority to withhold large amounts of reserves but the share-holders may not like it, if they are not paid any dividends at all. So everything


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has to be seen in its perspective, which it is exactly what makes it so difficult to establish straightforward rules. Autonomy and the level of it mostly seem from management contract between the Enterprise management and the Group man-agement. On the one hand we have mandated responsibilities, on the other duties to give account and to report on results and performances. 5.18 In order to be able to operate as an autonomous unit it is necessary to have available information systems to control and to report. From these systems meaningful real economic figures can be provided, also for statistics. If infor-mation systems, maybe only for internal use, are lacking, then the existence of an autonomous unit is very doubtful. A first hold in the analysis of a large En-terprise Group into Enterprises is the existence of Group Operating Divisions (GODs). These can nearly almost be considered to be autonomous. But, depend-ent of the statistical needs, it can be necessary to explore the capability of GODs to be “Enterprises” or reversely Enterprises can be defined at a lower level with-in the GODs, keeping the basic principles for criteria to be autonomous. A good conclusion is only possible after consulting the Enterprise Groups and agreeing with it, but with the requirements from statistics in mind.

5.19 The analysis of global enterprise groups should start regardless the territori-al boundaries. If territorial boundaries belong to the organisational criteria of the Enterprise Group, they still have to be analysed to check if they fit with require-ments from statistics. It is often easier to judge that a potential unit is not an en-terprise because it does not fulfil some basic requirements (negative approach) than to follow a positive approach to confirm it as adequate.

5.20 The BR recommendation manual (chapter 19) suggests three different op-erational criteria can be applied to identify an enterprise as autonomous actor in the economic world:

1. An enterprise has accounts at its disposal 2. The operations of an enterprise are managed in an integrated manner 3. The enterprise is market-oriented.

In some way these criterions summarise the more detailed previous treatment related to the aspect of autonomy. Also here the distinguished criteria must be considered in their combination and not solely. See further the BR recommendation manual 201016.

5.21 Identification rules. The following operational rules meet mainly the need to identify autonomous statistical units. The aim is to produce statistical information consistent at EU level, and as close as possible to the economic reality.

16 Business Register recommendation manual, § 19.32.


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Identification rule 1 - A single legal unit not controlled by any other legal units is an autonomous enterprise. Identification rule 2 - An enterprise group (Multinational or National) is auton-omous in itself; it will be equal to an Enterprise if there are no reasons to split it into more autonomous parts. Some groups have a complex structure: under a “financial holding” they can present more sub-groups that operate in different and distinct economical domains. These sub-groups often have sub-consolidated accounts and are listed on a regulated market: Identification rule 3 - In case of a conglomerate group17 each sub-group, if and only if it produces sub-consolidated accounts, has at least to be treated as an independent Enterprise and the intra-flow transactions between the sub-groups are not taken in consideration Some (Multinational or National) enterprise groups (or sub-groups) may decide to organise their activities in different “Group Operating Segments” (“GODs”) or “business lines”. Identification rule 4 - If the GODs are observable (their existence are proved in the reporting system of the Group), they are the starting point to identify and delineate the “autonomous enterprises”. Considering the market oriented criterion: Identification rule 5 - If one GOD inside a Group (or sub-group) represents a way on which the “group” itself performs a specific productive activity (it means that it contains all legal entities and their parts serving to this scope), it will be considered as a separate (autonomous) global enterprise. . Identification rule 6 - If inside a GOD there are more (market oriented) autonomous parts for which meaningful statistical data can be provided, these have to be considered as autonomous units and should be proposed to be global enterprises. Identification rule 7 - If one GOD perform support activities (as ancillary unit: administration, IT, wholesale, transport… or as artificial subsidiary corporation: own land, building, equipment or being nominal employer) for other GODs and the main part (more than 50%) of its transactions is with other GODs it has to be considered as a serving GOD. In this case it is not considered an autonomous enterprise. The outputs of the serving GOD have to be considered as

17 A conglomerate groups exists if the enterprise group is engaged in different activities that have no links except of shareholding with each other: no product, no process, no sales force, no brands etc. in common.


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intermediate consumption for the other GODs and its accounting data have to be consolidated with the data of the autonomous enterprise (global or truncated) it serves, in principle. However, there can be exceptions, e.g. for R&D and for holding activities which are provided at market prices. Here it can be considered to define quasi enterprises, which are dealt with in statistics as enterprises, see rule 8. Taking in consideration the NACE18 manual, the following rule is valid: Identification rule 8 - The R&D activities, if separated business line inside the EG, have to be considered “autonomous” GEN and from there TEN. Where possible the SNA19 and NACE20 manuals should be taken in consideration in the decisions on the establishment of the enterprise statistical unit 5. D. Autonomy at global and national level 5.22 The market orientation is an important criterion to identify the autonomous global enterprises. The question is then: In which market and for which market do we need to define these units? It is possible to speak in terms of local, regional, national, European, global market. In particular, and for purposes of international enterprises delineation, autonomy at global and national level could not be considered in the same manner. The boundaries of the European country have to be taken into account and to be related to the concept of “residence” in the National Accounts. An example can help: A, B and C are three legal units controlled by the same GEG. A and B are manufacturing units; C is a wholesale unit. They are part of the same GOD. The combination of A, B and C has to be considered as one Global Enterprise. A is resident in country X, B and C are resident in country Y. If there are intra-flow transactions between B and C, C can be considered as ancillary unit and the Truncated Enterprise is the sum of B and C. The NACE TEN code = NACE GEN code. If there are transactions between A and C (and not with B) this transactions are import/export activities and they are evaluated at arm’s length (for tax purposes). In this case we still have one GEN with one TEN in country X (legal unit A) and one TEN in country Y (combination of legal units B and C).

5.23 Autonomy at the global level is determining in the delineation of the Enterprise statistical unit GEN. The truncated national or geographical parts of

18 Nace introduction guidelines, § 53 19 System of National Accounts – 2008, 5.21-5.28 20 Nace introduction guidelines, § 77


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this are not necessarily autonomous because these are under the operational leadership of the GEN management, even if these are under local legal conditions. 5. E. Autonomy in relation to the provision of meaningful statistical data 5.24 The provision of meaningful economic figures is the purpose of business economic statistics. The best way to comply with this purpose is to find a fit with the information that is compiled for management purposes within the GEG and for the operational management of it. Also information for shareholders and/or the board of commissioners reflects real information on the operations of the GEG. Managers of autonomous units will have meaningful and detailed in-formation available from accounting systems and from other internal infor-mation systems. The best way to get meaningful data is to connect the need for statistical information to the available accounting and information systems and to extract data from these in data collection. At the highest level and for the Groups Operating Divisions accounting systems are being standardised accord-ing the IFRS, but more detailed information systems related to more detailed autonomous units may be available.

6 Classifications (activity and institutional): which, why, where and how, single and/or multiple? 6.0 As is mentioned in the chapter 3, first of all the statistical units must be con-stituted and established according to the criteria in the definitions. Once these units have been established, the units must be classified according to the appro-priate classifications. The main ones are the NACE and the size-class. In this chapter the issue of the activity classification (NACE) will be dealt with in more detail.

6.1 The issue of activity classification 6.1.1 Concerning the GEGs we face the question on how to classify the global enterprises (GENs) and the national parts (TENs) of global enterprises. As pro-posed in the feasibility study, we will in practice classify the national parts (TENs) either according to the principal activity of the GEN they belong to and/or according to their own activity. This § treats of the justifications to do so, the procedures we propose and the constraints we need to respect. 6.1.2 To begin the analysis, we need, from a conceptual point of view, to create the conditions for gathering significant European statistics, to find consistent solutions for classification:

- In the framework of the presented SU model (see §2.1); - With reference to the NACE prescription (NACE rev2. Chapter 3.1),

which states that every statistical unit is classified according to the fol-lowing rule: “One NACE code is assigned to each unit recorded in sta-


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tistical business registers, according to its principal economic activity. The principal activity is the activity which contributes most to the value added of the unit.”

- By using the method stated in the Business Registers Recommendations manual 2010 (also called “top-down” in the sense that a descending way of the NACE is used in the classification procedure from the sections (capital letters) to the classes (4 digits)).21

6.1.3 In consequence, the activity classification of GENs and TENs needs that we first interpret their definitions and delineation. Thus, the question of classifi-cation is strongly related to the question of autonomy:

- As autonomy is compulsory for each GEN, its classification at its own principal activity is straightforward when delineated, but leaves open the relation with the criteria that are used to identify the autonomy (see the previous chapter 5).The criterion of autonomy is the (only) determining one, but the detail should be the result of analysis and tuning with the GEG.

- As autonomy is often absent in the case of the TENs, we have to treat separately the question of their own classification. But we also have to treat the following question: “how shall we classify TENs of the same GEN in different countries in order to add them up to European aggre-gates consistent with the GENs they belong to”? The answer is in the du-al coding approach, see 6.1.13 and 6.1.14. Note; the major consequence of identifying three enterprise units namely ENT, GEN and TEN22in the work process is that the definition of the TEN as defined in Chapter 3 of the Guidelines can be strictly applied, meaning that the delineation of the TEN will straightforward be derived from the GEN and that the NACE code of the TEN and GEN will be similar. Opposite to what is pro-posed in the Methodology Report, there is no need for dual coding of NACE anymore.

6.1.4 According to the SU model that gives no place to homogeneity, GENs can be homogenous or heterogeneous global units in terms of activity. GENs should be considered to be real actors in the economy, not questioning the homogeneity, but only that on the autonomy regarding the current resources, (see the chapter 5)23.

21 This does not seem to create problems and is explained at the right end of this paragraph 6.1. 22 Notice of intention of the BSDG and DMES on the consistent implementation of Council Regulation No 696/93 on statistical units. 23 As many statisticians link the question of homogeneity to the kind of activity units (KAUs), we can state that the SU model itself does not indicate the relationship of the GEN and the KAU. Thus, from a theoretical point of view, GENs (and TENs) may consist of different KAUs. In profiling MNEs, KAUs and LKAUs are until now considered to be used only at national lev-els. Several KAUs can exist in the same TEN. The 2 issues are let open (not treated) in this re-port.


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6.1.5 The rules concerning the autonomy are, up to now, only related to the abil-ity to decide at least in production and commercial fields for a specific manage-ment that has a reporting system: they lead us to a solution with more heteroge-neous GENs, than previous ways of classification, be they national or not24. For example, if we follow the market orientation criterion that the autonomy implies usually, we cannot consider as a rule that head office activities, R&D activities and all other ancillary or auxiliary activities are autonomous GENs. It is the same for vertically integrated activities, even if they are operated in different countries. Thus, at the same time, those activities need to be included in the GEN or to be defined as separate quasi GENs. 6.1.6 As TENs are simply truncated parts (“local” units, if we state that a coun-try is “one” address) of global enterprises, this implies that we can have only one TEN per GEN and country. There is an analogy for what is currently done when local units are designed from the (national) enterprises. There can be only one local unit in the same address. 6.1.7 In practice, the availability of sufficient accounting-type or production-type data for surveying or gathering administrative files is a leading and substan-tial aspect of the enterprise definition in profiling GENs. Thus, it is to be sug-gested utilising the IFRS when delineating GENs of GEGs, because IFRS im-plies a relationship with the management structure and includes basic infor-mation on operational divisions or segments. The operational divisions are seen as a good starting point for delineating GENs, even if in some case we end with GENs that are parts or sums of them. 6.1.8 In consequence, if we wanted the GENs to be as homogeneous as possible (close to global KAU), we would have to accept less information per GEN for considerably more numerous GENs per GEG than when accepting more hetero-geneous GENs. 6.1.9 Another probable consequence is that, with heterogeneous GENs, the need to split legal units is less likely than with homogenous global GENs. This con-clusion is based e.g. on the assumption that many (but not all) GEGs organise their legal structure as much as possible in coherence with their management scheme. 6.1.10 As a summary about GENs, and to answer to the statisticians’ question about homogeneity, our conclusion is that there is no direct way to include more NACE homogeneity in the GEN definition that the homogeneity potentially exist-ing in the “real world”.

24 It may occur that within GEG operational segments more detailed autonomous parts can be distinguished. These should be taken under consideration then to be a GEN within the GOD. It can automatically lead to a more homogeneous GEN then.


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The solution related to the question on homogeneity should be found in the ap-plication of other and nationally used statistical units which are in accordance and consistent with the GENs and TENs. The existence of KAUs and LKAUs among the statistical units creates the opportunity to gather data based on the wished (more) homogeneous units. 6.1.11 Up to now, the SU model does not give clear lines to determine the prin-cipal activity of the TENs included in one GEN:

- Of course it is possible that TENs are purely internal to a GEG (e.g.: the production plant, which production is sold exclusively abroad via foreign commercial affiliates; other e.g.: a production completely integrated in the GEG by foreign affiliates etc.) => their own activity will compulsori-ly be different of this of the GEN they belong to.

- It is also possible that ancillary or auxiliary productions serve mainly af-filiates of the same GEG s in other countries; we have a turnover, which is not an internal flow inside the country of its production, but which is at the global level of the GEG => their own activity will be among auxiliary or ancillary activities (not displayed at GEN level);

- It is frequent that a TEN involves itself in the (wholesale or retail) distri-bution of products of other TENs of the same GEG => their activity is absorbed by the manufacturing activity at GEN level.

6.1.12 So at the end, the key question remains about whether it possible to create a good system of classification both from theoretical and practical points of view ensuring sufficient consistency between GENs and TENs; this leads to the fol-lowing proposal:

- If the GEN is present in only one country, the activity code of the TEN is equal to that of the GEN by definition.

- In other cases, there is a necessary rule: that the activity code of the GEN is consistent with that of all the TENs together (general bottom up ap-proach in activity classifying).

For this purpose we need to define a decision tree; it could be the following: - Apply the NACE rule directly to the GEN, with predominance in the

analysis given to the marketed activities; 25 - Define all the activities present in the GEN, including the non-marketed

ones (either because they are ancillary or auxiliary, either because their sales are internal to the group, or because they are vertically integrated even in the same local unit);

- Apply the NACE rule to each TEN.

25 In the case of GENs (and only in this case) if ancillary/auxiliary activities or integrated activi-ties have appeared in the process, we suggest that their specific data (on VA for example) will be reclassified with the activity they are used by or in which they are incorporated.


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6.1.13 It is still to be decided which is the best proxy for the VA (Value Added), as well for GENs activities as for TENs: employment, an additive variable, would be better than the turn-over which arithmetic is very complex and not well documented.

- This procedure ensures that the own principal activity of each TEN is, in economic meaning, consistent with the GEN principal activity26;

- To ensure the European consistency of the statistics based on the GEN/TEN principal activity, each NSI should collect both classification: this of the TEN and this of the GEN it belongs to; and make a double set of statistics (a national one based on TENs own principal activities; a European based on GENs). This can be indicated as a dual or double coding approach. This approach can be extended into multiple coding if we need statistical calculations for more than 2 geographical areas, e.g. national, European, global.

6.1.14 Aggregation of national figures according the TENs own principal activi-ties would not fit with EU figures. The dual coding intends to allow:

- A purely national calculation, in which the main activity is fixed accord-ing to the national viewpoint (and consequently may be different from the TEN of a country to the TEN of another in the same GEN: e.g. manu-facturing in one, wholesale in another, the GEN being classified as man-ufacturing);

- A calculation according to the global coding of the GEN, in which all TENs are classified with this only NACE => the EU figure is exactly the sum of the TENs figures belonging to the same GEN, but only for the variables which can be summed up. In the case of variables which must be consolidated like turnover, the meaning of consistency is different. Consolidation has to be applied according to the geographical area for which statistics are being compiled.

6.1.15 The "Top down" (related to the different levels of the classification) method as stated in the Business Registers Recommendations manual 2010: we suggest to use this approach to classify as well GENs as TENs, at their own main activity, in addition to the previous procedure determining their “basic” NACE activities:

"The top-down method follows a hierarchical principle: the classification of a unit at the lowest level of the classification must be consistent with the classifica-tion of the unit at the higher levels".

26 If we found that this top-down procedure is too heavy, in particular for the country of the GDC, we could let each country classify its own TENs; but in this case we would have to build consistent activity tables, relating for example the frequent presence of NACE 2910 Motorcar industry with NACE 4510 Motorcar distribution or selling whether NACE 2410 Iron and steel is consistent with NACE 2550 Stamping


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6.1.16 Below are the steps that the hierarchical principle follows: 1. Identify the section which has the relatively highest share of the value

added. 2. Within this section identify the division which has the relatively highest

share of the value added within this section. 3. Within this division identify the group which has the relatively highest

share of the value added within this division. 4. Within this group identify the class which has the relatively highest share

of value added within this group. The next example illustrates this approach.


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Example: a unit carries out the following activities (shares in terms of value added):

Section Division Group Class Description of the class Share C 25 25.9 25.91 Manufacture of steel drums and similar con-

tainers 10%

28 28.1 28.11 Manufacture of engines and turbines, except aircraft, vehicle and cycle engines

6%

28.2 28.24 Manufacture of power-driven hand tools 5% 28.9 28.93 Manufacture of machinery for food, beverage

and tobacco processing 23%

28.95 Manufacture of machinery for paper and pa-perboard production

8%

G 46 46.1 46.14 Agents involved in the sale of machinery, in-dustrial equipment, ships and aircraft

7%

46.6 46.61 Wholesale of agricultural machinery, equip-ment and supplies

28%

M 71 71.1 71.12 Engineering activities and related technical consultancy

13%

Identify the main section among Section C - Manufacturing (52%), Section G - Wholesale and retail trade; repair of motor vehicles and motorcycles (35%) Section M - Professional, scientific and technical activities (13%). Identify the main Division within main Section C: Division 25 Manufacture of fabricated metal products, except machinery and equipment 10% Division 28 Manufacture of machinery and equipment n.e.c. 42% Identify the main Group within the main Division 28: Group 28.1 Manufacture of general-purpose machinery 6% Group 28.2 Manufacture of other general-purpose machinery 5% Group 28.9 Manufacture of other special-purpose machinery 31% Identify the main Class within the main Group 28.9: Class 28.93 Manufacture of machinery for food, beverage and

tobacco processing 23% Class 28.95 Manufacture of machinery for paper and

paperboard production 8% Therefore the correct class is 28.93 Manufacture of machinery for food, bever-age and tobacco processing, although the class with the biggest share of value added is class: 46.61 Wholesale of agricultural machinery, equipment and sup-plies".


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6.2 The issue of institutional classification The classification according to the SNA and ESA institutional sectors is mainly applied for the Enterprise Group unit. 6.2.1 The present context: The profiling process described previously might be applied to all types of GEGs, including these which participate to the financial system (“financial in-termediation” e.g. banks, insurance or financial auxiliaries). But the financial system is highly regulated, its main activities are submitted to the consent of regulatory authorities prior to their beginning; they are also permanently super-vised by authorities able to set management and structure conditions. In conse-quence the perimeter of the regulated activities is largely in the hands of specific governmental bodies, be they known as “independent agencies”. This perimeter does not evidently fit with the Enterprise Group structure: there is the need of a deep insight in how to define the perimeter of the cluster of control and to delin-eate the Global Enterprise Group. This insight is not yet sufficiently available. According to the SNA and to the ESA, the activity classification of the financial intermediation is combined with their institutional sector classification, different from the institutional sector of other private businesses. Once more, the way the institutional sector classification and the GEG analysis fit to each other is to be elaborated further in the future. For all these reasons, in the initial stage of profiling, it was decided to concen-trate on the private non-financial enterprises sector. But this decision leaves open issues or questions such as what to do with financial parts of non-financial GEGs (or how to deal with significant non-financial parts of financial GEGs, where they are important). In a number of countries (e.g. The Netherlands) the compilation of statistics re-lated to financial institutions is the task of the Central Banks. The NSIs include these statistics as these are in their own statistical system, e.g. the National Ac-counts. On the contrary, over the past few years some NSIs have successfully profiled on a national basis (UK/ONS27), or have taken insight (INSEE28) in, a number of banks, real estate companies, investment companies and other busi-nesses classified in the financial sector. More close cooperation between NSIs and the Central Banks started for the building of the EGR.

27 Including Royal Bank of Scotland, Lloyds TSB, Barclays Bank and Santander-Abbey Nation-al. 28 Including BNP-Paribas, Société Générale


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This chapter will concentrate on concrete questions coming from this context, with the main aim to gather remarks or experience from NSIs. 6.2.2 Facts from experience: - Large GEGs of the financial sector have some of the most complex struc-

tures. This results for example for the UK in the necessity to find several high level correspondents spread over the whole of the country to organize each profile; and in a specific group structure in France , in which the GGH is not a holding as usual, but the largest Legal Unit, simultaneously involved in all its operational activities being thus split in different parts belonging to the various “enterprises” of the Group (the only exceptions of this general implication coming from regulatory forbidding).

- The information coming from private providers is not accurate, as they may treat financial loans as ownership links.

- The respective fields of structural surveys and of administrative (and super-visory) information do not easily fit to each-other; and if so the skills of the “industrial” and of the “financial” staff in the NSIs are so different that dia-logue proves to be difficult

- Nevertheless: - There are significant “banking” or “insurance” activities in non-financial

groups: for financing purchases or for financial management of the inde-pendent dealers in motorcar industry, distribution, for short term or revolving loans in retail networks, for long term financial loans in equipment industries etc.

- There are also very significant non-financial “enterprises” in GEGs that, as a whole, are clearly financial: operational leasing of motorcar, trucks and equipment (computers, machines) often including management, maintenance and staff and not only financing the purchase, real estate management and renting as well as development of building projects and building and con-struction29

- There could be very specific cases such as the “Caisse des Dépôts” in France, which is legally not financial but submits voluntarily to financial and banking regulations and which has also the largest French companies in ven-ture capital (not classified financial by the supervisory regulations), in real estate (rental of offices and housing), “private public local and long distance transportation”.

29 In FR the largest operator in these fields is owned and controlled by a banking group.


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6.2.3 Proposals:

- The list of GEGs to be profiled at European level in the initial stage will not include financial groups (eventual exceptions to be decided).

- Financial parts of non-financial GEGs will be treated at minimum. This includes: a. The delineation, in agreement with the concerned groups, of the

“financial enterprises” (GENs) and, if possible, their links with the Legal Units;

b. The discussion with the concerned services of the NSI and of the Na-tional Bank on the financial cluster;

c. Proposals on how to ensure consistency with NA on the Statistical units and on how to treat eventual secondary non-financial activities in financial enterprises.

7 The core variables and the roles in the BR/EGR context

7. A. Introduction 7.1 We must know ourselves as statisticians: what do we want to collect and what statistical information do we want to compile and publish? We need well defined statistical methodology in terms of units, definitions and so on, but we must also speak the language of the business. We must have knowledge of their accounts, which many times is their source for reporting data for statistics. Core variables in the accounts do not coincide with the needed core variables in statis-tics, like the SBS. So we must be aware of possibilities of translation selected core variables from business accounts variables into statistical variables. Necessity and availability of needed core-variables is the subject of this chapter. A problem that may rise is the splitting of the global data available in the ac-counts of GEGs into national outcomes. Instead of working bottom up from national data into global, it could be preferred to do the other way around, from global into national, and this all in relation to the data collection methods to be used (bottom up or top down). 7.2 In this section the issue is restricted to the core variables related to the Enter-prise Group and Enterprise statistical units. The main focus will be on the Enter-prise statistical unit (Global Enterprise and Truncated Enterprise), but here also attention will be given to their relationship with the Enterprise Groups unit and to the belonging core variables. No distinction is made in the present situation of the EU statistics, because in the present ESS the Enterprise Group is not used in regulations for statistics, although the Enterprise Group is to be included as a (statistical) unit listed in the Business Register.


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7.3 A distinction should be made between statistics describing the production processes (GDP related to income generation) and statistics describing the finan-cial processes (incl. income distribution or distribution of the income generated in the production processes). The distinction mainly relates to the aspects of au-tonomy which can differ for the different mentioned processes. - Statistics on financial processes should be based on statistical units that are

autonomous to the decisions related to the financial processes. These are the Global Enterprise Groups, with a differentiation to the Truncated Enterprise Groups.

- The statistics on the production processes should be based on the statistical units that are autonomous to the decisions related to production processes. These are the Global Enterprise, with a differentiation to the Truncat-ed Enterprises. In this approach, the P&L-accounts (Profit & Loss-accounts) are the main basis for the statistics on the production processes (mainly SBS), so the vari-ables for the Global Enterprise must be collected or calculated statistically from these accounts, with a differentiation to the Truncated Enterprises.

7.4 The Financial Statement (new name for the Balance-Sheet) that traces the Assets&Liabilities-accounts are the basis for the statistics on the financial pro-cesses; so the variables for the Global Enterprise Group must be collected or calculated statistically from these accounts, with a differentiation to the Truncat-ed Enterprise Groups. Variables related to “physical” investment, GFCF, or tangible assets are specific: as mentioned previously they are mostly part of the autonomous decisions of the “enterprises”; but they belong to the balance-sheet accounts. So that we need at least to locate them in these accounts and to translate them from the accounting language to the statistical one. 7.5 If no distinction is made between the different processes, as is not done in SBS a compromise must be found, but it is still useful to have the difference as a starting point. 7.6 For each statistical unit we should establish (see 7.14): - Variables for identification; - Statistical frame variables for underpinning data collection (e.g. for stratifi-

cation purposes) - Variables, also important for statistics compilation (e.g. NACE-code, institu-

tional sector code); - Variables for units’ continuity analysis - Information on mutual relationships of statistical units within the Enterprise

group. These types of variables must be stored in the frame (EGR and/or national BRs). It is to be repeated here that there is a distinction between the core variables which are essential in profiling and the centralised data collection for statistics (which is not profilers’ responsibility).


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7.7 In addition we have to check the availability, at the GEGs or at the GENs and/or TENs levels, of the necessary data for statistics compilation (for the spec-ified stakeholders) related to the adequate statistical unit. Availability can be in direct data collection or by statistical estimation from available records. The next steps of investigation could be: - To check these of the variables that we can find at the GEN or the TEN level

and also these which are not ready-made but could be calculated on request by the enterprises.

- To discuss which is the better way(s?) to gather them for SBS and NA pur-poses.

7. B. Contexts: the BR/EGR and the statistical domains: 7.8 As suggested in the title of this §, core variables are implied in the profiling activities in which they play important roles. Two kinds of roles have to be considered: In the 1st role, some of the variables are usually present in registers; either as

o Identification or checking data, permitting To validate the content of the register and/or To assess the continuity of its units and/or To manage the links between the different kind of units (e.g. en-

terprise with legal units or with the enterprise group) or as o Statistical frame variables, underpinning data collection (e.g. permitting

to split the populations in significant sub-populations - stratification pur-poses including NACE-codes and institutional sector codes - or as crite-ria for sampling purposes)

The 2nd role is specific to the “enterprise” Statistical Unit; this SU is purely sta-tistical, as it will be created to allow a better economic description of the “busi-ness world”, which is no more well described when relying on the Legal Units. 7.9 In this context, it is no longer possible to act as usual on a national basis: ask the reporting units only about the value of such and such variable on the SU they answer for; in this case, it is necessary to split the approach: - First to check if, or not, the variables are available; - And, second, if or not, their value is significant from an economic point of

view. 7.10 Even more difficult, for the 1st time, on an “industrial” basis, the “enter-prise” SU is being tested for its capabilities from an European (and no longer a national) point of view: are we able to describe consistently, through the data we ask them for, GEGs in different countries and their global enterprises; are we also able to split these GENs in their national parts all over Europe, the TENs, and to gather consistent data on the TENs ?


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The consistency is, of course very difficult to assess, and it is the topic of anoth-er ESSnet, whose results will have to be made available and later incorporated into this report30. See §11 for a short description of the relationship between used statistical units in present statistics and related to the ESSnet Consistency. Here, the scope is restricted to the domains of highest priorities, as detected and proposed in the “feasibility study”. 7. C. The main statistical stakeholders31 of “profiling” 7.11 The prioritized list for the survey statisticians is quite simple: - The BR as a whole (including the EGR), as it includes an “enterprise regis-

ter” - The EGR, as profiling is directly in charge of the “enterprise” register for the

“large and complex GEGs”, task including the checking of GEGs clusters, operating and economic structure, and the determination of their principal ac-tivities,

- OFATS (Outward Foreign Affiliate Statistics): o as they are in accordance with their own regulation providing information of affiliate “enterprises” outside Europe of European-centred GEGs; even if we know perfectly that the definitions might be more similar than identical, it would be paradoxical that the FATS statistics remain independent from the BR and EGR; o as they are the best candidates to provide basic significant information on the structure of the medium (and small?) Enterprise Groups for profiling pur-poses.

- SBS the Structural Business Statistics are, according to their own regulation, mainly based on “enterprises”; they constitute the domain which will get im-mediate improvement from the profiling, for use in o its own production of significant data and also as o a predominant provider of information for the National Accounts.

- Other domains are also interested in the profiling results, such as FDI (For-eign Direct Investment) and Balance of Payment statistics; their use is treated indirectly through their relations with the EGR system.

Even if one does not agree with the previous priorities and rank them differently, the results on core variables would not change much. If one thinks of omitted priorities, then the results could change more.

30 Final conclusions of the ESSnet Consistency work package 2 were presented in Vienna 3 and 4 December 2013. As the results of the ESSnet on consistency are available at the same date as this report, this is a task for the years 2014 and on. 31 Stakeholders can be defined in terms of Institutions or in terms of statistics. It is chosen for statistics here. National statistical offices (NSIs) and international statistical bodies like Eurostat, UNECE are of course stakeholders too.


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7.12 The place of National Accounts (NA) is predominant, but nevertheless dif-ficult to assess. - In reality, all links between NA and statistical units (SU) are indirect:

o NA offer statistics of a 3rd type (the 1st is statistical, the 2nd is use of ADMIN data, the 3rd is a kind of synthetic statistics).

o We propose SU for the 1st and 2nd type. - In the world of concepts, the NA need a set of consistent concepts to make it

possible to build their synthetic evaluations; of course, they tend to define themselves this set to avoid their coordination burden to be too important.

- Also in profiling large and complex GEGs the greatest consideration should be given to the manuals of NA; but proposals for changes should be allowed if and when the present (use of the) NA concepts leads to significant incon-sistencies.

- The relationship between National Accounts and Statistical Units, in particu-lar the Enterprise unit, should be assessed more clearly.

7. D. Variables linked to each stakeholder: 7.13 The variables for the most important statistical use are dealt with under this heading, but not in an exhaustive way. Further elaboration should be done else-where and is beyond the scope here. 7.14 BR as an “enterprise” register, also including the Enterprise Group: - Usual identification characteristics, including a name (there is no legal name

for an EG, so this usage name should correspond to the name under which the EG is known and can be publicly identified and/or can be the result of an agreement between the EG and the NSI).

- Relations with other SUs - The link and the composition of (legal) units to be made visible between the

global enterprise and its units on “lower” levels - Including a dual notion of Enterprises (GENs & TENs) 7.15 EGR according to the role it gives to profiling: - The same variables apply on the three SUs (GEG, GEN and TEN), previously

listed for BR, as it provides the “enterprise” register for large GEGs; - For checking GEGs cluster, structure & principal activities: o Delineation of the EG as combination of legal units under common control o Enterprise and its links with Legal Units (if possible as these links make it

possible to monitor the change of usual statistics and surveys based on LeU into the new system based on “enterprises” for those countries which used the legal unit as the basis for the SBS )

o information on size of the SU (to be précised: turnover, employment) - Control variables necessary for IT.


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7.16 FATS - The closeness between O-Fats and profiling is stressed by GEGs during the

contacts with them; this implies that => o OFATS could be replaced by quantified Profiles, in relevant kind of statis-

tical collection strategies; o OFATS could provide the structure of profiles for semi-manual light profil-

ing procedures if extended as well to EU and domestic parts as to foreign parts of the same group (so that OFATS would become a result of profil-ing for the largest GEGs and a source for EGR update for medium size GEGs).

- The list of OFATS permanent variables will be soon completed, even if re-mains under exam in the appropriate committee of Eurostat.

7.17 SBS with 2 strategies:

- Profiling as a provider of a list of SUs for surveying, for using data of administrative files (ADMIN if possible), or matching both kinds of data; with what kind of quality control?

- Profiling in charge of mixed role (register and part of collection): with what kind of cost control?

- Need to check the SBS list (the “regular” and the “specific” by industry) Among the other stakeholders, the case of National Accounts needs a complete study, which is made in the paragraph 7.F. Thinking about consistency between truncated and global level, the attention should be paid to the global perspective! 7. E. The position and needs of the GEG 7.18 The relations with the GEG, in the delineation of enterprises it comprises, have to be direct and confident. Nearly every time the organisation is complex, the GEG representatives ask about what kind of variables we would like to gather on the “enterprise”: their answer on the possibilities to do so might change, according to the type of varia-bles we need. So, it is to find a common European answer to this question, because this would lead to the least burden at GEGs from common European needs. 7.19 What could be the approach to this topic? - If we suppose that in the present situation, many countries rely on “tax office”

data, related to some kind of accounting data or system; - If the providing of (or enabling the SBS to provide ...) basic information to

build the National Accounts (which are balanced in the accounting way) is supposed to be the first priority;

- If we suppose that the SBS statistics (on turn-over, employment, etc.) should rely to the same SUs as the SUs surveyed for NA purposes,

- Priority is given to “accounting type” core variables and rely them first with the SBS core variables.


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7.20 The Variables for reconciliation with SBS statistics, NA use and their links with accounting standards presented here are limited to the components of the Value Added They are elaborated more completely and in more details in the ANNEX III. The needs of NA are usually presented along of 3 different lines: - The components of value added as a source for sectorial accounts (as well by

Institutional Sectors as by industry); - The basic data for evaluation of fixed capital (elements coming from the bal-

ance-sheets or the so-called “financial statement”) - Bases for wealth estimates (coming from the rest of the balance-sheets); these

data could also be useful for checking the fixed capital elements as part of the balanced items of a global account.

Here only the first line is developed. 7.21 The IFRS accounting standard (International Financial Reporting Standard) provides a template of Profit & Losses (P&L) accounts, also for operational segments of a GEG. This is a tentative version of a very simplified data set that try to include enough variables to produce the main aggregates of sectoral ac-counts for NA flows; it includes nearly all variables that appear in SBS require-ments (missing at this moment change in merchandise inventories) plus as few variables as necessary to have complete accounts. These accounts and the data of these seem very difficult to obtain when the En-terprise statistical unit has insufficient autonomy regarding its production pro-cesses from a financial (production process related) point of view, but, in this case, the existence of a specific “enterprise” including holdings, managing activ-ities (and other residual ( mainly auxiliary)activities of the GEG) is very proba-ble; this residual “enterprise” would also include most of the “production’ ori-ented financial-type variables. 7.22 Very important: it works from a by-activity version of the P&L ( in which purchases, wages and salaries, depreciation of fixed capital, etc. are displayed explicitly) and not from the frequently displayed version, which is by- function (in which the main variables are “cost of sales, distribution costs, administrative costs, etc.”). So that the existence (and GEG the agreement to display) of this by-nature version of the accounts is crucial. The beneath table with variables reflect the Enterprise and Truncated Enterprise statistical units, resulting in the operational (truncated) results (remark: in some cases the information of this table is less detailed that requested by the present SBS questionnaire e.g. on splitting between sales of own production, sales of merchandise etc.; the same for inventories):


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P & L by nature (not by function) (consolidated for the GEN or the TE)

Content of the boxes

1st evaluation of VA ( by the production side ) =

“Production” = Proxy of the “Revenue” variable? + pure T-O + other activity products +- produced inventories

T-O (sales to 3rd parties) net of granted discounts & rebates (IAS18) if possible split between sales of merchandise and other sales. Newly produced inventories and fixed assets (incl. grants on fixed assets)

+- Other products and expenses Patent, franchise & brand royalties etc.; more useful if split between products and charges.

- Used purchases - Other external expenses

Purchases of goods (raw material, equip-ment’s and parts etc.), services and mer-chandises, net of in inventories of received discounts and rebates +ancillary costs on purchases (CIF etc.)

2nd evaluation of VA ( by the compo-nents) =

+ Employees wages and salaries Including bonuses and share of results + Taxes on products and indirect taxes +Depreciations Physical and value change

= Current operating re-sult (optional)

Close to net operating result of the NA

+- Other current products and charge Other current non-recurring products &

charges (e.g. sellings of assets, depreciations of goodwill)

Operational result

What is very important here, is that the translation process has begun: the variables in the centre column give proxies to the wished NA-required variables, the left column giving the clue for the calculation of the VA as well by the production side (something close to production less intermediate consumption) as by its components (wages and salaries including social contributions paid on salaries plus “indirect taxes” plus current operating surplus)

8 Classification of changes: which, why and how? Continuity rules. 8. A. Background and context 8.1 The BR recommendation Manual lists all the types of “changes” that can affect the statistical units it comprises. We do not propose to list all types, but only to concentrate here on the changes that affect “Enterprises” and “Global Enterprises Groups”. 8. B. Classification of changes 8.2 The basic general cases of change in GEGs and GENs are described in the following §’s.


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The first case arrives when previously independent legal units come to fall under a common control creating a GEG, with only one management and thus a sole enterprise (§ 8.3). We have then to look not only to the enterprise but also the newly created enterprise group. The second case (§ 8.4) is similar except that 2 or more GENs are created. The third type concerns the cases when a sole GEG is being restructured (§ 8.5). The fourth type concerns the cases when two (or more) GEGs are being restruc-tured (§8.6). We assume without being sure at this stage of having analysed all cases that a combination of simple and/or elementary cases is sufficient to describe the whole real cases that might happen. The full description of these cases will be done from 2014 on in the successor ESSnet of the VIP programme. Having observed what were the GENs/TENs before and after the restructuring is not sufficient, in particular for measuring the business demography: the com-plementary question we have not treated is whether the previous units have all to be ceased and if the following units are all new born? Looking at this question from the other side , the question would be raised as whether some units are “the same” as previously, or in other terms whether the change to one unit has been sufficiently small that it allows to consider it (in relevant cases) as non-significant; in these cases there is a “continuous unit”. The § 8.8 to §8.11 explain the proposed principles and show on selected theoret-ical examples what we mean by continuity. It must be specified that as all business demographer or classificators, we as-sume that the best variable for measuring the size of any change would be the VA. As all others, we have to assume that is it not possible to measure it easily in the elapse time we have to decide on continuity. As all others we will thus use a proxy variable. But because we are concerned by restructuring and because in this context turnover is not additive or easily measurable in case of splitting, the proxy we will use is employment. In the time we had it has not been possible to make our proposal sufficiently consistent with the methods of business demography; thus this is a topic for fur-ther attention. 8.3 Pure birth of a GEG: A GEG is created from “single” legal units32 that were previously independent and thus individually treated as enterprises; this implies simultaneously:

- The "death" of each of the previous GEN/TEN enterprises consisting in one single legal unit;

32 If there was no GEG previously, the creation results compulsorily from the merging of legal units in a GEG.


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- The creation at this date of a new GEG, which perimeter includes all the previous legal units;

- The creation of a GEN which perimeter is the same as the GEG perime-ter;

- The eventual creation of TENs in each country where the legal units op-erate.

There is no suppression of GEGs, because we do not stipulate that a single inde-pendent legal unit is a GEG (contrary to what we do about GENs / TENs) 8.4 Birth of a GEG with autonomous GENs: The basis is similar to the case 8.3. But the new GEG includes several GENs / TENs. If it happens that a GEN is composed of a single previous Legal Unit, then this GEN (which is also a TEN) is in continuity with the previous “enterprise” and equal to the concerned legal unit. The other GENs/TENs are each to be treated as in case 8.3; this implies:

- The creation of a new GEG, which perimeter includes all the previous legal units;

- The creation of GENs which global perimeter is the same as the GEG pe-rimeter;

- Some of the GENs are new (perimeter to be listed); their TENs are to be created in the countries where they operate;

- Some GENs/TENs are in continuity (this implies that each of these last GENs are made of a single legal unit);

- The "death" of each of the previous non continuous GEN/TEN enterpris-es consisting in one single legal unit.

8.5 Restructuring of one existing GEG, that leads to re-profiling:

- A new GEN can be added (0:1); of the previous GEN: is it the same and in continuity or is it a new one?

- A GEN can be deleted (1:0); in the simplest case it is taken over by an-other GEN; is the resulting GEN “the same” as the previous one?

- A GEN can be split (de-concentration) (1:n); same question about the eventual continuity of one of the resulting parts?

- Several GENs can be combined (concentrated) (n:1); idem ? - Several GENs can be restructured (m:n).

For more details about the concerned operation we can refer to the classification and rules of the BR manual.

Anyhow, in all cases, we have to check whether they imply the creation of a new (or of several) new GEN(s), the “death” of one (or several of them) at the date of the operation, but we have also to treat the situation of the resulting: is there one (or several) which is (are) the heir(s) of (a) previous GEN(s) and that has (have) to be treated as continuous?


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8.6 Changes occurring in situations where several GEGs are involved: - The most simple case occurs when a GENs benefits from a spin off to

become a new independent GEG; then there is continuity for the GEN and “birth” of a new GEG. The continuity of the initial GEG after spin off has to be treated.

- The next case occurs when a GEN is transferred without any change from one GEG to another: then there is continuity for the GEN and the question has to be raised for the two concerned GEGs: are they each con-tinuous or is one or the other or are both of them changed by the transfer?

8.7 more complex cases take place when two GEGs exchange GENs or part of GENs to recombined themselves and them on an (m:n) basis as well for GEGs as for GENs. Let us assume that all the cases can be dealt with by a “combinatorial procedure” using the simple cases of the points 8.5 and 8.6. 8. C. Continuity rules 8.8 We now are presenting proposals for continuity or discontinuity of statistical units, with as economic meaning as possible:

- We propose the same rules for GEGs and GENs except that they are ap-plied to the relevant level;

- For more easy understanding, the presentation will apparently rely on “legal units”(named here ULn); but the cases would not be different if we replaced the LeUs by other units (internal reporting units of GEGs; or directly the GENs): these units can conceptually come from legal units by first splitting legal units in (virtual) parts then recombining the (virtu-al) parts in the new type of units;

- The reasoning is based on the idea that the initial units are “givers” and the resulting are “heirs”. If the giver gives the majority of its content to the heir and if the heir receives the majority of its content from one giver, then there is continuity. In all other cases the initial units die and the re-sulting are new.

8.9 The basic general case will describe the transfer of a unit from one GEG (resp. GEN) to another GEG (resp. GEN): The GEGs (resp. the GENs) E1 and E2 do exist before and after the restructur-ing; E1 “sells” its unit UL2 to E2; the question we have to answer is: “are the GEGs (resp. the GENs) E1 and E2 the same after the restructuring, or not?”


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This case is relatively general, if we notice that the previous scheme might cover a lot of different situations: - Partial transfer of one unit from E1 to E2 => the analysis will imagine a vir-

tual break-down of the original unit in two pieces: first piece to be trans-ferred / second piece remaining in E1;

- Creation of E’2: virtual breakdown of E1 (with no content in the 1st period; real existence in the 2nd period);

- Etc. 8.10 The approach of the main “giver” and “heir” GENs (or GEGs) needs further explanation. 8.10.1 The diagram 2 shows a very simple case: in the period N an enterprise (resp. a GEG) E’1 that results from the merger of three enterprises (resp. GEGs) of the period N-1. The small squares are relative to the size of each constitutive unit. Diagram 2.

Clearly E1 is the largest contributor to E’1. It is the “main giver”. E’1 receives more from E1 than from any other giver; it is the heir of E1. But E1 does not constitute the majority of E’1. There is no continuity between E1 and E’1; they are different units and thus they must have a different ID.

N - 1 N

E1

E2

N - 1 N

E1 UL1 UL2 UL3

E’1 UL1 UL3

E2 UL4 UL5 UL6

E’2 UL2 UL4 UL5 UL6

N - 1 N

E1

E2

N - 1 N

E1 UL1 UL2 UL3

E’1 UL1 UL3

E2 UL4 UL5 UL6

E’2 UL2 UL4 UL5 UL6

UL1 UL2 UL1

UL2 UL3 UL3 UL4 UL4

UL5 E3 UL5

E1

E2

N-1

===========>

N

E'1


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8.10.2 The third diagram is nearly the same as the second; with a main exception Diagram 3

E1 remains the “main giver” to E’1. But now its gift is a majority gift: E’1 is the “majority heir” of E1. E1 is thus the “majority giver” to E’1. There is full continuity between E1 and E’1; they must be considered identical; their ID is the same. 8.11 From givers and heirs to continuity33: The proposed definitions are the following:

- The “main giver” is the GEN of the previous period (N-1) that has the maximum economic value of all givers in common with the concerned GEN of the current period. The main giver is always defined. We have to decide what economic value has to be used; the best would be VA but it is probably too difficult to monitor it in BR procedures. The second best is them the employment (on an “fte” fulltime equivalent basis);

- The GEN of the current period is the “heir” of the GEN of the previous period that gives it the most;

- The “majority giver” does exist when a GEN of the previous period gives to its “heir” a majority of the heir’s chosen economic variable of period; there is backward continuity;

- If the gift of its “main giver” represents more than half of its economic value (chosen variable) of the previous period, then the GEN of the current year is a “majority heir”; there is forward continuity

- A GEN of the current period might be new, being the majority heir of no GEN of the previous period.

- When a majority giver gives to a majority heir, then there is a continu-ous GEN (same ID etc);

- The definitions and consequences are the same for GEGs; - They are looked at independently from the GENs they comprise.

33 Note: The actors are difficult to name for which “English” is not the mother language: - Are “giver”, “main giver”, “majority giver” adequate; in French they are called “af-

fluent” name that does exist in English but can also be replaced by “stream”, “tribu-tary”, “feeder” etc.

- Difference between “main” and “majority”? What about “principal”? Needs to be decided commonly, …

UL1 UL2 UL1

UL2 UL3 UL3 UL4 UL4

UL5 E3 UL5

N

E'1

E1

E2

N-1

===========>


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8.12 Examples for explanation: The following scheme (diagram 4) shows a rather simple case: Diagram 4

E’1 is the “majority heir” of E1 which is its “majority giver”: they are one and the same GEN; E’2 is the “majority heir” of E2 which is its “majority giver”: they are one and the same GEN. It leads to a slightly more complex case: Diagram 5

E’1 remains the “majority heir” of E1 which remains its “majority giver”: they are one and the same GEN; E’2 remains the “majority heir” of E2 which is no more its “majority giver”: they are two different GENs.

N-1 N

E1

E2

N-1 N

E1 UL1 UL2 UL3

E’1 UL1 UL3

E2 UL4 UL5 UL6

E’2

UL2 UL4 UL5 UL6

N-1 N

E1

E2

E’2

N-1 N

E1 UL1 UL2 UL3

E’1 UL1 UL3

E2 UL4 UL5 UL6

E’2

UL2 UL4 UL5 UL6


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Then to the next case: Diagram 6

N-1 N

E’1 UL2 UL3

E1

UL1 UL2 UL3

E’2 UL1

UL4

E2 UL4 UL5 UL6

E’3 UL5 UL6

E’1 remains the “majority heir” of E1 which remains its “majority giver”: they are one and the same GEN; E’2 is at the same time the “heir” of E1 and of E2 (no majority heir); E2 is the “giver” to E2, and the majority giver to E’3; E’3 is not the majority heir of E2; This analysis leads to the following list of Units.

N-1 N

E1

E2

E’2

E’3

And finally to an “extreme case”, in which there is no more continuity: Diagram 7

N-1 N

E’1 UL2 UL3

E1

UL1 UL2 UL3

E2 UL4 UL5 UL6

E’2 UL1 UL4 UL7

E3 UL7 E’3 UL5 UL6


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9 Analysis of usefulness of units of the new model for SBS, STS, FATS, Prodcom and NA 9.1 The question of the usefulness of the new unit model and of its ability for pro-cessing statistical data was initially supposed to be one of the most decisive ques-tions for assessing the validity of studies on profiling. In practice, facts happen to be somewhat different:

- At the end of 2013, the European Business Statistics are being re-regulated through the writing of FRIBS as a framework supplemented and made explicit by Commission regulations;

- FRIBS uses the combined results of the ESSnets on Profiling on Con-sistency and on the EGR;

- It appears mainly through the analysis of the ESSnet of Consistency that the present definition of “enterprises” is very similar from its economic interpretation to the proposed one, has been compulsory for 20 years, is poorly applied by the Member States, but is not contested.

In consequence, the application of the unit “enterprise” for publication of the main economic statistics in the EU is no more an issue. 9.2 The main positive or difficult facts happening at the end of 2013 are the fol-lowing: Outward FATS appear to be very close to the necessary inputs for profiling: the UCI is nearly always the respondent; it is required to answer in terms of activi-ties relative to NACE, but often replies according to its “global operating seg-ments”, splitting them by countries of operation; we do not always know how the number of affiliates per activity and country is evaluated since the economic figures concern the segments. Mostly O-FATS may be on one way the result of intensive profiling and on the other way may provide the supplementary information needed for light profiling; considering also the fact that the domestic sources for Inward FATS are sup-posed to refer to enterprises, the use of enterprises for the whole of the FATS seems efficient, allowing to compare the results in a matricidal form. Some changes in the surveying methods are planned that would ease the process moni-toring. The other assessments are being processed through a double type of analysis: 1. A Task Force on Statistical Units gathering country and Eurostat experts

with the coordinators of the ESSnets is preparing the future Statistical Units to be included in the FRIBS regulation; this TF is validating the Profiling ESSnet proposals, expanding it without significant difficulties to the whole productive domain, and finalizing the wording of the definition and of “oper-ational rules” that facilitate their implementation: the list includes the enter-prise group, the enterprise (global and truncated); the kind of activity unit (KAU) and its local part (LKAU) will be part of the SUs, proposed to be used for STS and as inputs for National Accounts, even if probably not com-


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pulsory registered in the BRs; this report will need to be updated in 2014 to be worded in accordance with the results of the TF foreseen mid of the year;

2. “FRIBS packages” are being drafted for each statistical domains, that include a lot of technical specifications including the SUs to be used in each of them; the preliminary drafts of these packages do not show dramatic conceptual is-sues but lead to the emergence of implementation problems of the same kind as the country consultations comments.

Eurostat has also launched a series of country consultations on the future of Busi-ness Statistics, domain by domain and at the BSDG level. As awaited, the imple-mentation comments and issues are numerous. Apart from costs and financing, which is a prominent question but not relevant to the “methodology” as such, and from the breaks in series to happen when and if the SUs or their use are changed in any BS domain, the remarks seem to concen-trate on the difference between Statistical Units / observation units and reporting units: until now it was easily possible to do as if the three types of units are the same:

1. The use of Legal Units in most countries gave the appearance of units having accounting reports (considered as statistical basis), official representatives al-lowed to “sign” answers (reporting) on apparently adequate figures (observa-tions).

2. The for more economically significant but less legally defined (except in ac-counting topics) units in a context of administrative liberalism makes it nec-essary to treat explicitly the difference between who reports, on which ob-served but eventually not desired units (e.g. Legal Units figures can be used as intermediate stuff to estimate “enterprise data” on the base of “core varia-bles” computed by the GDC at request of GDC NSIs as well for GENs as for TENs).

The proposed concepts need a re-examination of the process not only for apply-ing the “top-down” approach in delineating the units but also for the collection of data in all and every statistical domain. Last but not least, the case of Prodcom for which even presently the coherence with SBS and STS is specific will need very specific analysis. 9.3 A permanent and very strategic question has to be answered about the links and coherence with the National Accounts. NA are supposed to use mostly the LKAU in the production estimates, historically because LKAUs were (supposed to be) the place where outputs were produced from their inputs according to pro-cesses described in quite stable NA “technical coefficients”. This analysis should be questioned when globalisation reigns in physical production, destroying this technical approach at least in any individual country; the ESSnet on Profiling is in no case legitimate to do so but can report such questioning when it comes from the main NA authorities, which is the case.


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The same ESSnet is fully legitimate in its role when it stresses the synchrony of statistics: we are now preparing the BS backbones for the years 2020, used in NAs probably not sooner than 2025; the questioning is then about what will be the units the ESA will want to use in 1 decade and 1/2. The answer cannot be straightforward; it cannot be either: nothing will change. Then what is the most important: try to stick to technical coefficient (which is anyway impossible in the present ESA/SNA because reference is made on the owner of the products and no more on the physical flows)? Try to describe better local and global pro-duction (what the links between global and truncated enterprises allow)?

At the end of 2013, contact is being made between the conceptual assemblies of National Accountants and the Profilers supporting bodies. No solution yet; but promising discussions.

10 The concept of autonomy related to main information and variables: meaningfulness and availability of necessary information/data. How relates global autonomy to geographical autonomy at GEGs? What are the conse-quences? 10.1. Autonomy at the global level is determining in the delineation of the Enterprise statistical unit GEN. The truncated national or geographical parts of this are not necessarily autonomous because these are under the operational leadership of the GEN management, even if this is under local legal conditions. 10.2. The provision of meaningful economic figures is the purpose of business economic statistics. The best way to comply with this purpose is to find a fit with the information that is compiled for management purposes within the GEG and for the operational management of it. Also information for shareholders and/or the board of commissioners reflects real information on the operations of the GEG. Managers of autonomous units will have meaningful and detailed information available from accounting systems and from other internal information systems. The best way to get meaningful data is to connect the need for statistical information to the available accounting and information systems and to extract data from these in data collection. At the highest level and for the Groups Operating Divisions accounting systems are being standardised according to the IFRS, but more detailed information systems related to more detailed autonomous units may be available. 10.3 The consequence of the fact that TENs are not autonomous necessarily is that the treatment of the TEN is different for national and supranational statistics. This becomes evident in the use of multiple coding and the use of different classification codes depending on the kind of statistics, national or supranational.


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II Consistency and breaks Aim: To enlarge this assessment of the present theoretical or used statistical units (e.g. present enterprise, KAU and eventually LKAU) through a contribu-tion to the ESSnet on Consistency, in accordance with the domains it will choose (SBS, STS etc.)

11 Relationships with used statistical units (ENT/KAU/LKAU) in present statistics (SBS, STS, FATS, Prodcom, NA) and related to Consistency ESS-net 11.1 The “External study on detail evaluation of the legal acts in the areas of statistics which were identified by member states as areas to revision” (main authors: Dr. Josef Richter, Christian Engelage, Peter Thomas) provided a useful synoptic overview (para 2.2.2.1.) in which were described all the statistical units used in the various statistical domains. Briefly, the situation can be summarized as follows:

• SBS: mainly enterprise and KAU for some specific module; • STS: KAU (for Industry and Construction) and enterprise (Retail Trade

and other services); • FATS: enterprise (the resident enterprises for Inward; non-resident en-

terprises for Outward); • Prodcom: enterprise; • NA: Institutional Unit (the enterprise is considered as an institutional

unit) and the Establishment (it corresponds to Local KAUs). 11.2 “ESSnet on consistency of concepts and methods of business-related statis-tics - 2010 project on statistical units” launched an inquiry at the end of October 2011 through a web-based questionnaire to identify and analyse different typol-ogies of inconsistencies. The sections of the questionnaire were related to the statistical domains under investigation and each section of the questionnaire was composed of modules, one for each investigated unit, Legal Unit (LeU), Enter-prise, Local Unit (LU), Kind-of-Activity Unit (KAU), Local Kind-of-Activity Unit (LKAU). The compilation of the questionnaire was open to the 27 Member States of the European Union and to the EFTA Countries. 11.3 The main results of the survey were disseminated with the document “ESS-net Consistency Deliverable 3.2 - Identification and evaluation of Member States inconsistency – Part 1 – (July version / Version 1.4)”. Part of these results may also be used to better understand the actual situation in the use of the statistical units and their relationships in the present statistics. In particular, it is important to underline as: • The identification of LeUs and Enterprises is generally seen as a BR task. In

fact, “out of the total respondent countries, 71% of the SBS experts take the list of the enterprises directly from the BR without any further manipulation


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and the other five countries use the BR as the main frame and they just com-bine it with the information coming from other sources”. For STS statistics the use of the statistical unit “Enterprise”, even when not mandatory derives from lists identified by the BR without any further manipulation.

• “13% of the countries consider each identified legal unit as a productive unit without further analysis while more than 80% of countries say they perform further analyses to understand how the unit is actually productive, above all by using sources that could give this information (45%) or by using thresh-olds of certain variables (42%) or profiling methods (35%). About 52% of the countries perform some activities to combine legal units in enterprises when they consider them “not autonomous”, nevertheless actually only 30% of the countries carry out a complete analysis and apply in practice the procedure of profiling in a “strict” sense. They represent 20% of the total enterprises and 18% of total European employment”

• KAU is implemented in the Business Register of 11 countries even it is not required by Regulation; “17 countries use KAU to produce SBS statistics (required by regulation), 13 countries use KAU to produce STS Industry sta-tistics (required by regulation) and 2 countries use KAU to produce other STS statistics (not required by regulation).” “15 countries do not have KAU or Lo-cal KAU on their Business Register”

• “The information on Local units is mainly issued from BR experts (27 coun-tries)”.

• “The first part of the National Accounts questionnaire contains the statistical unit used for compiling national production accounts. 71% (17 countries) an-swered that they mainly use enterprises or legal units. The remaining 29% (7 countries) mentioned that they compile their National Accounts on the basis of KAUs or Local KAUs”

11.4 It clearly emerges that the BR plays a central role. The enterprise delinea-tion (seen as a task of the BR) carried out by the profiling activity may deter-mine an impact in all the main statistical domains. However, compared to profil-ing approaches in practice today – considering the main aspect of the model (see chapters 2 and 3) – the profiling approach proposed by this report introduces an international dimension. While leaving the same links among the Enterprise Group, the Enterprise and the Local Unit, the proposal makes no references for the statistical units KAU, LKAU, UHP). 11.5 For further details on the possible approaches to afford the data collection problem especially for SBS and FATS domains see the paragraphs 7C, 7D and 7E. See also chapter 9 for the analysis of the usefulness of units of the new mod-el for the main statistical domains. 11.6 The proposals of the ESSnet on Consistency regarding statistical units’ def-initions have been passed on to a Task Force on Statistical Units which has been launched by Eurostat. The Task Force gathers experts of statistical domains at


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Eurostat and experts of statistical units and business registers from some mem-ber states – among which also participants of the two ESSnets on Consistency resp. on Profiling. This Task Force shall provide the wording of the definitions which shall be included in the coming European Framework regulation for Inte-grated Business Statistics (FRIBS) and the operational rules for the application of the renewed definitions. The work of the Task Force will go in year 2014 since it proved ambitious to work out new definitions and operational rules which take good care for all the interdependencies which exist between the sta-tistical units.

12 Analysis of potential breaks in time series in changing the used units, aspects of continuity and consistency; implications of changing 12.1 Profiling activity, national or multinational, meets the need to treat the complex situations in which the statistical unit “enterprise” is built as a combina-tion of several (more than one, numerous) legal units. The result is the creation of a unit closer to the economic/organizational world rather than to the adminis-trative one. For GEGs acting in a global perspective with hundreds (or thou-sands) of Legal Units (LeUs) often created for fiscal/administrative reasons, pro-filing is the proper tool to make a better description of the activities carried out. 12.2 The top-down approach followed for the GEGs profiling activity introduced a double view of the statistical unit “enterprise”: the “global enterprise” (GEN) derived from the operational segments disclosed by the group itself and the “truncated (national) enterprises” (TEN) which are the truncated national parts of a global enterprise. Operationally, the first step is the delineation of the GEN and the second is the identification of the TENs as the national parts of the GENs both options recommended in the Feasibility Study (Options D and E WPA – SGA 2010)34. 12.3 Following the manual European profiling approach adopted in the ESSnet it is necessary to take into account three elements that can produce substantial ef-fects: 1) The global view; 2) The possibility to split legal units into several enterprises; 3) The accounting data consolidation to prevent double-counting.

34 Option D - Profile at the global group level and derive and classify GENs at the global, and TENs at the national, level centrally by the NSI of the GDC. Pass the TENs and the list of legal units for each country to the relevant NSI for use as supplied in the national business register and for data collection. Option E - Create GENs and collect data centrally and apportion to the national level, where a GE includes activity for more than one country. There would be no link to the legal units other than at the global group cluster level.


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- The first effect is due to the fact that starting from the group perspective, even if it is a combination of single legal units, the global view is conceptu-ally irrespective of national boundaries.

- Furthermore the single legal units may contribute to more than one enter-prise (second effect: one to many relationships). In that case the links are not referred to financial or controls ties but they are only related to the actual economic structure of the enterprises within the group.

- The application of a top-down method leads to a data consolidation of the intra-group flows (or better intra-GEN flows). If IFRS standards are fol-lowed they represent a very helpful standard. Considering the business op-erating divisions introduced in IFRS8 principle35 the perspective changes in favour of the group view in comparison with the legal or administrative cri-teria, until now mainly adopted for the enterprise delineation. Anyway pro-filing activity is independent of the application of accounting standards (IFRS, GAAP) and it could be possible to obtain the same results also with the “traditional” financial statements or adopting another (e.g. bottom-up) approach in close cooperation with the GEG.

12.4 The application of the manual European profiling produces results differing from those obtained with the classic and frequent present situation in which each legal unit is entirely comprised in a single enterprise. Such approach determines consequences in terms of the treatment of legal units (especially for units per-forming “ancillary” activities): - The delineation of statistical units (impact on the structure of the BR); - Stratification characteristics (for example NACE codes, size class); - Values of variables (for example, number of persons employed, turnover). 12.5 Profilers from GDC Countries produce the first “global” view. Considering the situation in which the financial statements are useful, the NSI responsible collects the data for the Global Enterprises (GENs) starting from the consolidat-ed balance sheets (that means eliminating the intra-group flows) not considering the national boundaries. The result is that the pure sum of the national results (for example for the EU Countries) for some variables can never be equal to the values obtained considering the GENs. So if the minimum requirement for GEN was a principal activity code, an estimate of the employment and the turnover, the differences with the aggregation of the National data would be the following: • “Global” NACE code could be different from the national (change of view);

there could be two extreme situations: a group operating in the same way in all Countries (=> global=local NACE code for all the Countries and for thee GEN); a group with the principal activity only in one Country (global=local

35 The core of the principle is “disclosing information to enable users of the financial statements to evaluate the nature and financial effects of the business activities in which the groups are engaged and the economic environments in which they operates”


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only for one Country36). In practice, GEGs are within the extremes and it is advised to adopt a dual-coding system especially necessary in the application of Option D to permit calculation of European aggregates (see paragraph 6.1). But, apportioning data for all the Countries in the option E should also be supported by a careful evaluation of the GEGs organisations.

• The employment values are the same if we consider the entire group: sum-ming national data or GENs values must produce the same result. But if we consider the variable “employment for each activity” the results could be dif-ferent because GENs are created in a different manner.

• “Global” turnover is necessarily different from the pure sum of national data both for the entire group and the enterprises: in contrast to what happens for the employment the accounting consolidation produces lower values than the summary; considering the single GEN the effect could be different because the reduction due to the consolidation could be balanced from the legal units’ aggregation.

12.6 The second task of the profiling team of the GDC Country is deriving the TENs both for Option D and E. Ideally the TENs would be the unit for statistical surveys but they need to be able to provide the full set of accounts. This is possi-ble if the TENs comprise whole Legal Units that have the ability to provide ac-counting data for statistical purposes37. 12.7. Going down one step more towards the national level, the effects are both in the GDC Country of the GEG and in the other Countries. In the majority of the cases (when TEN = sum of LeUs) the profiling activity brings to the aggre-gation of different legal units. Only in some cases, also a split of single legal units will be needed. Taking into account the national dimension, the values of the economic variables are produced after consolidating the intra-group flows within each different Country. The potential breaks in changing the used units should then be the fol-lowing: • A reduction of the total number of “enterprises” in the BR. • Changes in the structure of the BR in terms of size classes (increase of the

share of large enterprises) • A simplification in terms of NACE codes scattering: if the statistical units are

considered as complex units performing a principal and some secondary ac-tivities: 1) The TENs are generally38 larger than the “traditional” units (in relation to their principal NACE code);

36 In very extreme, but exceptional cases the GEN NACE code could be different of the NACE codes of all the TENs it comprises 37 Until now, with the exception of a few “European companies”, LeU are nationally defined 38 Generally for the TEN’s employment the final result is an increase but the effect is uncertain when we compare the previous situation (LeU=Ent or national profiling with LeUs’ combina-


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2) “Support” units or ancillary units, often of small size, disappear. • A break for the turnover time-series due to two main effects:

1) An increase due to the aggregation of legal units previously coded in a dif-ferent way (or aggregated in a different way from national profiling activity); 2) A reduction due to the intra-group flows detection.

For turnover, the final result is globally lower than the turnover coming from bottom up procedures; but it may be higher or lower on each NACE code de-pending on the impact of detailed intra-group flows. 12.8 For the other Countries manual European profiling needs also a preliminary evaluation of the TENs. Broadly, the steps for non-GDC partners after receiving their own truncated parts are: • Evaluating the delineation structure; could be the TENs the unit for statistical

surveys? Is it possible to collect data in that way? • Comparing national and global NACE code; is a dual-coding system neces-

sary (or sufficient) to guarantee coherence at the national level? • Comparing the structure and the values (12.7 para): different number of en-

terprises (and LeUs); NACE changes; different values. 12.9 It deserves a speech in part the evaluation of the value added (VA) as result of the profiling activity. In the 6th chapter of this report (The core variables and the roles in the BR/EGR context) and in the more comprehensive annex III the core variables implied and their roles in the profiling activities are described. Data consolidation (global or national) means deleting the intra-group flows for some variables and summing for others. In theory VA does not change. In fact, if we consider the simple case in which only two LeUs constitute an enterprise the situation may be described as follows: • LeU A (NACE Section C, manufacturing) sells all its output to LeU B

(NACE division 46, wholesale); • Purchases of goods (costs) for A:100; • Production of A= Purchases of goods (costs) of B: 120; • Production of B: 160; • Evaluation of VA by the production side (simple hypothesis Production-

Costs) for the aggregation of A and B: (120-100) + (160-120) = 20+40 = 60. The GEN obtained from the manual European profiling is classified in section C and deleting the intra-group flows VA=160-100=60: the value added does not change. But which is the situation in terms of NACE codes? In the “traditional” view 20 is for Section C and 40 for Division 46; after manual European profiling 60 is for Section C. So if the total (for a Country) value added is built for aggre-

tion) with the manual European profiling results in which the LeUs are split into more enterpris-es.


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gation weighting in a different way the values in terms of NACE codes, manual European profiling also determines a change for the variable “value added”.

III Consolidation aspects Aim: The consistency of information collected at the different levels of the groups should be considered and the potential sources of inconsistencies be-tween the data produced at the different levels should be explored (this case in-cludes a possible insight into External Trade in goods and services).

13 Description of basic organisational principles of large GEGs and the appearances of these 13.1 The questions concerning basic organisational principles of large and com-plex GEGs refer more to the economic or the management science than to the statistical studies. But, as previously stressed, our aim is to describe the “real economic” world, and not exclusively the legal organisation. Knowledge on or-ganisational principles and the reasons for creation of a legal structure within a group give first holds for the statistical approaches. In this context, we could easily conclude that, according to the large variability of managerial structure, each GEG case is specific. So, prior to the pure statistical work, let us go for a very short while into an in-sight of the “reasons” for an EG to become “large and complex”. There are many books on organisational issues of companies, also in relationship with ac-counting, but for the purposes of profiling it would be interesting to have means and criterions for groupings according different motivations. 13.2 The enterprise group can be motivated by the following looked for effects: 1. Industrial leveraging effect of scale These effects tend to promote a world-type organisation, in which each country plays a role very specific according to its economic advantages; the management is usually either centred on “business lines”, the production of each country be-ing integrated in a global process or of the “functional type”, with stress put on the “markets” and on the supply chain, which leads to great difficulties to de-scribe the production and to apportion it country by country. They can operate on:

- Procurement and/or logistics - Manufacturing - Back-office and ancillary services - Use of R&D results (patents, process, models)

2. « brand » effect of scale These effects lead to a “distribution” model, reproducible in each country, not compulsorily related to a unique or united production model; it can be also used in a franchise type of development, in which the “autonomy of the franchisees can be interrogated.


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They can operate on: - Advertising (world brands) - Relations with other GEGs (global contracts) - Human Resources (attraction effect)

3. Financial effect of scale Their priority is not the costs or the efficiency of the GEG (industrial) or its dis-tribution (“brand”) but the financing of its activity. They can operate on:

- Lending and borrowing (leveraging?) - Using fiscal benefits and/or (in combination with) relocation.

13.3 Reversely, the enterprise group can meet conditions that lead to a “regional and/or local type of organisation”: 1. The nature of goods and services traded

- Small unitary price of goods (forbidding long distance transport and leading to local production; but the production processes can be world-wide) - Maintenance and repairs (similar to previous point) - Services to persons (as well personal as relative to persons) (having also to be produced locally and commonly also related to local habits or culture for-bidding integration of process management)

2. Necessary local distribution (can supplement the alinea 1, or be specific) - Of perishables (as varied as fruits, cement …) - With advice or fitting (clothes) - Etc.

3. Specificity or constraints of (local) regulations - Regulated activities (e.g. fix or mobile phone, broadcasting etc.) - Services of most professionals - Etc.

13.4 The previous effects can combine; after combination, they produce typical appearances of GEGs that we will try and describe more precisely through our testing experiences. The result of testing will be included in the “manual” of profiling as guidelines to profile in concrete situations. At this stage, we can list examples of what we think to be in force in some in-dustries: 1. Pure industrial effect: Motorcar construction industry / High value industrial edibles (chocolate, solu-ble coffee, etc.) / Iron and steel producers 2. Industrial effect combined with nature of products: High unit value construction materials producers (even in this case they remain “heavy” products / Escalator constructors (to be locally installed according to local regulations) 3. Industrial leveraging effect combined with « local» regulations (networks, defence) Defence industry / Pharmaceutical distribution / Fix and mobile phone (seem to be all organised on regional basis even if all the techniques are global).


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4. Pure financial: This effect results in conglomerates (highly diversified GEGs), that have no de-scripted cut-offs with investment funds. Tests will try to reveal significant limits (if no combined system of reporting, no synergies between the different activi-ties, no common general staff, no share of treasury => the different segments will be considered as independent “EGs”.

14 How relates consolidated information at the (global) group-level to required geographical statistics? How to decompose and how to deal with internal flows of goods and services within global groups, including the aspect of transportation? 14.1 As emerged in different parts of this document, shifting from the global to the national level produces additional problems of data consolidation. In fact, accountants’ concepts are irrespective of the national boundaries while the statis-tics are mainly produced for the national level. There can be several situations in which the various ways to consolidate the data may determine very different results (see also Annex 6 for a comprehensive example). 14.2 At the global level there can be two situations:

a) The GENs correspond to the operating divisions disclosed in the con-solidated accounts;

b) The GENs are different in comparison with the divisions and they are the result of the agreement with the group.

In the case a) the global values are consolidated and available in the annual re-ports. In the case b) data supplied by the group should be consolidated and avail-able via direct contacts. In both cases it is not required for the NSIs an additional effort to treat the intra-group flows. At least it could be necessary to start from the “core variables” to estimate some others. 14.3 According to the geographical area under examination, data consolidation affects the national level (TEN) but also other kind of aggregations (EU for ex-ample). Data can be obtained directly from the groups (if mandatory) or estimat-ed by the NSIs treating the intra-group flows. In both cases it should be clarified what it is meant with “intra”. In fact, TEN values may be obtained by a data consolidation:

a) Within the truncated group (treating all the flows among the units of the truncated group);

b) Within the single enterprises (TENs) of the group (treating the flows towards other enterprises of the same group as a third parties flow).

14.4 Testing activities showed as the treatment of the intra-group flows is one of most difficult aspects of the approach and also in other experiences outside the EU the measurement of the intercompany transactions is considered from many years as a very complex task. In practice, for the TEN level, groups were asked for a supplementary job: producing consolidated values or supplying to the NSIs


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with all the flows. With the second option the NSIs accept to produce in house the “core variables” for their respective TEN. Avoiding any kind of evaluation of this option, before deciding the in house treatment NSIs should also consider the problem of the sources potentially useful to collect the intra-group flows without involving the group. 14.5 The accounting principle “IAS 24 Related Party Disclosures” has the ob-jective to “ensure that an entity’s financial statements contain the disclosures necessary to draw attention to the possibility that its financial position and profit or loss may have been affected by the existence of related parties and by transac-tions and outstanding balances, including commitments, with such parties.” (http://ec.europa.eu/internal_market/accounting/docs/consolidated/ias24_en.pdf) A related party is “a person or entity that is related to the entity that is preparing its financial statements (in this Standard referred to as the ‘reporting entity’). (a) A person or a close member of that person’s family is related to a reporting entity if that person:

(i) Has control or joint control over the reporting entity; (ii) Has significant influence over the reporting entity; or (iii)Is a member of the key management personnel of the reporting entity or

of a parent of the reporting entity. (b) An entity is related to a reporting entity if any of the following conditions applies:

(i) The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is relat-ed to the others).

(ii) One entity is an associate or joint venture of the other entity (or an asso-ciate or joint venture of a member of a group of which the other entity is a member).

(iii)Both entities are joint ventures of the same third party. (iv) One entity is a joint venture of a third entity and the other entity is an as-

sociate of the third entity. (v) The entity is a post-employment benefit plan for the benefit of employees

of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are al-so related to the reporting entity.

(vi) The entity is controlled or jointly controlled by a person identified in (a). (vii) A person identified in (a)(i) has significant influence over the en-

tity or is a member of the key management personnel of the entity (or of a parent of the entity).

A related party transaction is a transfer of resources, services or obligations be-tween a reporting entity and a related party, regardless of whether a price is charged.” 14.6 The principle requires that “Relationships between a parent and its subsidi-aries shall be disclosed irrespective of whether there have been transactions be-tween them. An entity shall disclose the name of its parent and, if different, the

http://ec.europa.eu/internal_market/accounting/docs/consolidated/ias24_en.pdf


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ultimate controlling party. If neither the entity’s parent nor the ultimate control-ling party produces consolidated financial statements available for public use, the name of the next most senior parent that does so shall also be disclosed”. The disclosure required by the principle “shall be made separately for each of the following categories:

(a) The parent; (b) Entities with joint control or significant influence over the entity; (c) Subsidiaries; (d) Associates; (e) Joint ventures in which the entity is a venturer; (f) Key management personnel of the entity or its parent; and (g) Other related parties”.

Examples of transactions to be disclosed if they are with a related party are: (a) Purchases or sales of goods (finished or unfinished); (b) Purchases or sales of property and other assets; (c) Rendering or receiving of services; (d) Leases; (e) Transfers of research and development; (f) Transfers under licence agreements; (g) Transfers under finance arrangements (including loans and equity contribu-

tions in cash or in kind); (h) Provision of guarantees or collateral; (i) Commitments to do something if a particular event occurs or does not occur

in the future, including executory contracts (recognised and unrecognised); and

(j) Settlement of liabilities on behalf of the entity or by the entity on behalf of that related party”.

14.7 Thus, for the units that adopt the IAS principles is possible in theory to col-lect all the necessary information to treat the intra-group flows. It is possible to achieve the result with the direct use of clerical staff engaged in the annual re-port analyses or acquiring external data base. In that latter case it is important to consider that generally accounting data recorded by private companies relate to P&L and Asset Liabilities schemes while this information are disclosed in the Notes of the Reports.


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IV Modes in profiling Aim: To elaborate further the different approaches to profiling (mainly through description of the use of top-down and/or of bottom-up procedures)

15 The standard and basic steps in profiling large and complex GEGs

15.1 Methodologically the basic steps in profiling large and complex enterprise groups (GEGs) are: - Selection of the GEGs to be profiled - Defining the GDC, that determines the responsibility for the profiling of the

GEG - Desk preparation: - Collection of information on the legal structure, using EGR data - Determination of the countries in which the GEG operates, and so deter-

mination of the NSIs involved - Collection of information on the operational structure of the GEG, using

the annual reports and information at GEG websites - Collection of the GEG information that is already available at the NSIs

(e.g. from surveys) - Analysis of the relationships between the legal structure and the opera-

tional structure. If these are not clear, priority should be given to the op-erational structure of the GEG

- Analysis of the role and place of the GEG in statistical outputs (uses) - Informing the GEG management at the highest level as possible by the NSI

at highest level as possible on the plan for profiling the GEG and explaining the goals and procedures of it.

- Drafting a first proposal for the profile in terms of statistical units (global Enterprises)

- Informing for comments the NSIs of EU-countries in which the GEG oper-ates on the draft profile

- Discussing the proposed profile with the GEG - Proposal is in accordance with reality - Autonomy of the proposed units regarding production processes (allocat-

ing current resources) - The availability of the core variable data items (see chapter 4) - Possibilities of the GEG to split global enterprise data according the

truncated enterprises, what means according the countries in which the global enterprises are operating

- Discussing the reporting and observation structure - Discussing the way of maintaining the profile - Discussing the management of relationship between the GEG and the

NSI - Discussion and final agreement with the relevant NSIs as to the structure of

the global and truncated enterprises for profiling


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- Formal agreement between NSI and GEG on the statistical units’ structure, the reporting structure and the structure for observation. This agreement should be formalised and approved by a contract or a formal letter, to be drafted and sent by the NSI

- Information on the profile and contract to the users in the NSIs (all NSIs of countries in which the GEG operates)

- Evaluation and regularly check of the profile, both with the GEG and the users

- Update of the profile if necessary. Update also includes confirmation of ex-isting profile.

The presented steps are according the Deming quality circle: plan, do, check, and act. Procedures and guidelines for this will be prepared in the work package C.

16 Quality in profiling: what information should be available at the end of the profiling process Profiling is intended to delineate enterprises, global and truncated, and to gather information for these enterprises or at least to ensure that the defined enterprises are suitable for collection purposes. Profiling is a cooperative activity in which each partner has a responsibility in the quality of the final product of profiling. In this process, however, the country of the GDC has a special role and the final responsibility of the quality of units defined. This quality will rely not only on the direct usability of released information but also on its capacity to help part-nering countries in building business statistics based on these units. On that re-gard, SBS and FATS statistics should be served in priority. 16.1. Quality in statistics is an important concern of the European Statistical System. The quality criteria are included as principles in the European statistics Code of Practice that is the result of a common agreement between the National Statistical Institutes and Eurostat. They are detailed in the ESS handbook for quality report (Eurostat publication – 2009)39. These criteria generally apply to the output of the statistical process. However, it is possible to interpret them in the context of profiling. Some of the aspects are more relevant in this context: 16.2 Relevance is defined, in the ESS handbook, as "the degree to which statisti-cal outputs meet current and potential user needs”. This criteria fits with the pro-filing context since profiling intends to define units that are useful for the users both national and European. The Truncated Enterprises should be recognized by the business statisticians as statistical units to be used in building business statis-tics in the case of global enterprise groups.

39 The definitions given in the document are extracted from the ESS Handbook for quality report


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16.3 Accuracy and reliability: "The accuracy of statistical outputs in the general statistical sense is the degree of closeness of estimates to the true values." This criterion can be translated in profiling by the condition that the statistical units defined through profiling should represent on a proper way the national and Eu-ropean production systems and be usable for production of statistics. They should be complete and the result of profiling should cover all the productive activity of the GEG. 16.4. The "timeliness of statistical outputs is the length of time between the event or phenomenon they describe and their availability. Punctuality is the time lag between the release date of data and the target date on which they were scheduled for release as announced in an official release calendar, laid down by Regulations or previously agreed among partners." The timeliness requires the enterprises defined through profiling to be updated regularly. The punctuality means that deadlines for profiling need to be estab-lished in order to provide the business statisticians with the information in time for their needs. 16.5 "Accessibility and clarity refer to the simplicity and ease with which users can access statistics, with the appropriate supporting information and assis-tance." This criterion is more related to the availability of profiling information rather than to the profiling process. However, clarity implies that the profilers in the different countries follow the same rules and the same conventions in order to be understood by the others. An important quality characteristic for profiling is that the process and its results in terms of “enterprises” are easily understandable by the respondents them-selves; thus the business officials are able to monitor the updating of the whole process and to be committed to do so. 16.6 "The coherence of two or more statistical outputs refers to the degree to which the statistical processes by which they were generated used the same con-cepts - classifications, definitions, and target populations – and harmonised methods. Coherent statistical outputs have the potential to be validly combined and used jointly. Examples of joint use are where the statistical outputs refer to the same population, reference period and region but comprise different sets of data items (say, employment data and production data) or where they comprise the same data items (say, employment data) but for different reference periods, regions, or other domains. Comparability is a special case of coherence and re-fers to the latter example above where the statistical outputs refer to the same data items and the aim of combining them is to make comparisons over time, or across regions, or across other domains." The result of profiling should introduce more coherence and comparability in business statistics based on the new defined enterprises: the priority has been given to coherence between countries - for describing the same GEGs - and in each country between domains - which implies that the enterprise units are prominent part of the business registers.


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In consequence, in order to reach these goals, profilers should be coherent be-tween each other in their profiling practices in order to keep the global coher-ence that comes from the central treatment of a GEG. 16.7 The quality of the GDC profiling has mainly to deal with accuracy and reli-ability, accessibility, clarity and coherence. The result of the GDC profiling should cover the whole productive activity of the GEG to answer the criteria of accuracy and reliability. All the GEN should be delineated in terms of legal units (including the

legal units outside the EU); None of the GEN should be empty in terms of legal units; All the GENs should be qualified with the following information:

o NACE o Employment o Turnover

All variables should have a time stamp in order to prevent potential dis-crepancies between GDC and partnering information.

In case some legal units have not been included in a specific GEN, or a GEN “others” is created or these units are “let outside the scope of profil-ing”40. In any case, these units should not represent more than 10% of the total GEG employment.

In order to fulfil the objective of accessibility and clarity, the partnering exercise should be made easy and useful for both the partnering and the GDC countries. For that purpose the GDC profiling should include the following information: The legal units which are let outside the scope of profiling should be

qualified (or they are inactive, or they are assessed not being in the frame of the GEG, or they are out of the profiling scope).

In case of inclusion of a new legal unit that was not in the initial EGR frame, this legal unit should be mandatorily identified by its name and its country of residence and whenever possible by the town of residence.

When the new legal units are in the country of the GDC, in addition, the legal units should be identified with an EGR ID.

As to the largest GEGs, a minimum understanding of their organisation and what their business consists of has to be shared between them and all implied NSIs; to reach this objective a descriptive (documentary) note is attached to the quantitative tables: this note first drafted at the GDC level might be completed updated or corrected by partners and of course also by the GEG. Among the necessary information, the usual naming of the GENs and TENs which might be different from one country to the other.

In order to fulfil the criteria of coherence, as much as possible, the following information on TEN should be available as well with associated time stamps:

o NACE

40 Which conceptually is not different for each of these legal units to be considered as a quasi-GEN !


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o Employment o Turnover

16.8 The activity of the partnering countries fits more specifically into the quali-ty criteria of relevance and accuracy, coherence and timeliness. To fulfil the criteria of relevance and accuracy, the partnering countries have the responsibility of checking if the TEN defined by the country of the GDC suits with the needs of national business statisticians. Moreover, they also should check that the TEN defined cover the GEG national productive activity and that no substantial unit has been forgotten. The status of the GEG legal units should be confirmed:

o The legal units added by the country of the GDC should be identi-fied with an EGR ID

o The status of the other legal units should be confirmed or a pro-posal of change should be made

The content of the TEN should be confirmed or a change should be pro-posed, in consistence with national business statisticians. The proposal of the partnering country should reflect the usability of the TEN in national business statistics.

At the end of the partnering exercise, the following information should be available for all the TEN with associated time stamps:

o NACE o Employment o Turnover

This information should originate either from the GDC profiling (and be confirmed by the partnering country) or from the partnering country.

In order to fulfil the timeliness criteria, a deadline of 10 days should be respected by the partnering countries to answer the country of the GDC or at least to in-form on the reasons for answering later. 16.9 The profiling of a group could be considered as of a good quality if the var-iables that are required from the GDC and from the partnering countries are filled up. However, it is not guaranteed that all the partnering countries will answer to the country of the GDC. In the meanwhile, some of the countries will have a small involvement in the profiled GEG. Under certain conditions, some of the TEN will be automatically granted. At the end of the process, a profiling will be considered of a sufficient quality if 90% of the employment has been approved, manually or automatically, by the partnering countries. 16.10 Another dimension of the quality that needs to be taken care of is the time-liness and punctuality. The Profiling process can provide quite updated infor-mation. However, this advantage should be kept by organising the whole process (GDC and partnering) in a limited period of time. On that regard, both GDC and partnering countries should be made aware to the necessity the profiling process to be as short as possible.


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Another aspect of timeliness is that profiling should refer to updated infor-mation. To fulfil that criterion, the profiles should be updated regularly. On that regard, an annual periodicity for the largest and a biennial periodicity for the medium GEG could be established. According to criteria that still have to be established, an extra profiling has to be set up when large restructuring happens to a GEG. 16.11 Profiling builds a bridge between the perception the GEG has of its activi-ty and the statistical needs of data. Statistical needs are both European and na-tional. Taking into account all these dimensions leads to solve potential incon-sistencies. In particular, it amounts to solve the issue of double counting of some financial flows within the GEG (turnover in particular). Some conventions could be taken to solve some aspects: it is agreed that the NACE code of the TEN may not be the same than the NACE code of the GEN. In that case, in order to produce EU aggregates, it can be proposed to use the NACE code of the GEN. There will be a difference between the sum of the na-tional figures and the EU aggregates, but as it is acknowledged, it makes it pos-sible to be documented: thus it is not an inconsistency. The inconsistencies in turnover are more difficult to solve and more problemat-ic because there are several sources of inconsistencies. The GEN turnover is given by the GEG and is usually consolidated41. The TEN turnover may have several sources that will create inconsistencies: The TEN turnover may be transmitted by the GEG itself, in that case it

will also be consolidated and the sum of the TENs turnovers will corre-spond to the GEN turnover. In that case, there is no inconsistency; but the TEN figures will not fulfil national statistics requirements and it may generate inconsistencies between the national turnover and the other SBS data;

The TEN turnover may be the result of a national investigation and in that case it might include intra-GEG flows between countries. In that case it will be difficult to ensure full consistency between the GEN turn-over and the sum of the TEN turnovers, but TEN figures are coherent with other variables in national statistics

A mixed situation may occur when the GEG provides TEN turnover, but the partnering countries proposed a revised turnover that will be coherent with the other SBS variables at the national level. This situation is the worth in the sense that it will create inconsistency not only between the sum of the partnering countries turnover and the EU aggregate, but also among the turnover of the different partnering countries, some of them keeping the consolidated turnover given by the GEG and some using na-tional figures. In order to solve this situation, the central collection of da-

41 Two situations appear in practice: either the GENs turnover are fully consolidated and add exactly to the GEG turnover, or there remain flows between GENs that are deduced when adding up to the GEG.


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ta at the level of the GEG should be generalised to all the GEG under profiling and should cover not only NACE, turnover and employees, but all the SBS variables.

The employment should theoretically not be touched by consolidation issues and should be coherent. However, some differences may arise due to the follow up of different employment variables. The following kind of data may be found in GEG annual reports: headcounts vs. full time equivalents (FTE), employment at a given date (31/12 in general) vs. annual average. As it is not possible to re-quire the use of one specific variable at the global and national levels and in all the countries, it is proposed to ensure a consistency within a margin. For that purpose, whatever source of information is used at the TEN level (GEG or na-tional source), the following rule should apply:

- The sum of the TEN employees should correspond to the GEN employ-ees within a margin of 5%.

- The TEN employees proposed by the partnering countries should be equal to the TEN employees provided by the GEN within a margin of 5%.

17 Description of the general principle approach

17.1 The basic principle should be that used statistical units represent the real statistical economic reality. The units (global) EG and (global) ENT (GEN) must be considered units that autonomously generate economic processes or are in-volved in these processes. This means that the units are not represented by pure legal, fiscal or administrative constructions. 17.2 As to small enterprises, the operational structure and the group structure will not differ very much. Enterprises can, as in many other cases, be defined in terms of (combination of) legal units within the Enterprise group. But enterprise groups and enterprises mostly will be equal, which means that all legal units constituting the group will be combined in only one enterprise. 17.3 The operational structure of domestic large and complex enterprise groups (all resident enterprise groups) will in most cases differ from the legal structure. Then it mostly will not be possible to have a good delineation of enterprises along the lines of the legal units. A tailor-made analysis using the requested cri-terions must result in the enterprises to be used in statistics. 17.4 At multinational groups the international dimensions must be taken into consideration additionally. The only level of a real economic analysis is the global level. From the results of the global analysis the national truncated parts of the globally established enterprises are derived as truncated enterprises. 17.5 There is a huge gap between the small units and the large and complex ones. In between a big amount of medium sized groups exists, of which a num-ber can be complex too. How to deal with these “in- between” units needs fur-


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ther attention. The solution for these must be found in a combination or com-promise of the approaches used for the smallest and the largest units. 17.6 Different intensities of profiling will be described in the chapter 19.

18 The difference between top-down and bottom-up profiling and how to combine these modes? 18.1 In top down profiling firstly the full group as a set of all legal units under common control is to be established. After this the group must be analysed into its group operating divisions (GODs) and from there in the global enterprises for statistical uses. Having done this, the profiler may in some cases be able to link the legal units to the enterprises. In other cases, the units must be identified through discussion with the business. Enterprises are to be established according the main criterion of autonomy regarding production processes. Market-orientation and data availability are components in the autonomy check. Diagram representing top-down profiling (see report WPA 2010).

An advantage of this way of profiling may be that daily or frequent changes in the legal organisation do not immediately affect the structure of the statistical units, although these changes could indicate the need for an update or a partial update of the profile. Another advantage is that profiling in this way leads to an exhaustive profile that means that all legal units are included in the profile, are incorporated in one or more enterprises or are separate individual quasi-enterprises (including SPEs and inactive or dormant legal units). 18.2 For very large and complex groups, it would be very exceptional if the profile analysis would result in an enterprise structure as presented in the diagram related to the paragraph 21.75 of the BR recommendations manual, see below. Here the underlying principles are: “ Once the enterprise group is

Global

Group

Global

Group

TEN1 TEN2 TEN3 TEN4

GOD1 GOD2

GEN1 GEN3 GEN2 Statistical envi-ronment at global (GEN) and nation-al (TEN) levels

Legal or opera-tional (non statistical) environment


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reconstructed from the legal units, the enterprises must be delineated within the set of legal units that are the basis of the enterprise group: The enterprise consists either of a single legal unit (‘simple enterprise’) or of a combination of two or more legal units (‘complex enterprise’). It follows that an enterprise group must consist only of complete enterprises, not parts of them.” (21.75 quoted) Diagram: Legal units as a common basis of the enterprise group and its constituent enterprises

18.3 In the bottom-up approach, a legal unit is identified together with its relationship with its immediate parent, which is the direct controlling legal unit. This creates tree structures as the basis for creating enterprises. It deals effectively with time-lags and other deficiencies in administrative data. While it results in an accurate reflection of the structures and activity of a group, it is a costly way to deal with groups with hundreds of affiliates. The legal units’ diagram, including the resulting enterprises structure, could be the result of a top down analysis or the result of a bottom up analysis. The bottom up procedure starts with the individual legal units and it is checked each time if the legal units fulfil the requirements to be an enterprise. If not, it is checked if it fulfils if it is combined with its direct controlling legal unit or with the units it is direct controlling and so on.

Enterprise group Enterprise 1

Enterprise 4

Enterprise 2

Enterprise 3

Enterprise 5

Head of group A

Legal unit E

Legal unit D

Legal unit C

Legal unit B

Legal unit F

Legal unit G

Legal unit

I

Legal unit H

Legal unit

J

Legal unit K


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18.4 From the above presented descriptions and diagrams it may become clear that the use of a mixture of the approaches can be very useful. In practice we will have an iterative process in which the requirements are checked for the found possibilities of combinations. If no combinations are possible at all we cannot longer rely on the legal units structure and must use the approach as presented in the above top down profiling diagram. The mixed approach mostly will apply for the medium sized groups (e.g. more than … persons employed) and for the very large units that are not selected for manual European profiling.

19 The different intensities of profiling (Intensive, light, manual, automatic) 19.1 From the definition of profiling all kind of organisational units can be sub-ject of it for the establishment of the enterprise structure, except for single units carrying out economic activities in their own and for their own account. It is an exception if a large economic activity would be carried out in a single legal unit not belonging to a group. It still occurs in governmental institutions, but these are out of scope here. 19.2 Available means and resources should optimally be assigned. Most atten-tion is needed where most effective results can be reached in terms of costs and quality. Response burden is included in these criterions. 19.3 Automatic procedures for the constitution of enterprises based on legal units are suitable and sufficient for small units. It could be agreed to automati-cally combine all legal units under common control if the size of the combina-tion does not exceed a certain level. 19.4 Automatic generated proposals for the constitution of the statistical units structure for groups exceeding the criterions mentioned before, must maybe manually checked according quality signals from the automatic procedures. Here we come to the procedure of passive profiling. Manual action is done if the au-tomatic business registers procedures generate signals, or if there is a need to do so based on feedback information of users of the register. This kind of manual interaction can be seen as a kind of very light profiling. 19.5 Intensive profiling is to be done for the very large and complex groups which have very high impact on the statistical outcomes. So the top xxxx enter-prise groups should be statistically structured as actual as possible. It is recom-mendable to assign a profiler (sometimes called an account manager as in pri-vate business or a coordinator) to these groups. This manager, well known with the group, can judge the statistical impact of changes within the group. As com-pared with usual domestic profiling activities of the (truncated) groups the meth-odology and procedures to start manual European profiling will have conse-quences for the selection of the groups to be profiled according the approach of intensive profiling.


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19.6 There are a large number of groups between the groups selected for inten-sive profiling and units which are constituted according automatic procedures. Depending on available means and resources and statistical input (such as en-larged OFATS surveys in some countries) the number of units under active pro-filing can be defined. Active profiling can additionally be done for quality checking for a defined group of units, although these units do not belong to the population for the intensive profiling, or signal based.

20 The selection of groups to be distinguished (criteria and numbers) 20.1 Selection of European global enterprise groups (GEG) with their GDC in the EU+EFTA. At the EU level, the population of interest is approximately the top 600 groups for European intensive profiling and the 1000 following for light profiling. The European global enterprise groups (GEG) in the target of profiling should be selected in the EGR population. This population can be segmented into 3 cat-egories of groups for profiling purposes: Large GEGs for intensive profiling Medium GEGs for light profiling Small GEGs that should be automatically profiled.

20.2 Three main criteria can be taken into account to delineate these 3 catego-ries: the size of the group, its complexity in terms of number of performed ac-tivities and the geographical scope of the group. Two of these criteria (the size and the scope) are subjective and depend of the size of the country where the group has its GDC. Indeed, a GEG of 3000 employees will be considered as a large GEG in a small country where it will have a big impact on national statis-tics and as a small GEG in a large country where its impact on statistics will be insignificant.

1) The size of the group measured by: o The global employment o The number of affiliates o The size of the group in the EU

2) The geographical influence The geographical influence reflects how far the group has activities in a number of countries. For profiling purposes, it is limited to the European activity of the group and measured by taking into account the number of European countries (EU+EFTA) where the GEG has activities and the number and the percentage of employees who are working outside the GDC country. 3) GEG Classifications for size and geographic influence according to the country where the GEG has its GDC


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The size and number of the enterprises and groups differ from one country to another in the EU+EFTA. The classification of the groups for profiling purposes needs to take into account these differences in order to balance the breakdown of GEG to be profiled per country. Three groups of countries could be delineated for which the criteria to select groups would differ in terms of size, activity and geographical influence. Two classifications of countries need to be performed in order to adjust the size criteria applied to the GEG. The first classification is performed taking into ac-count the size of the groups in the different EU countries. The second classifica-tion is made on the geographical influence criteria. Classification 1: The countries are classified into the 3 groups according to 3 size criteria: the median number of employees, the 3rd quartile of number of em-ployees and the last decile of number of employees of the groups with GDC in the country. Classification 1 Group1 Group2 Group3 Countries included Bulgaria, Estonia,

Iceland, Latvia, Lichtenstein, Malta, Slovakia, Slovenia

Austria, Finland, Cyprus, Czech Re-public, Hungary, Italy, Lithuania, Luxembourg, the Netherlands, Nor-way, Portugal, Ro-mania, Sweden

Belgium, Denmark, France, Germany, Greece, Ireland, Poland, Spain, Switzerland, UK

Size class definition for GEGs Small <1500 employees <2500 employees <5000 employees Medium 1500-3999 employ-

ees 2500-8499 employ-ees

5000-16999 em-ployees

Large ≥4000 employees ≥8500 employees ≥17000 employees

Classification 2: The countries are classified into the 3 groups according to 3 geographical scope criteria: the median number countries where the GEG is act-ing, the third quartile and the last decile of number of employees of the groups with GDC in the country. Classification 2 Group1 Group2 Group3 Countries included Bulgaria, Estonia,

Hungary, Ireland, Latvia, Lithuania, Romania, Slovenia, Czech Republic

Cyprus, Greece, Italy, Malta, the Netherlands, Nor-way, Poland, Por-tugal, Slovakia, Spain, Sweden, UK

Austria, Belgium, Denmark, Finland, France, Germany, Iceland, Lichten-stein, Luxembourg, Switzerland


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The indicator of influence is calculated according for the three populations of countries according to the following rule: For large countries (group3)

Geographical influence Number of countries where the group is act-

ing outside the country of the GDC Number of employees outside the country of GDC

Part of employment outside the country of GDC

<3 3-10 >10

<4000 <20% Small Small Medium 20%-50% Small Medium Medium 50%-70% Small Medium High ≥ 70% Medium High High 4000-5000 <20% Small Medium Medium 20%-50% Small Medium Medium 50%-70% Small Medium High ≥ 70% Medium High High 5000-6000 <20% Medium Medium Medium 20%-50% Medium Medium Medium 50%-70% Medium Medium High ≥ 70% high High High ≥6000 <20% High High High 20%-50% High High High 50%-70% High High High ≥ 70% High High High

For medium countries (group2)




<2 2-8 >8

<3000 <20% Small Small Small 20%-50% Small Medium Medium 50%-70% Small Medium High ≥ 70% Small High High 3000-4000 <20% Small Medium Medium 20%-50% Small Medium Medium 50%-70% Small Medium High ≥ 70% Small High High 4000-5000 <20% Medium Medium Medium 20%-50% Medium Medium high 50%-70% Medium Medium High ≥ 70% Medium High High ≥5000 <20% Medium Medium Medium ≥ 20% Medium High High


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For small countries (group3)




<2 2-6 >6

<2000 <20% Small Small Small 20%-50% Small Medium Medium 50%-70% Small Medium High ≥ 70% Small High High 2000-3000 <20% Medium Medium Medium 20%-50% Medium Medium high 50%-70% Medium Medium High ≥ 70% Medium High High ≥3000 <20% Medium Medium high 20%-50% Medium High high 50%-70% Medium High High ≥ 70% Medium High High

4) The complexity of the group in terms of number of activities An indicator is calculated with information available in the EGR that reflects the number of activities performed by the group in the EU+EFTA42 (related to the NACE code). It is calculated taking into account the NACE of the enterprises in the EU and weighted by the number of employees of these enterprises. The support activities are removed from the calculation. These support activities are detected when they are found in at least 80% of the groups and representing, in each group, less than 10% of the total EU GEG employment. 28 activities are removed : computer programming and consultancy ('6201', '6202' ,'6209' ,'6311), financial holding ('6420' ,'6499' ,'6492'), engineering and R&D ('7112', '7219'), wholesale ('4669', '4649', '4690', '4618', '4614'), financial services ('6619', '6612'), head offices ('7010', '7022'), retail trade ('4778'), business support activi-ties ('8299'), accounting ('6920'), advertising ('7311'), real estate ('6832','6820','6810'), renting and leasing of machinery ('7739'). The following variable is then computed for each group:

Multi-activity indicator

part of the first activity (a)

part of the second activity (b)

part of the 3rd activity (c)

(a)+(b)+ (c)

mono-active GEG ≥ 90% - - quasi-mono active GEG [80%-90%[ <10% - bi-active GEG [80%-90%[ ≥ 10% - quasi-mono active GEG <80% <10% <10% bi-active GEG <80% ≥ 10% <10%

42 The only activity taken into account is the one performed in the EU because it is the only one for which information is reliable.


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tri-active GEG <80% ≥ 10% ≥ 10% ≥ 80% multi-active GEG <80% ≥ 10% ≥ 10% <80%

20.3 Evaluation of the number of groups to be profiled after application of the criteria. The following table gives a segmentation of the GEG into 3 categories made on the EGR population of 2011:

Intensive pro-filing

Light pro-filing

Automatic pro-cedures

Austria 31 55 326 Belgium 30 19 168 Bulgaria 0 6 4 Switzerland 58 56 298 Cyprus 6 10 65 Czech Republic 3 11 58 Germany 98 218 1082 Denmark 22 22 124 Estonia 2 6 16 Spain 17 47 231 Finland 31 33 137 France 83 86 479 UK 100 105 770 Greece 4 4 28 Croatia 1 5 Hungary 2 1 17 Ireland 11 6 87 Iceland 3 5 13 Italy 28 63 442 Lichtenstein 3 0 8 Lithuania 3 17 Luxemburg 3 4 11 Latvia 2 9 Malta 1 2 5 Netherlands 67 64 787 Norway 12 35 215 Poland 1 10 32 Portugal 3 14 71 Romania 1 0 8 Sweden 52 62 549 Slovenia 1 14 19 Slovakia 2 4 9 Grand Total 675 965 6083


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This classification relies on the quality of the information in the EGR. In particu-lar the economic information at the global level of the GEG and at the enterprise level is essential to properly shape the GEG population. Given that the largest GEGs are included in the EGR 2010, the number of GEG to be profiled (intensively or lightly) should not change over time. However, this classification is indicative and the population of GEG to be pro-filed may be the result of an agreement between Eurostat and the NSIs. Especial-ly in the population of the GEG that need to be profiled, the choice between light profiling and intensive profiling cannot rely only on size criteria. 20.4 Selection of global enterprise groups (GEGs) with their GDC outside the EU+EFTA. A part of the activity in the EU is performed in enterprises under the control of GEGs that have their GDC outside the EU. In some cases, this part is not negligible and the activity performed in the EU deserves to be profiled. In that case, only the EU part (plus the affiliates underneath in the tree) will be dealt with. The structure of the EU sub groups of non EU GEG is not homoge-nous and may lead to the proposal of various treatments. This paragraph aims to give selection criteria for the non EU GEGs that should be profiled and proposes some treatments according to their European structure. 20.5 Criteria to be taken into account in the segmentation. The same criteria that have been presented could apply for non EU GEGs, but in a simplified way. It is proposed to take into account the criteria of size and geographical influence and not to differentiate the countries where the GEG have activities. 1) The size of the group is measured by:

o The EU employment o The number of affiliates

2) The geographical influence The geographical influence is measured by the number of countries where the GEG is acting. The combination of these two criteria allows classifying the non-EU GEG ac-cording to the following grid: Number of EU countries where the GEG is acting Number of EU employ-ees

3 countries or less

3-5 countries 6 countries or more

< 3500 employees small small small 3500-5000 employees small medium medium 5000-7500 employees small medium top > 7500 employees medium medium top It could be agreed that top non-EU groups should be intensively profiled and medium groups should be lightly profiled. However, some other aspects need to be taken into account in order to clearly make the distinction between the two populations. One is the availability of EU information which is essential for light profiling and the other one is the structure of the EU part of the non EU GEG.


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20.6 Evaluation of the number of groups to be profiled after application of the criteria. The following table gives the number of the non-EU groups in the EGR 2010 according to the country of the GDC. Top Medium Small

Canada 3 3 146 Japan 18 10 280 USA 93 66 1695 Other non EU countries 15 16 1109 Total 129 95 3230

What is interesting for EU countries is to know how they will be impacted by the profiling of these groups as main or partnering profiler. The following table gives, per country, a first estimation of the number of non-EU GEG to be profiled as GDC profiler or as partnering profiler (detailing the total number of non EU GEG in which the countries are involved and the num-ber of non-EU GEG for which they have more than one legal units in the part-nering country). The potential main profilers have been selected as they have the highest em-ployment of the non-EU GEG in their country. A current analysis shows that this is not necessarily the most appropriate country to perform the “GDC” profiling. A further manual investigation will assess if the non-EU GEG has a European organisation (and a European headquarter) or if its European subsidiaries direct-ly depend of the global headquarter and don’t have economic relationships. In the first case, a European profiling will be relevant and the country of the head-quarters is a good candidate to be the main profiler. In the second case, there is no obvious European organisation of the GEG and each country will perform its own profiling. In such case, it could be relevant to share practices in order to treat the different parts of the GEG on the same way (if it is relevant).


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Potential main pro-

filer Partnering profiler Partnering profil-

er with more than 1 legal unit

Top medium top medium top medium Austria 2 1 92 62 65 30 Belgium 3 2 106 78 88 58 Bulgaria 29 15 7 3 Switzerland 4 1 92 63 86 44 Cyprus 11 6 6 3 Czech Republic 2 2 94 65 57 31 Germany 25 20 99 64 94 62 Denmark 84 52 57 24 Estonia 30 12 9 3 Spain 10 4 105 78 88 52 Finland 1 88 48 50 24 France 18 23 100 65 89 59 UK 22 21 105 73 101 73 Greece 41 15 19 2 Croatia 24 5 5 Hungary 2 1 100 67 67 28 Ireland 7 4 91 58 83 52 Iceland 2 4 1 Italy 4 1 105 78 78 54 Lichtenstein 1 2 Lithuania 28 11 9 1 Luxemburg 1 69 31 66 24 Latvia 30 7 11 1 Malta 4 3 2 1 Netherlands 2 5 113 81 106 72 Norway 1 87 49 64 25 Poland 21 8 91 74 78 58 Portugal 1 91 45 53 18 Romania 2 1 95 29 43 10 Sweden 2 101 64 82 43 Slovenia 32 11 10 3 Slovakia 1 71 30 30 6 Total 129 95 2191 1345 1600 864


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21 Priorities and follow up strategies: which group in which intensity with which frequency? 21.1 Light or intensive profiling. The boundary between GEGs that deserve an intensive profiling and GEGs that can be treated according to a light method is narrow. The GEGs to be profiled according to a light profiling process are sup-posed to be medium sized GEGs that are not too complex and that do not man-datorily require a contact with the GEGs. For these GEGs, only available sources are used (annual reports of the GEG, statistical information available in the NSI from surveys or administrative sources, including FATS data) to deline-ate the GENs and TENs. However, in order to be able to collect the minimum set of information accepta-ble for a profiling of a good quality (see in §16.7 and 16.8 the list of infor-mation), the GDC profiler needs to have available enough information. For each GEN, the GDC profiler mandatorily needs to provide the economic information which qualifies the GEN (NACE code, number of employees, turnover), but also the content of the GEN in terms of legal units. In addition, it would be appreciat-ed for partnering countries to have economic data that qualify their TEN (mainly number of employees and turnover). Before starting to lightly profile a GEG, the GDC profiler should check the availability of this information of the following documents: Consolidated annual accounts

With segment information by activity With the delineation of segments in terms of legal units

Answer to the O-FATS survey That allows to delineate the GEN and TEN That allows to derive economic information on GEN (and TEN)

These two sources are complementary. If the mandatory information cannot be completed, the GDC profiler may take the decision to contact the GEG to complete the profiling. In that case, it will become an intensively profiled GEG. At the opposite, if a profiling has been started as intensive but the GEG does not accept to collaborate, it cannot automatically become a light profile. In order to transform it into a light profiled GEG, the mandatory information needs to be available. 21.2 Automatic procedures. The majority of groups are out of the scope of pro-filing. The category of GEG to be treated according to automatic procedures is heterogeneous however. It includes both groups that are small by their size, or simple to profile because they perform only one activity or GEG that perform their activities in a restricted geographical area. For some of them the boundary with GEG in the scope of light profiling is tiny. It will depend of the resources


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available in the NSI for profiling and the availability of the information to build and qualify the GENs and TENs. The following table gives an idea of the characteristics of the GEG to be treated automatically in the EGR201143:

Number of GEG Mono-active GEG 1856 Quasi-mono active GEG 694 GEG acting in 1 country outside the GDC country

1131

Bi-active GEG 1680

GEG acting in 2 countries outside the GDC country

199

GEG with less than 250 employees 256 Other GEG 267

The automatic procedures should be based on the following principles:

Only one or two GENs are defined in the GEG. In case of one GEN, it contains all the active legal units belonging to the GEG. In case of two GENs, the allocation of the legal units to the GEN is made according to an algorithm that takes into account the NACE of this legal unit.

The GEN economic data correspond to the GEG global data (NACE, employment and turnover)

The TEN economic data are initially computed at the central level (Eurostat). An automatic algorithm attributes to the TEN a NACE code that takes into account all the activities that are performed in the TEN and makes a comparison with the GEN NACE code. The employment corresponds to the sum of the legal units employees.

The NSIs have the responsibility to check and amend these data. They can also compute automatically national figures for SBS or STS purposes.

22 Relationship with updating strategy of the EGR First proposal to be drafted in relationship with the WPC and EGR which, if possible, identifies links between legal units and enterprises for identification of the enterprises. See also chapter 7.

43 The table excludes the cases where the GEG is active only in the GDC country. It corresponds to the cases where the GEG has subsidiaries in more than 1 country, but the subsidiaries outside the country of GDC don’t have activity (on the criteria of employment). These cases may point out lack of quality in the EGR and need to be removed from the target population.


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V EU-parts of non-EU GEGs Aim: To define profiling for the European part of non-European groups: desk profiling of a few groups could be undertaken to define potential different mod-els (of profiling as well as of statistical units etc) and to propose a way of treat-ing them.

23 Description of the problem 23.1 Profile the EU-parts of a non-EU GEG necessitates knowing, guessing or estimating: - The GGH of the GEG (we will often precisely know it from the commercial

providers, with more difficulties when individuals are concerned) - Its GDC (we will most of the time know it easily for the GEGs whose GDC is

located in the most developed countries; it can be more difficult to locate it with certitude when either the owner(s), the capital or the management comes from developing countries; not because it is theoretically impossible but be-cause the present commercial data providers, centred on developed countries, have less information of satisfactory quality. We probably will have more problems when the scheme changes rapidly than in more traditional struc-tures. A question to treat is the eventual link between the rate of growth of an economy and the rapidity of change of its productive structures: if this link does exist then we will have more problems with GEGs whose GDC is in fast developing countries.

- The hierarchical scheme of the overall control (because of lack of infor-mation, the case is more difficult when developing countries are involved; but it is frequently missing whatever the country of origin is. What we know quite well is that there is a control, direct or indirect, without being able to draw the tree).

As a consequence it is difficult to be sure of the global size of the GEG, the EU-part being often insufficient to be taken as a significant characteristic, as well on turn-over as on employment. We probably, in numerous cases, will not be able to find correspondents in charge of the GEG in Europe; correspondents that we usually look for in order to discuss the profiling proposals. It is also difficult to know the operational segments that do exist in the GEG and to be sure of their impact on the “truncated enterprises” - truncated meaning in this case as well restricted to EU as restricted to an individual MS. What might often happen is the existence of apparently independent sets of affil-iates of the group, each set operating in a bundle of MS, with great difficulties to


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build relationships between what is on in the sets of affiliates and the bundle of countries. Nevertheless, only testing can show us if our fright is justified. The 2 first exam-ples (one in France with a very large global and diversified non-EU group, one in UK with a non-EU group specialised in all electronic and computerised ap-parels) do not justify the difficulties described previously, but this “small” test-ing is not yet able to permit significant conclusions.

24 The impact of partly profiling on the statistical units model 24.1 What is our real aim when profiling a non-EU GEG? Our answers can be of two types: - We would like to do exactly the same process as for EU-GEGs: o Determination of the exhaustive global cluster of affiliates and/or con-

trolled legal units; o Delineation of the global enterprises through the analysis of the operating

segments (but with difficulties to meet global GEG officers if required), then the delineation of the TENs;

o Checking the ability of the TENs to provide the required statistical data. - We would want to profile only the group defined by the EU affiliates and

their daughters, granddaughters etc. (exactly as if the upside part of the GEG was limited to one unique GGH with direct links to the EU parts, rubbing the intermediate structures). A possible problem can be the delineation of the right group cluster (perimeter) because of the possibility that control relation-ships only can be detected outside the EU.

The advantages and disadvantages of the 2 solutions have been slightly ex-plored: - We are not sure to be able to get the upside information from non EU GEGs;

on the contrary all the downside data are legally available in Europe; - If we are sure that we want to describe Nokia as belonging globally to the

manufacturing industry, we see no real advantage to describe Samsung in the same way (for the EU, Samsung is a pure distributive group)

- We feel comfortable when the group has created a European holding struc-ture; we found it uncertain when each affiliate report to non EU owners. In the last case it could be impossible to do more than a legal unit investigation or to survey a large bunch of very small subgroups, having no direct relations with each other even if all related to the same but practically unknown global enterprises.

We have nevertheless made a provisional choice and decided to test the profiling restricted to the EU and downstream.


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VI SPEs, Holding Companies (HCs), Head Offices (HOs) and “other special cases”

Aims: To describe the implications of changing from current enterprise to GEN/TEN, including the treatment of some specific cases among: financial ve-hicles, holdings( and to split them up from the head offices, headquarters and in the profiling terminology from the GDC global decision centre), auxiliary activi-ties and units, R&D, SPEs; To check and assess at/in which conditions it would be possible to do it consist-ently with other statistical domains or users.

25 Special Purpose Entities (SPEs) 25.1 The term Special Purpose Entity, SPE, is used for legal units that are creat-ed to fulfil narrow, specific or temporary objectives and/or to gain fiscal ad-vantages44.

- Other special business structures frequently encountered in GEGs such as legal units consisting purely of centralized R&D, headquarter or auxilia-ry activities are labelled as other special cases.

- During the tests, another rather unexpected type of cases has appeared: wholesale intermediate affiliates belonging to the producing group, with a small activity size: they buy the (manufactured) products from operat-ing countries at a rather low producer’s price and sell them back to other affiliates or to independent buyers at arm’s length often through a net-work of commercial representatives employed by a branch in the con-suming country; thus the “competitive prices” appear between a non-producing country and the consuming country, the producing country re-ceiving in an “optimized” version only a fee for processing. Profiling al-lows analysing these relations and links inside the same GEG in different countries.

25.2 SPEs and other special cases have an increasing importance in the global organisation of the GEGs and in their extension to new geographic areas. 25.3 SPEs and other special cases affect business statistics and national account statistics through altering structures of enterprise population, GDP in relation to GNI and international trade in services. For example, SPEs often locate in coun-tries offering tax advantages, and one of their main purposes is to generate cross transactions between subsidiaries located in different countries. Therefore, SPEs directly affect FDI creating initially artificial cross-border financial flows. As showed previously they might also affect the value of production and of property income flows.

44 The guide “Impact of Globalisation on National Accounts”, p. 39 Item 4.5.


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25.4 The recent international statistical regulations and manuals (including the SNA 2008 and the ESA 2010, the BPM6 manual etc.) recognize the impact of SPEs and other special cases. However, the detailed guidelines on how to handle these entities in various statistics only appear now; countries are in many cases still left to choose their own treatment. National experience, task forces and working groups show that existing definitions and recommendations for treat-ment are still specific to the very statistical domain in question – reflecting its perceived objectives and characteristics. But as the description of the underlying phenomena and the tentative statistical measurement of them increase, a large consent is appearing that the “domain statisticians” all use the same basic infor-mation in a converging way: they need to discuss and agree with the GEGs on what is on, and on which way to treat it; they need to use efficiently private ac-counting data and it is necessary to share analysis and data between involved countries. Moreover, decision trees and other technical solutions, which are presently typically described for legal units within national boundaries, are to be translated to GEGs and enterprises at global level. 25.5 The profiling of large and complex GEGs may take a crucial role in assur-ing coherent statistical treatment of SPEs and other special cases in the business statistics and as providers of data to national accounts. As profiling will be real-ised in close co-operation with the EGR and as SPEs are specific phenomena of the GEGs, the leading profiling NSI-this of the GDC of the GEG - may provide the EGR with updated information on SPEs and other special cases. The EGR could then flag SPEs and other special cases accordingly, and the information would be centrally available for production of various statistics. As a conse-quence, individual statistics need no longer to identify SPEs and other special cases but may take their status as given, and apply the appropriate statistics-specific treatment to these entities. 25.6 In this Section VI Chapter 26 summarizes the identification criteria of SPEs as described in recent international regulations and manuals. Chapter 27 propos-es treatment of SPEs in GEG profiling. Chapter 28 summarizes ancillary activi-ties and R&D activity as described in recent international regulations and manu-als. Chapter 29 proposes treatment of R&D and auxiliary activities in GEG pro-filing. Chapter 30 introduces the issue of branches and “VAT positions”.

26 SNA principles and requirements of Special Purpose Entities (SPEs) 26.1 GEGs often have legal units that are insignificant from economic45 point of view of the production and of related topics. In different statistical manuals, these types of units are referred as ancillary or auxiliary units or artificial subsid-

45 more precisely, the point of view of production and distribution of goods and non-financial services


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iaries. Moreover, terms SPE and SPV46 are used for certain types of units. To a large extent, the complexity of a GEG arises from the amount or variety of these special types of units. 26.2 Concerning the SPEs, the new international manuals (the 2008 SNA, BD4 and BPM6) include general criteria which may help statisticians to identify them. In addition, many different task forces/working groups in Eurostat have attempted to facilitate the identification of SPEs. This is the recent case of a Task force on HOs, HCs, and SPEs common to national accountants of Eurostat the ECB and OECD47 26.3 The SNA 2008 Chapter 4 “Institutional units and sectors” defines institu-tional units and their use. The chapter deals with different types of corporations including not only legally constituted corporations but also cooperatives, limited liability partnerships, national resident units and quasi-corporations. Moreover, special focus is given to special cases such as groups of corporations, head of-fices and holding companies and special purpose entities.48 The main principle in the SNA 2008, referred to by the latest TF to date is that standard criteria for determining whether they constitute an institutional unit should be applied to each individual corporation, whether or not it forms part of a group. The SNA 2008 mentions some special cases (mainly related to large groups of corporations) and includes some paragraphs on SPEs:

“Such units often have no employees and no non-financial assets. They may have little physical presence beyond a “brass plate” confirming their place of registration. They are always related to another corporation, often as a subsidi-ary, and SPEs in particular are often resident in a territory other than the terri-tory of residence of the related corporations. In the absence of any physical di-mension to an enterprise, its residence is determined according to the economic territory under whose laws the enterprise is incorporated or registered. For more detail on problematical cases see BPM6. Entities of this type are commonly managed by employees of another corpora-tion which may or may not be a related one. The unit pays fees for services ren-dered to it and in turn charges its parent or other related corporation a fee to cover these costs. This is the only production the unit is involved in though it will often incur liabilities on behalf of its owner and will usually receive investment income and holding gains on the assets it holds.”49

46 special purpose vehicle 47 common report dated 14 June 2013 48 Part B of the chapter 4 (SNA2008). 49 Paragraphs 4.56 and 4.57 of the SNA2008.


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26.4 According to the SNA 2008 only following categories of SPEs need to be treated different from other resident entities50:

– Captive financial institutions – Artificial subsidiaries of corporations

A prominent example of a captive financial institution is a holding company that simply owns the assets of subsidiaries. The holding companies are distinct from what the SNA names the Head Office (in BR they are referred to as GDC or GDC, that are, also, active in managing the GEG or part of it)

Artificial subsidiaries of corporations are created to provide services to the par-ent corporation or other corporations in the same group. For example, the parent may create a subsidiary which owns buildings or equipment and whose sole function is to lease them to the parent corporation or to its affiliates51. 26.5 Other work on identification of SPEs. In addition to SNA2008 the 4th edi-tion of the OECD Benchmark Definition of Foreign Direct Investment (BD4) provides guidelines on how to identify SPEs. The OECD52 criteria are:

”i)The enterprise is a legal entity, a) formally registered with a national authority; and b) subject to fiscal and other legal obligations of the economy in which it is resident. ii) The enterprise is ultimately controlled by a non-resident parent, directly or indirectly. iii) The enterprise has no or few employees, little or no production in the host economy53 and little or no physical presence. iv) Almost all the assets and liabilities of the enterprise represent investments in or from other countries. v) The core business of the enterprise consist of group financing or holding ac-tivities, that is – viewed from the perspective of the compiler in a given country – the channelling of funds from non-residents to other non-residents. However, in its daily activities, managing and directing plays only a minor role.”

50 “Special purpose units” of general government should also be treated explicitly, but they are excluded here, because the focus is on the corporate sector 51 the artificial characteristic is even greater if it is lease back and not direct lease. Simi-lar examples would be on HR, management of patents, etc. 52 The OECD Benchmark Definition of Foreign Direct Investment, 4th edition, p. 102, Box 6.2. 53 An issue comes from the treatment of R&D as GFCF: it results from this treatment that patents and models become non-financial produced assets; their fees remain prod-ucts of ordinary services - as anticipated from the ESA95 - creating Value Added and thus impacting GDP =>

1- The SPE might produce such services; 2- The business statistics need to cover properly these flows.


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In 2010, the Eurostat Balance of Payments Working Group and the ECB Work-ing Group on External Statistics54 agreed on definition of SPE for the compila-tion of FDI statistics in the EU. The definition is in line with the BD4 guidelines. The Eurostat Task Force on FDI has recommended using the definition agreed by the BoP WG and the WG-External Statistics as a basis to identify SPEs in the EGR. The Task Force also recommends that SPEs have to be flagged in the EGR for FDI and FATS purposes and it lists criteria that could be used to produce a list of potential candidates for national SPEs using the available information in the EGR. This work is closely related to that of profiling of GEGs. On the one hand, profilers can provide input on the SPEs and other special cases to be flagged in the EGR. On the other hand, profilers could also use the list of poten-tial candidates for SPEs and other special cases generated by the EGR. Also another Eurostat Task Force has dealt with the identification and the treat-ment of SPEs. The Task Force on recording of certain activities of multination-als in national accounts recommends that the treatment of SPEs in EU member states should conform to the classification table reproduced in Annex IV of this report. The Task Force provides also a decision tree for the identification of SPEs (see also the Annex IV). All the guidance on SPEs in current manuals and other research on the subject is taken into account in a recent guide called “Impact of Globalisation on Na-tional Accounts”55. Chapter 4 of the guide focuses on SPEs. However, the man-ual still states that a clear definition of SPEs is not available and the work on common conceptual framework on SPEs is one of the priority items on research agenda. 26.6 Proposals selected from the report of the TF on HOs, HCs and SPEs. Tak-ing into account the previous developments, the TF finds it more useful to work on practical classification, rather than try to find criteria that could cover com-prehensively the whole of this issue (the objective is to treat about 90% of the accumulated concerned assets in an economy). A stress is put on the necessity to come to consistency with business statistics in the future: “In order to make the recommendations of the Task Force useable in Business Registers, the concept of “institutional unit” according to the SNA should be brought in line with the concepts used in Business Register, and vice versa” (see also the footnote 1 page 7 of the final report). [Note: an ad hoc Task Force on Statistical Units has been installed mid 2013which amongst others has the task to draft a definition and operational rules for the enterprise group (2a,

54 External Statistics refer to all statistics that focus on cross border transactions (such as FDI, foreign trade statistics) 55 See http://live.unece.org/fileadmin/DAM/stats/groups/wggna/Guide_on_Impact_of_globalization_on_national_accounts_FINAL.pdf

http://live.unece.org/fileadmin/DAM/stats/groups/wggna/Guide_on_Impact_of_globalization_on_national_accounts_FINAL.pdf



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2b) and the reference to institutional unit (3). At the moment of finalizing this document it is not yet clear what this means for the current proposed GEN/Ten approach] As it is not an objective of Profiling to discuss in-depth the links and differences between “enterprises”, “enterprise groups” and “institutional units” (see also Note above) our main will be to be practical on the way to the required con-sistency. Thus we have to pay a maximal attention to the classification of some types of SPEs as given in the § 5.2 of the TF report (numbers are ours). The distinction among different SPE-type of entities and the brief description were taken from the TF report; as ESSnet profiling we added an evaluation of the proposed solu-tions according to our methodology TF1: Holding company Function: Holding the assets (owning controlling level of equity) of subsidiary corporations on behalf of its parent without undertaking any management activi-ties Criteria: An SPE (or similar type of entity) exercising some aspects of manage-rial control over its subsidiaries should be classified as head office; see also sec-tion 3 and 4 of the report. Industry ISIC Section K 6420 Sector S127 - Captive financial institutions and money lenders. TF1 - Profiling assessment: when these entities are situated in the control tree upwards from the GDC, we agree with this classification:

1. The result of it will be to consider that the profiled GEGs are based on the GDC controlled affiliates; this is mostly consistent with the way we use the consolidation perimeter and thus manageable in a profiling per-spective.

2. The “upward holdings” belong to the financial sector, will be eventually profiled in the future, noting that their own tree finishes just above the GDC (the non-financial GEGs not being part of their perimeter and being treated as non-controlled - even if majority - ownership). How the GDC should be identified has not been established yet and should be part of fu-ture testing.

3. This treatment if validated allows investment funds to be involved in several “independent” GEGs.

4. Of course in our use, the term “captive financial institution” might not be the best.

When the holdings are located inside control sub-trees, we prefer to keep them in the profiled GEG as part of the relevant “enterprise”.


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TF2: Shell company Function: Passing through funds from non-residents to non-residents without conducting any operations in the economy Criteria: A shell company only deals with group enterprises and is thus classi-fied under S127. If the relevant SPE (or similar type of entity) mainly holds shares of subsidiaries, it should be regarded as a holding company. Industry ISIC Section K6430 or K 6499 Sector S127 - Captive financial institutions and money lenders TF2 - Profiling assessment: it is, mutatis mutandis, the same as the previous one; for profiling all the units, also shell companies, located inside the control sub-trees, will be kept in the profiled GEG as part of the relevant “enterprise” to be found TF3: Unit for holding and managing wealth of individuals and families Function: Holding financial and non-financial assets for individuals and families Criteria: According to the 2008 SNA, family trusts are to be treated as captive financial institutions (S127). However, if the trust deals with individuals and families on the open markets, it should be distinguished from other family trusts and it should be classified under the corresponding financial subsector, for ex-ample, as Non-MMF investment funds (S124). Industry ISIC Section K 6430 Sector S124 – Non-MMF investment funds or S127 - Captive financial institu-tions and money lenders TF3 - Profiling assessment: it is, mutatis mutandis, the same as concerning the two previous cases. TF4: Securitisation company Function: Securitising assets for fund raising Criteria: Purchasing assets while issuing securities such as Asset Backed Securi-ties (ABS) and Asset Backed Commercial Paper (ABCP) or acquiring loans originated by other units. Although SNA 2008, para. 4.110 states that financial corporations engaged in securitisation are to be classified under S125, SNA 2008, para. 4.59 also considers at least some securitisation vehicles as captive financial institutions (S127). Assuming that the relevant units pass the institu-tional test, they should be classified as part of S125, if they purchase assets on the open markets while raising funds on the open markets; if they do not operate in the open markets on either assets or liabilities, they should be classified in S127. Industry ISIC Section K 6499 Sector S125 - Other financial intermediaries except insurance corporations and pension funds or S127 - Captive financial institutions and money lenders


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TF4 - Profiling assessment: we agree; for units of that kind classified under S125, profiling should consider the securitisation company as an “enterprise” (activity carried out for the market); for the exceptions under para. 4.59 (SNA 2008) profiling treatment is the same of points TF1 and TF2. TF5: Conduit Function: Raising or borrowing funds, often from unrelated enterprises, and re-mitting those funds to its parent or to another related enterprise Criteria: According to SNA 2008, para 4.114 c, conduits should be classified in S.127 (captive financial institutions), if they qualify as institutional units and raise funds in open markets to be used by their parent corporation. Conduits typ-ically do not transact on the open markets on the asset side. Industry ISIC Section K 6499 Sector S127 - Captive financial institutions and money lenders TF5 - Profiling assessment: it is, mutatis mutandis, the same as concerning the TF1 and TF2 cases: if possible these units should be grouped with the enterprise they contribute to create with their specific activities (raising or borrowing funds). TF6: Royalty and licensing company Function: Concentrating group receipts concerning royalties and similar flows received from intellectual property rights and trademarks Criteria: An SPE-type of entity holding intellectual property rights or trade-marks and receiving royalties or similar flows for a group of enterprises or indi-viduals is regarded as an independent royalty and licensing company. The issue of economic ownership of the relevant non-financial assets needs further discus-sion: see issue 4 (of the original paper). Industry ISIC Section N 7740 Sector S11 - Non-financial corporations TF6 - Profiling assessment: we agree, up to the point that we will take the rele-vant companies as part of the perimeter of the GEG that has to be profiled. If possible these activities should be split to the different enterprises otherwise a specific “enterprise” should be created (in practise, the same treatment foreseen for the GDC). TF7: Captive leasing company (including mobile equipment renting com-pany) Function: Financial leasing or operational leasing within a group Criteria: Financial leasing companies operating on open markets are to be clas-sified under S125 (see SNA 2008, para. 4.110). Captive leasing companies should be classified under S127. Operational leasing company should be classi-fied as non-financial corporations (S11).


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Industry ISIC Section K 6491 for financial leasing companies, ISIC Section N 7730 for operational leasing companies Sector S125 - Other financial intermediaries except insurance corporations and pension funds, S127 - Captive financial institutions and money lenders or S11 - Non-financial corporations 21 TF7 - Profiling assessment: we agree, up to the point that we will take the rele-vant companies as part of the perimeter of the GEG that has to be profiled. The solution of the TF that considers as crucial the distinction “within a group/to the open markets” is fully consistent with the profiling methodology. TF8: Factoring and invoicing company Function: concentrating sales claims and invoicing sales of enterprises Criteria: An SPE-type of entity providing factoring and invoicing services with-in a group is classified as captive financial institutions (S127). If the unit deals with counterparties on the open markets, it should be rather classified under S125. Industry ISIC Section K 6499 Sector S125 - Other financial intermediaries except insurance corporations and pension funds or S127 - Captive financial institutions and money lenders TF8 - Profiling assessment: we never met such a case, even when the GEG has created cash management process (this means that we do not know if they keep in-house the factoring and invoicing operations or if they outsource them). Thus, without experience, we probably will propose to put this type of company in a specific “enterprise” which main activity is financial. On the other hand it may be concerned to belong to “ordinary business” of an enterprise to assure reve-nues for deliveries. For all the activities carried out within the group we general-ly followed the approach of point TF1 while for market activities a specific “en-terprise” could be created.

27 Treatment of SPEs in profiling; the global and national perspective 27.1 Profiling raises expectations for a coherent and extensive identification of units generally defined as SPEs. An important outcome from profiling could be flagging SPEs in EGR where different statistical domains such as FDI, NA and SBS could obtain the SPE status in a coherent way. 27.2 The core of the profiling methodology consists of the global perspective, the top-down approach and the use of IFRS standards. This has implications for the enterprise delineation, which is specifically demanding when recognition and treatment of SPEs is concerned: the usual conceptual approach relies on legal units or branches taken as quasi-legal units; our approach needs at the end to decide what “enterprises” are to be built and what are their links with the legal units the other have in mind.


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27.3 The global perspective and the top-down approach imply a precise order in the enterprise delineation: GEG first - separated from its upward holding(s) as treated in the previous chapter- then GENs and eventually TENs as national parts of them. The IFRS standards are used to delineate GENs: the financial statement discloses segments each of which usually consists of several LeUs or parts of them, and a GEN is generally derived from a segment or a GEN closely corresponds to a segment. The IFRS standards allow MNE holdings, financial units, headquarters and SPEs being reported in segments. Thus a GEN also may include these types of activities. 27.4 According to the model adopted for profiling (Chapter 2) SPEs are consid-ered individually as quasi enterprises, part of ordinary enterprises, or grouped to build ordinary or specific (quasi) enterprises to have a full coverage of the enter-prise group. More specifically, legal units that cannot be included in operational GENs or TENs are treated in a way similar to SPEs. 27.5 The problem of SPEs has also emerged in the accounting sector. The IFRS 10 standard has been effective from the 1st of January 2010. The principle SIC12 in force until the end of 2012 but useful for our understanding deals with SPEs56. The IFRS 10 standard which replaces SIC12 introduces a single consoli-dation model for all entities based on control, irrespective of the nature of the investee (i.e., whether an entity is controlled through voting rights of investors or through other contractual arrangements as is common in special purpose enti-ties)57. 27.6 There are two alternative sources available for SPE identification: one based on the IFRS standards, and the other based on NACE codes recorded in EGR.

56 Under SIC 12, an entity must consolidate a special purpose entity ("SPE") when, in substance, the entity controls the SPE. The control of an SPE by an entity may be indicated if: • The SPE conducts its activities to meet the entity's specific needs • The entity has decision-making powers to obtain the majority of the benefits of the SPE's

activities • The entity is able to obtain the majority of the benefits of the SPE's activities through an

'auto-pilot' mechanism • By having a right to the majority of the SPE's benefits, the entity is exposed to the SPE's

business risks • The entity has the majority of residual interest in the SPE Examples of SPEs include entities set up to effect a lease, a securitisation of financial assets, or R&D activities. 57 Under IFRS 10, control is based on whether an investor has 1) power over the investee; 2) exposure, or rights, to variable returns from its involvement with the investee; and 3) the ability to use its power over the investee to affect the amount of the returns.


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27.7 The IFRS standards suggest two types of legal units to be investigated as SPE candidates in profiling GDC-based GEGs as explained in 24.4: a) the LeUs that are not consolidated in the financial statements of the group, and b) the LeUs that are consolidated in the residual segment of the financial statement typically named as “Other”. For the first type, we should normally make a distinction between the “marginal units” (in an accounting sense) and the eventual SPEs; the solution is to flag all the concerned LeUs as potential SPEs. For the second type it is necessary to understand whether the LeUs within the “Other” segment can be organized in autonomous and meaningful GENs. If it is the case, the specific GENs have to be created independently from the residual “Other” GEN. If not, then the concerned LeUs will remain in the “Other” GEN and flagged as potential SPEs. It is noteworthy that the IFRS 10 instructs most SPEs to be consolidated in the financial statement. As a consequence, on one hand most LeUs outside the scope of consolidation are SPEs, and on the other hand more LeUs consolidated in the residual “Other” segment are in fact SPEs. 27.8 The use of EGR data including NACE code in the identification of SPEs is described in the report by the FDI Task Force58. Concerning the types intro-duced by the GGNA manual (financing and holding companies; royalty and li-cence companies; factoring companies; leasing companies) profiling could help integrating EGR and desk results, especially based on the financial statements. Good results could also be obtained in delineating empty shells during the GDC evaluation. In general, at the global level flagging the financial sector should be easier. 27.9 Based on either IFRS standards, or the EGR data, or a combination of the two sources, the GDC profiler first flags the suspected SPEs. Next, the partner-ing country will either confirm or disapprove the suggested SPE status based on the national first-hand sources such as registers and surveys. The SPE delinea-tion in profiling is realised in a close co-operation between the GDC profilers and the partnering countries. Coherence with the GEN implies that for example the decision tree for the identification of SPEs of “Eurostat Task Force on the recording of certain activities of multinationals in national accounts (TF MU-NA)” is not completely applicable. In fact, an entity controlled by another resi-dent institutional unit could be part of another GEN and data consolidation fol-lowing only the territorial aspects should not be the proper solution. Anyway, specialists in manual European profiling members will be aware that in terms of automatic procedures and for situations in which a complete manual European profiling cannot be undertaken the decision trees developed in different Task Forces will lead to good solutions.

58 Final report of the Task Force ”FDI Requirements on the EGR”, p.22 Box 6: Recommenda-tions for the identification of SPEs.


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27.10 Here some important proposals of the FDI task force are copied. The FDI Task Force report presents the most recent and the most operational definition of SPEs; it is also nearly described as a process to delineate them. So the content of the Box 6 of the report of the FDI Task Force leads us to issues such as: can it either be used as a starting point in our profiles or as a set of requirements to be fulfilled for further use by the FDI statisticians?


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Box 6: Recommendations for the identification of SPEs 6.1. SPEs have to be flagged in the EGR for FDI and FATS purposes. Three categories should be identified:

(i) Empty group heads, (ii) SPEs used for “passing through capital” and possibly (iii) Other SPEs.

6.2. The European SPEs, which are a subgroup of the national SPEs, should be also identified in the EGR. 6.3. The definition of SPE (national and European concept) as agreed by the BoP Working Group and the WG-External Statistics should be used as a basis to identify SPEs in the EGR. 6.4. The following criteria included in the definition of SPE could be used to produce a list of potential candidates for national SPEs using the available in-formation in the EGR:

(i) The enterprise is a legal entity incorporated in a Member State or a branch registered in the country → in the EGR, it should be a legal unit resident in a Member State. (ii) The enterprise is ultimately controlled by a parent not resident in the Member State, directly or indirectly59 → in the EGR, the UCP/GDC should be resident in another Member State. (iii) The enterprise has no or few employees60→ in the EGR, the number of employees should be 0, 1 or blank. (iv) The core business of the unit frequently consists of group financing or holding activities → in the EGR: – Units under NACE codes 6420, 6430 or 7010 could perform activities po-tentially related to SPEs (codes 6492, 6499 and 6619 could be also consid-ered) and, – A legal unit will not very likely be a SPE if there is another entity in the group performing a production activity in the same country of residence.

6.5. The information on SPEs could be fed into the EGR in two possible ways: (i) National FDI compilers provide their own list of SPEs to be incorporated and flagged in the EGR. (ii) Alternatively, the EGR produces a list of potential candidates for being SPEs (at national and EU/EA level) using the criteria described in Recom-mendation 6.5. This list is checked by the national institutional contacts and the validated entities are flagged as SPEs in the EGR.

59 we should add “or controls affiliates that are all non-residents –case of the empty group head”; but the conclusion stays right: the GDC/UCP is resident in another mem-ber state; 60 The TF on HOs HCs and SPEs identifies “few” with 3 (and not “0” or 1); but this change does probably not create substantial difference.


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28 Auxiliary activities and R&D according to SNA 28.1 National account statistics are identified as important end-users of data compiled for new profiled statistical units, and hence discrepancies with SNA are to be avoided as much as possible. BPM6 is considered here next to SNA, since it focuses on cross-border transactions which play a significant role in GEG activities. Therefore, both SNA and BPM6 are to be acknowledged when deciding on how to deal with GEGs’ auxiliary activities and R&D in profiling. SNA and BPM6 apply the term institutional unit for a unit, supposed to be close to TEN in the profiling terminology, and establishment for a unit supposed to be close to LKAU61. 28.2.1 Ancillary activities and artificial subsidiaries. The SNA 2008 makes a distinction between artificial subsidiaries and a unit undertaking only ancillary activities. The SNA 2008 Chapter 5 discusses the role of ancillary activities. When the basic routine services62 that are required by all enterprises are provided in-house, they are called ancillary activities. According to SNA, an ancillary activity is a supporting activity undertaken within an enterprise in order to create the condi-tions within which the principal or secondary activities can be carried out. According to SNA, ancillary activities are not separately identified for small enterprises with single location but for larger enterprises with multiple locations it may be useful to treat them as secondary or even as principal activities. SNA specifies that activities, such as producing own machinery and equipment for the enterprise or carrying out own R&D, are not (to be treated as) ancillary. Concerning the treatment of ancillary activities, SNA states that if an establish-ment undertaking ancillary activities is statistically observable or it is in a differ-ent location from the establishments it serves, it may be useful to treat it as a separate establishment unit.63 However, ancillary activities are not satisfying the conditions of being separate institutional units in the SNA framework) neither of having sufficient autonomy in the Profiling method). Within SNA, the artificial subsidiary is a subsidiary corporation wholly owned by a parent corporation and created only to provide services to the parent corpo-

61 Statistical units used in present statistics (including national accounts) and implications of changing the units are discussed in more detail in the chapter 11 and 12. 62 Such as keeping accounts; providing communication facilities; purchasing materials and equipment; hiring, training, managing and paying employees; storing materials or equipment: warehousing; transporting goods or persons inside or outside the producer unit; promoting sales; cleaning and maintenance of buildings and other structures; repairing and servicing machinery and equipment; and providing security and surveillance. Paragraph 5.35 of the SNA2008. 63 Paragraph 5.41 of the SNA2008.


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ration or other corporations in the same group. Artificial subsidiaries are not regarded as separate institutional units in SNA but as an integral part of the par-ent, and their accounts are consolidated with those of the parent (unless they are resident in an economy different from that of their parent and treated as SPEs).64 However, SNA does not discuss whether activities of artificial subsidiaries may be treated as separate establishments when possible. In conclusion, attempting to translate the SNA65 guidelines into the profiling approach, SNA allows ancillary activity units to be treated as nationally truncat-ed parts of GENs where GEN represents the principal activity and ancillary ac-tivity units form a TEN that is dual coded to represent the national activity which is different from the GEN activity. SNA indicates the similar treatment for artificial subsidiaries. Thus, remaining in line with SNA, ancillary activities or artificial subsidiaries may not constitute a GEN but be dual coded TENs. 28.2.2 Research & Development. According to SNA, research and development is not an ancillary activity, and it is recommended that a separate establishment should be distinguished for it when possible. The output of R&D should be val-ued at market prices or at the sum of total production costs plus an appropriate mark-up. Moreover, the output of R&D should be capitalized as intellectual property products.66 However, SNA does not discuss directly whether a subsidiary carrying out R&D activity is to be interpreted as an artificial subsidiary or as a conventional subsid-iary which is treated as a separate institutional unit. In conclusion, attempting to translate the SNA guidelines into the profiling ap-proach, SNA bypasses altogether the question whether R&D subsidiaries should form a GEN. As SNA recommends R&D to be interpreted as LKAU, brought to the profiling terminology, a national R&D unit should be included in the GEN which manages it (either a productive GEN whose R&D activities are split from the production, or a specialised R&D GEN), presented as a TEN (i.e. one TEN per GEN per country) with R&D activity code if convenient (or just part of the convenient TEN), even in case the GEN does not present R&D as its principal activity. The introduction of dual coding (see chapter 6) will contribute to a solu-tion here.

64 Paragraphs 4.62-4.64 of the SNA2008. 65 It is important to have in mind that the SNA is written from a national perspective 66 Paragraph 6.207 and 10.104 of the SNA2008.


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29 The treatment of R&D and auxiliary activities, with focus on crossing border services

29.1 The problems of R&D and auxiliary activities in the frame of the multina-tional groups are related to different kind of issues. First, we need to decide whether the R&D or auxiliary activities of the enter-prise group can form a global enterprise (GEN “other” or GEN “auxiliary”). Especially this question arises in cases where the R&D and/or auxiliary activities are organised and reported as own operational segments according to IFRS rules. Second question is what is the impact of GENs and TENs on treating the finan-cial flows of such activities between countries? Do the GENs and TENs help the identification and measurement of cross-border services? Auxiliary activities are by nature similar to those of R&D. The only difference is that auxiliary activities are limited in scope to the type of service functions that virtually all enterprises need to some extent. R&D, instead, is not necessary to all enterprises. 29.2 There are several ways to organize the R&D or auxiliary activities inside the group. Three different examples are put in the annex V to illustrate the issue. Further examination of the issues and experiences from testing must lead to more concrete recommendations.

30 Branches and the question of VAT positions 30.1 Some specific situations as for example VAT positions67 need to be further investigated. Here follows some first insights of the phenomena. 30.2 GEGs often open VAT positions in different countries mainly for fiscal reasons. In some cases high levels of turnover and/or exportations are recorded for these, mostly empty, shells. In these cases it may not be clear whether the values are related to other resident subsidiaries or to foreign units of the same group. A practical solution often adopted in a national perspective is to look for units of the same GEGs and consolidate the data. Profiling methodology could be a valid tool also in such situations in defining the activities carried out by the units and finding the proper solutions especially evaluating the intra-group flows (cross-border) or the presence of particular agreements (for example, contract manufacturing) within the GEG.

67 A tax position is a position that an entity takes in a previously filed tax return or which it ex-pects to take in a future tax return, which it uses to measure current or deferred income tax assets and liabilities. A tax position can yield a permanent reduction or deferral of income taxes paya-ble. Examples of tax positions are the decision to not file a tax return, to shift income between tax jurisdictions, and to classify a transaction as tax-exempt.


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30.3 In some cases a VAT position may be considered as an SPE but in this doc-ument the choice was to separate the NA aspects (chapters 24 and 25) from other concepts. According to the GGNA manual68, the value added tax (VAT) regis-tration is not a sufficient condition in the European Union for an entity to be classified as a resident institutional unit. Such an entity is deemed to be resident in a country for certain administrative purposes but not for statistical purposes. However, (global) profiling methodology can help in identifying such VAT enti-ties that are not resident for statistical purposes. The interrelationships between the GDC and the partner countries should be sufficient to solve the possible in-consistencies in the statistics (see Annex VI). 30.4 Branches defined as “local units without separate legal entity”, which are dependent on foreign enterprises, and classified as quasi-corporations according to ESA95 and SNA93 principles, shall be treated as enterprises in the business registers” (BRRM 2010). For the SNA2008 a branch may be identified as an institutional unit “when a non-resident unit has substantial operations over a sig-nificant period in an economic territory, but no separate legal entity” and “this unit is identified for statistical purposes because the operations have a strong connection to the location of operations in all ways other than incorporation”. In manual European profiling these kind of units will belong to the perimeter of the GEG they belong to. From here these will be part of the analysis of the GEG into the statistical units structure of the group via the profiling exercise. 30.5 Regardless of the definitions within the European Community it seems very difficult to imagine a situation in which an administrative source of a Country does not record a branch as a separate legal entity. Generally it should be easy to understand if the unit is a national one or a branch but the main consequence for the EGR is the presence of more records for the same unit (even if in different countries).

68 See pages 43-44, 269 and Chapter 9 http://live.unece.org/fileadmin/DAM/stats/groups/wggna/Guide_on_Impact_of_globalization_on_national_accounts_FINAL.pdf




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List of abbreviations

A&L Assets and Liabilities BRRM Business Register Recommendations Manual (2010) BR Business Register BD4 The OECD Benchmark Definition of Foreign Direct Investment, 4th

edition BoP Balance of Payments BPM6 Balance of Payments and International Investment Position Manual,

sixth edition BR Business Register CBS Centraal Bureau voor de Statistiek (Statistics Netherlands) D&B Dun & Bradstreet ECB European Central Bank EG Enterprise Group EGR European Groups Register ENT Enterprise ESS European Statistical System EU European Union FATS Foreign Affiliates Statistics FDI Foreign Direct Investment GAAP (United States) Generally Accepted Accounting Principles GDC Global Decision Centre GDP Gross Domestic Product GEG Global Enterprise Group GEN Global Enterprise GGH Global Group Head GGNA Expert Group on the impact of Globalization on the National Ac-

counts GNI Gross National Income GNP Gross National Product GOD Group Operating Division IDBR UK Interdepartmental Business Register IFATS Inward Foreign Affiliates Statistics IFRS International Financial Reporting Standards INSEE Institut National de la Statistique et des études économiques (French

National Institute for Statistics and Economic Studies) ISTAT Istituto nazionale de statistica (Italian National Statistical Institute) KAU Kind of Activity Unit LKAU Local Kind of Activity Unit MNE Multinational Enterprise Group MUNA Multinationals in National Accounts NA National Accounts


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NACE Nomenclature statistique des Activités économiques dans la Com-munauté Européenne

NSI National Statistical Institute OECD Organisation for Economic Co-operation and Development OFATS Outward Foreign Affiliates Statistics ONS Office for National Statistics (UK) P&L Profit and Losses Prodcom Production Communautaire R&D Research and Development SBS Structural Business Statistics SNA System of National Accounts (UN) SPE Special Purpose Entity STATFIN Statistics Finland STS Short Term Statistics SU Regulation Statistical Unit Regulation TEN Truncated Enterprise UCI Ultimate Controlling Institute UK United Kingdom UN United Nations UNECE United Nations Economic Commission for Europe VA Value Added VAT Value Added Tax WPA Work Package A (of the ESSnet profiling)


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ANNEX I: BR recommendation manual 2010 chapter 21, the points 21.31to 21.46 “21.31 For the definition of control in the BR Regulation, the definition given in point 2.26 of Annex A of Council Regulation (EC) No 2223/96 (the European System of Accounts ESA 1995) shall be used:

“Control over a corporation is defined as the ability to determine general corporate policy by choosing appropriate directors, if necessary. “

A single institutional unit (another corporation, a household or a government unit) secures control over a corporation by owning more than half the voting shares or otherwise controlling more than half the shareholders’ voting power. In addition, government secures control over a corporation as a result of a special legislation decree or regulation which empowers the government to determine corporate policy or to appoint the directors. In order to control more than half the shareholders’ voting power, an institutional unit need not own any of the voting shares itself. A corporation C could be a subsidiary of another corporation B in which a third corporation A owns a majority of the voting shares. Corporation C is said to be a subsidiary of corporation B when either corporation B controls more than half of the shareholders’ voting power in corporation C or corporation B is a shareholder in C with the right to appoint or remove a majority of the directors of C. 21.32 The definition states that control may be exercised in different ways. The acquisition of an absolute majority (50 % +1) of shareholdings with voting rights is the main instrument used to take control over a legal unit and in the absence of other information it is generally used as a proxy to control. On the other hand, the absolute majority of ownership of the capital share ownership is not always necessary or a sufficient condition to have control. 21.33 It may not be a necessary condition because there may be situations in which a large relative shareholding with voting rights but without absolute majority is enough to take control. This can be due to: (a) Legislation, contracts or agreements affecting control; (b) Absenteeism in meetings on the part of other shareholders. This is more a de facto situation and difficult to prove in practice. 21.34 It may not be a sufficient condition because the ability to effectively exercise control depends on the ability to actively participate in the decision-making process. This may be limited by: (a) Shareholdings with limited voting rights; (b) Statutory provisions that limit the transferability of shares; (c) Temporary suspension of voting rights.


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21.35 Effective minority control means having effective control of a unit without holding the majority of voting stock. It does not include indirect control via a majority-controlled subsidiary. The most common case is a minority but large shareholder and a very large number of dispersed small shareholders, none of whom hold a significant share of the capital. The minority shareholder can thus exercise effective control insofar as no majority of shareholders is really able to oppose it. However, it is possible that the small shareholders could join forces in order to have more influence over strategic decisions. Effective minority control is, in general, difficult to prove in practice and a shareholding between 10 and 50 percent is generally regarded as influence, not control. 21.36 Situations vary considerably from country to country and depend on the legal framework concerning corporate governance, i.e. the legislation that regulates the allocation of property rights and control of enterprises in the economy. In particular, the principles vary sometimes notably between civil law systems and common law ones. 21.37 Control can be a de facto situation without legal basis or other proof and in such a case it is not to be stored in the business register. Strategies of outsourcing, aimed at reducing production costs and increasing productivity, such as exclusive sales or supply contracts, may generate dependency of one legal unit on another without any direct participation on the part of the latter in the capital share of the former. A legal unit can thus be ‘captured’ by another unit without being owned by it. The link may be a commercial contract, which ensures the ‘de facto controlling’ legal unit the exclusive rights to the work of the ‘subordinate’ unit. In the case of natural persons, such subordinate units have often been referred to as false self-employed in business demography. At least in theory such a subordinate can cease this control by closing down their legal unit. This is not possible for a subsidiary that is owned by the parent. 21.38 According to the SU Regulation (Annex III C, Explanatory notes 4), ”The subsidiary enterprises of a subsidiary enterprise are considered to be subsidiaries of the parent enterprise. (…)”. This means that a parent unit may have indirect control over a legal unit (sub-subsidiary) through one or many other subsidiaries. Indirect control does not require the parent unit to own a majority of an integrated shareholding in the capital share of the sub-subsidiaries. The difference between control and ownership is shown in Figure 3. 21.39 The example in figure 3 shows that X has indirect control over unit C, even though it owns indirectly (60 % * 30 %) + (60 % * 30 %) = 36 % of its capital share, X controls C through its two subsidiaries A and B by combining their voting rights in the meeting of C (30 % + 30 %) = 60 %. On the other hand, Y owns (40 % * 30 %) + (100 % * 40 %) = 52 % of C, but has no power to control it, since the voting rights that it has in its meeting of C amount only to 40 % of its capital share. In other words, the voting rights resulting from paths


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X-A-C and X-B-C have to be cumulated to determine actual control (sometimes this is called ‘cumulative control’). Figure 3: How control can differ from ownership

X

A B

C D

Y 60% 60%

100% 40%

40%

30% 30%

21.40 Control is a (direct or indirect) relationship between legal units such that either one legal unit is controlled by exactly one other legal unit or it is not controlled by any other legal unit. The ownership of a unit or a group of units is related to the holding of its assets, and determines the distribution of financial flows and income. If a unit or group of units is owned by shareholders, its ownership is vested in the shareholders collectively and can be seen as diffused among the legal units that own its shares in proportion to their shareholdings and independently of voting rights. 21.41 In fact, deriving control links from the ownership structure between legal units defines an operational hierarchical structure of the enterprise group with one legal unit at the top (the global group head) which is not controlled by any other legal unit and which controls all other legal units in the hierarchy. Therefore it is necessary to also record minority intermediate shareholdings into the business register, in case there is indirect control where the links can only be derived from the complete ownership structure. 21.42 The control hierarchies in Figure 4 are derived from the example in Figure 3 and should be recorded in the business register.


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Figure 4: How to record control links from ownership structures

X

C A B D

YY

21.43 The group head can be either resident in the country that compiles the business register, if the group is domestically controlled, or abroad. Unless otherwise noted, ‘group head’ refers to the ultimate or global group head, not to a national (or European) group head, which has a foreign parent. 21.44 If the group head is a resident legal unit, it must be recorded in the national business register as a single legal unit, which may possibly form an enterprise in combination with other legal units, according to the principles stated in Chapter 7. 21.45 The statistical concept of the enterprise group is different from the accounting concept, as can be derived from the Seventh Council Directive (see the Annex). In fact, as it is stated in explanatory note 3 of section III C of the Annex to the SU Regulation “this definition (of accounting groups …) is not suitable for statistical analysis because they do not constitute mutually exclusive, additive groups of enterprises. A statistical unit known as ‘enterprise group’ based on the ‘accounting group’ concept must be defined by applying the following four amendments: - Consider accounting group at the highest consolidation level (group head); - Include in enterprise group units whose accounts are entirely integrated in those of the consolidating company; - Add majority-controlled units whose accounts are not included in the overall consolidating by virtue of application of one of the criteria allowed by the Seventh Directive, i.e. difference in the type of activity or small relative size; - Discount temporary links of less than a year.” Operational rules for identifying control links 21.46 Control is a complex concept in economic terms. Statistical operational rules need to rely on observable criteria: Proof of control. Therefore it is sufficient that at least one of the following applies, in order to identify a link of direct or indirect control between two legal units: 1) A legal unit directly owns more than 50 % of the voting rights of another

legal unit (direct control);


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2) A legal unit indirectly owns more than 50 % of the voting rights of another legal unit, through subsidiaries (indirect control);

3) Existence of special legislation decree or regulation, which empowers the government to determine corporate policy or to appoint the directors of the legal unit;

4) A legal unit fully consolidates the accounts of another legal unit, according to the criteria of the Seventh Directive, and no other legal unit consolidates the same legal unit (control by virtue of full consolidation);

5) Administrative sources, collecting declarations in application of specific laws for market regulation, provide the information that a legal unit controls one or a set of legal units, even though it owns less or 50 % of its voting rights (effective minority control) and no other legal unit owns more.

Note — It may be possible that two rules, e.g. both cases 1 and 4, could apply simultaneously. As one unit cannot be controlled by two different units, the de facto controlling unit should then be chosen. Case 4 can in general be considered as weaker than 1, because there can be consolidation situations with less than 50% ownership and situations with over 50% ownership without consolidation.” End of quotation out of the BR recommendations manual.


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ANNEX II: Background information related to autonomy The concept of autonomy in the present European Statistical System (ESS) and in the SNA II.1 The concept of autonomy in the Statistical Units Regulation The Council Regulation (EEC) N. 696/93 “on the statistical units for the obser-vation and analysis of the production system in the Community” does not clearly define the concept of autonomy for a given statistical unit. It mentions this con-cept in different areas of the Annex: 1. Section II/A. legal, accounting and organisational criteria: “In order to define

units that are recognisable and identifiable in the economy, legal or institu-tional criteria must be applied. In some case, legally separate units must be grouped together as they are not sufficiently autonomous in their organisa-tion.”

2. Section III/A Enterprise: “The enterprise is……..which benefits from a cer-tain degree of autonomy in decision making, especially for the allocation of its current resources”.

3. Section III/B Institutional unit: “The institutional unit is an elementary deci-sion-making centre characterized by uniformity of behaviour and decision-making autonomy in the exercise of its principal function. ….. In order to be said to have autonomy of decision in respect of its principal function, a unit must be responsible and accountable for the decisions and actions it takes”

4. Section III/C Enterprise Group: “An enterprise group…… . … can have more than one decision-making centre, especially for policy on production, sales and profits. It may centralize certain aspects on financial management and taxation”.

Concluding remarks on SU Regulation: differences in the concept of autonomy between enterprise and enterprise group are due to different types of “decision making processes”: allocation of current resources for the enterprise (but what are they?) and financial management and taxation for the group. Somehow it seems that time is the discriminant: for the enterprise, autonomy is related to decisions taken in the short and medium term; for the enterprise group, autono-my is related to strategic, long term decisions. II.2 The concept of autonomy in the new SNA The SNA is “the internationally agreed standard set of recommendations on how to compile measures of economic activity” (chapter 1, A.1.1), at the same time “the SNA …..serves as a coordinating framework for economic statistics” be-cause it “is seen as the conceptual framework for ensuring the consistency of the definitions and classifications used in different, but related, statistics” and it “acts as an accounting framework to ensure the numerical consistency of data drawn from different sources…” (Chapter 1, E.1.57).


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According to this point of view, the SNA should not only be the point of arrival, but mostly the starting conceptual basis, on which to build up - or base (?) adapt (?) - the concept of autonomy. II.3 The main conceptual element of the SNA is the following: The Institutional Unit (IU) is the fundamental unit identified in the SNA. It is defined as: “…. an economic entity that is capable, in its own right, of owning assets, incurring liabilities and engaging in economic activities and in transac-tions with other entities. The main attributes are: a. An IU is entitled to own goods or assets in its own right: … able to exchange

the ownership of goods and assets in transactions with other IU. b. It is able to take economic decisions…..for which it is itself held be directly

responsible and accountable at law c. It is able to incur liabilities on its behalf….. d. Either a complete set of account…..exists for the unit or it would be possible

and meaningful, from economic viewpoint, to compile a complete sets of accounts if they were to be required” (chapter 4, A.4.2).

From this SNA approach it can be concluded that the focus is on the economic meaningfulness of the basic statistical unit; from there on the ability to exchange ownership (buy and sale), to take decisions and to incur liabilities; and not on the legal basis. The words “meaningfulness” and ability need further explanation. First we have to assess the meaningfulness and from there the ability. II.4 Other fundamental points are: The two different types of ownership: “The legal owner of entities such as goods and services, natural resources, financial assets and liabilities is the IU entitled in law and sustainable under the law to claim the benefits associated with the entities”….”The economic owner as goods and services, natural re-sources, financial assets and liabilities is the IU entitled to claim the benefits associated with the use of the entity in the course of an economic activity by virtue of accepting the associated risks” (chapter 3, B.3,21, B.3.26). “…when the expression of ownership or owner is used and the legal and economic owner is different, the reference should be understood to be the economic owner” (chapter 3, B.3.27) Valuation of transactions: “Market prices of transactions as defined as amount on money that willing buyers pay to acquire something from willing sellers; the exchanges are made between independent parties and on the basis of commer-cial consideration only, sometimes called “at arm’s length” (chapter 3, E.3.119). National boundaries: “The total economy….consists of all the IUs which are resident in the economic territory of a country. … The concept of residence in


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the SNA is not based on national or legal criteria. An IU is said to be resident in a country when it has a centre of predominant economic interest in the economic territory of that country” (Chapter 2, B.2.19). In all of these statements the economic aspects are said to be predominant as compared to the legal ones (see what has been shown in bold). II.5 At the same time the SNA contradicts these “predominant economic ele-ments” when it says: In practice some IU are controlled by others and thus in such cases autonomy of decision is not total and may vary over time. Legally independent holding of assets and liabilities and autonomous behaviour do not always coincide. In the SNA preference is generally given to the first case aspect because it provides a better way to organise the collection and presentation of statistics….” (Chapter 2, B.2.16). And “…. However, each individual corporation should be treated as separate IU, whether or not it forms part of group……Although the management of a subsid-iary corporation may be subject to the control of another corporation, it remains responsible and accountable for the conduct of its own production activi-ties…….Another reason for not treating groups of corporations as single IU is that groups are not always well defined, stable or easily identified in practice” (Chapter 4, B.4.51-4.52). In these points the SNA seems to follow a pragmatic policy because even if “its usefulness is limited in some cases” the autonomy is considered in terms of le-gally independent holding of assets and liabilities. Concluding remarks on SNA concepts: even if the SNA prefers economic as-pects (see transaction evaluation at arm’s length and the concept of economic ownership), at the same time it suggests that these items are preferably identified under "legal" viewpoint and inside the National boundaries (in order to simplify the statistical data acquisition?). The SNA does not want to consider the existence of complex organisational structures (among which enterprise groups at national or global level are the main and the most clear) and the dependence links that characterize the relation-ships between the different legal units of these structures. The fact that the SNA does not consider the existence of the complex organisa-tional structures (at national or global level) and the dependence links that char-acterize the relationships between the different legal units of these structures must lead to a reconsideration of or addition to what is described here in the SNA. The issue of the data collection is to be considered after initial establish-ment of the most adequate statistical unit. Adaptation of the statistical unit to solve data collection problems should only be done by exception in the cases where it has appeared to be impossible to collect according to the usual SUs.


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As we can see in practice, operational economic structures of an Enterprise Group can vary from the formal legal structure. Here we cannot find a general appearance. Some groups operate economically according the legal structure, although combinations of legal units can be necessary. With other groups the operational economic structure has no or only a few correlation with the legal structure. Following the legal structure in the last case leads to meaningless eco-nomic figures/data in statistics. On the contrary, the “enterprises” that we pro-pose are more realistic (and also more pragmatic) that the present IUs; they can be made consistent with the other concepts of the SNA.


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ANNEX III: Variables for reconciliation with SBS statistics, NA use and their links with accounting standards.

III.1 The needs of NA69 are presented along of 3 different lines: - the components of value added as a source for sectorial accounts (as well by

Institutional Sectors as by industry); - the basic data for evaluation of fixed capital (elements coming from the bal-

ance-sheets or the so-called “financial statement”) - bases for wealth estimates (coming from the rest of the balance-sheets); these

data could also be useful for checking the fixed capital elements as part of the balanced items of a global account.

III.2 The IFRS accounting standard (International Financial Reporting Standard) provides a template of Profit &Losses accounts, also for operational segments of a GEG. This is a tentative version of a very simplified data set that try to include enough variables to produce the main aggregates of sectorial accounts for NA flows; it includes nearly all variables that appear in SBS requirements (missing at this moment change in merchandise inventories) plus as few variables as nec-essary to have complete accounts. These accounts and the data of these seem very difficult to obtain when the En-terprise statistical unit has insufficient autonomy regarding its production pro-cesses from a financial (production process related) point of view, but, in this case, the existence of a specific “enterprise” including holdings, managing activ-ities (and other residual ( mainly auxiliary)activities of the GEG) is very proba-ble; this residual “enterprise” would also include most of the “production’ ori-ented financial-type variables. III.3 Very important: it works from a by-activity version of the P&L ( in which purchases, wages and salaries, depreciation of fixed capital, etc. are displayed explicitly) and not from the frequently displayed version, which is by- function (in which the main variables are “cost of sales, distribution costs, administrative costs, etc.”). So that the existence (and GEG the agreement to display) of this by-nature version of the accounts is crucial. The beneath table with variables reflect the Enterprise and Truncated Enterprise statistical units, resulting in the operational (truncated) results (remark: in some cases the information of this table is less detailed that requested by the present SBS questionnaire e.g. on splitting between sales of own production, sales of merchandise etc.; the same for inventories):

69 See also the UNECE Handbook on the impact of globalisation on National Accounts, 2011. In this handbook also attention is given to topics like Special Purpose Entities (SPEs). (http://live.unece.org/fileadmin/DAM/stats/groups/wggna/GuideNA_April.pdf)

http://live.unece.org/fileadmin/DAM/stats/groups/wggna/GuideNA_April.pdf


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P & L by nature (not by function) (consolidated for the GEN or the TE)


1st evaluation of VA ( by the production side ) =

“Production” = Proxy of the “Revenue” variable? + pure T-O + other activity products +- produced inventories

T-O (sales to 3rd parties) net of granted discounts & rebates (IAS18) if possible split between sales of merchandise and other sales. Newly produced inventories and fixed assets (incl. grants on fixed assets)

+- Other products and expenses Patent, franchise & brand royalties etc.; more useful if split between products and charges.

- Used purchases - Other external expenses

Purchases of goods (raw material, equip-ment and parts etc.), services and merchan-dises, net of in inventories of received discounts and rebates +ancillary costs on purchases (CIF etc.

2nd evaluation of VA ( by the compo-nents) =

+ Employees wages and salaries Including bonuses and share of results + Taxes on products and indirect taxes +Depreciations Physical and value change

= Current operating re-sult (optional)

Close to net operating result of the NA

+- Other current products and charge Other current non-recurring products &

charges (e.g. selling’s of assets, deprecia-tions of goodwill)

Operational result

III.4 Depending on the size of autonomy some more variables can be associated to the enterprise unit, but this will not be a general situation. So these variables can be considered as in between belonging to the Enterprise unit and the Enter-prise Group unit. The next table gives some insights in these variables. Also large investments can belong to this category. The investment variable needs more attention because decision making on investments can done on different levels depending on the size of the investments and/or the kind of the invest-ments (strategic or operational).


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Financial result

Operational result+ Treasury prod-ucts

Net costs of net financial debt

- Cost of debt

+- Other financial products and costs - Taxes costs Taxes on result + deferred taxes + participa-

tions of employees in the results +- Net result quota-share of minority owning of non-consolidated interests

When the GEG has a real influence on deci-sions

+- Pre-tax net result of: . non-continued activities . ceased or being sold activities

IFRS 5

Net result

- Minority interests Part of the Net result accruing to minority holders, for globally consolidated affiliates

Net result, share of the group

III.5 The IFRS also defines templates for A&L (asset & liabilities) tables. As argued in the introduction (see 7.3) the variables presented in the A&L-accounts are applicable to the Enterprise Groups units’ types and less for the Enterprise units’ types. A very simple table for assets and liability is shown in the tables below.

ASSETS


Non floating assets

Intangible asset

Goodwill Other intangible (patents, brands, etc.)

Tangible assets

Equipment, machines etc. Buildings for hire Biological non-current assets (forest, orchard, cattle, etc.)

Financial assets

Equity share in associate enterprises (Equity share in TENs of other countries) Other disposable (sellable) financial assets Non-current assets, disposable to be sold? Deferred taxes (asset type)

Floating as-sets

Stocks Goods and merchandise Biological current assets (crops, vegetable and fruits, animal products, etc.)

Financial floating assets Credits to clients Other financial current assets Cash and similar

Total Assets


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In order to be able to give sufficient information to the stakeholders (mainly the NA) this table has to be completed by specific data that are to be found in the Notes and annexes to the Annual Report, at least: Tangible assets ( Gross value 1st January + Increase – acquisition, creation, etc. - less Decrease – sales, withdrawal of tangible assets, etc. = gross value at the 31st December) Amortisation accounts (Total value 1st Jan + Increase of the year less Withdraw-als (e.g. when selling) = Total value 31st December) The same for depreciations including P&L accounts. Some extra, nationally specific, information can be necessary.

LIABILITIES Content of the boxes

Shareholders funds

Shareholders funds

+ Equities + Other non-distributed reserve funds + Non distributed net results + Value of non-current assets disposable for sale (directly accounted for in the shareholders funds) = Total of shareholders funds - Minority shareholding = Shareholders funds, part of the group

Non current liabili-ties

Long term debt Deferred taxes Long term reserves

Current liabilities

Suppliers credit Short term financial debt Short term part f long term debt Eligible taxes Short term reserves Liabilities directly linked to non-current assets disposable for sale

TOTAL LIABILITIES


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ANNEX IV: SPEs - classification tables Special purpose entities, financial sector: classification table by Eurostat


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Special purpose entities, non-financial sector: classification table by Eurostat


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Decision tree for the identification of SPEs70

70 (Source: “Eurostat, Task Force on the Recording of Certain Activities of Multinationals in National Accounts, final report, 2009c”)


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ANNEX V: R&D problem statement examples Example 1: R&D activities of the GEG is centralized in one LeU in one country and sold as a R&D service In this example, R&D services are separate items over which ownership right can be established. A GEG has 2 GENs and operates in 2 countries France and Italy. It also has, in France1 a R&D centre, which has a role of supporting the operational entities worldwide. It has financial flows with all the legal units in both GEN1 and GEN2 and in both countries. To keep the example “simple”, we assume that all other LeUs except that of R&D activities are operating in the market. Thus, there are no other intra-group flows expect those of the R&D LeU4. The money flows from LeUs 1, 2 and 3 to R&D LeU4 are drawn into the figure. GEN1 GEN2 NACE: 152 NACE: 141 Empl: 830 Empl: 520 Operating revenue: 2500 Operating revenue: 2900


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Different options: a- Consider LeU4 as a separate GEN3 (and TEN3 in France)

with an activity of R&D (NACE:721) b- Split LeU4 into GENs and TENs according to value added

(employment?) c- Allocate LeU4 to GEN1 (NACE: 152) which generates the

highest value added (employment?) and split it then into TEN1_IT and TEN1_FR.

d- Allocate LeU4 to GEN1 (NACE: 152) which generates the highest value added (employment?) and then into TEN1_IT, which generates the highest value added inside the GEN1

f- Other solution ………………………………………………………

Purely from the conceptual and theoretical point of view, and ignoring all possi-ble practical or technical problems, the recommended option is b. However, taken into account the practical constraints, several options remain open. One possible pragmatic solution is to follow the idea in the identification rule 8, introduced in paragraph 5.21. This would mean choosing option a. Option a could be pragmatic choice also in case of ancillary activities (instead of R&D) even though there the option b is even more recommended as in case of R&D. Example 2: R&D of the GEG is included in each LeU in each country In this example, R&D services are not sold outside a legal unit. Otherwise, the example is the same: a GEG has 2 GENs and operates in 2 coun-tries France and Italy. We assume that all the LeUs are operating in the market. Thus, there are no in-tra-group flows. Compared to example 1, the idea of this example is to illustrate a situation, where similar R&D activities exist but from point of view of the legal structure they are organised differently.


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GEN1 GEN2 NACE: 152 NACE: 141 Empl: 830 Empl: 520 Operating revenue: 2500 Operating revenue: 2900

FRIT

ITIT

Leu1 = TEN1_FRNace: 152Empl: 400of which R&D people 50OR: 2000


Leu2 = TEN1_ITNace: 152Empl: 430of which R&D people 50OR: 2500

FRIT

ITIT



Leu2 = TEN1_ITNace: 152Empl: 430of which R&D people 50OR: 2500

Different options: a- Consider each LEU as a TEN and use the activity codes of

LeUs, too. b- Consider R&D activities as a separate GEN3 (and TEN3 in

France and TEN3 in Italy) with an activity of R&D (NACE:721)

c- Other solution ………………………………………………………… ………………………………………………


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Example 3: R&D of the GEG is centralized in one LeU in one country but not sold as such (global production) Services, such as R&D, are not generally separate items over which ownership right can be established and cannot generally be separated from their production. For example, merchanting arrangements may be used for the management and financing of global manufacturing processes. It is said in BPM6 paragraph 10.42 that ”In cases where the merchant is the organizer of a global manufacturing process, the selling price may also cover elements such as providing planning, management, patents and other know-how, marketing, and financing. Particu-larly for high-technology goods, these nonphysical contributions may be large in relation to the value of materials and assembly.” Thus, in such cases, the merchant is involved in activities such as research and development but that activity is not directly recorded as balance of payments transaction of R&D services.

FR

IT

Leu1

Nace: 152

Empl: 300

OR: 500

Leu3

Nace: 141

Empl: 420

Leu2 =

Nace: 152

Empl: 330

OR: 500

LeU4: R&D and sales office

Nace: ?

Empl: 450

500 500

500


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In this example LeU4 in France is the R&D centre of the group and it also sells all the final products to customers. The responsibility for the production process is in France. The other three legal units are producing the products based on cost-plus contract. Their operating revenue is costs plus fixed fee. Different options: a- Consider LeU1 and LeU 2 as GEN1, Leu3 as GEN2 and

LeU4 as GEN3 with an activity of R&D (NACE:721) b- Consider LeU1 and LeU 2 as GEN1, Leu3 as GEN2 and

LeU4 as GEN3 with an activity of wholesale (NACE:46) c- Consider LeU1 and LeU 2 as GEN1, Leu3 as GEN2 and

LeU4 as GEN3 with an activity of manufacturing (NACE:152)

d- There is only one GEN… e- There are two GENs… Allocate LeU4 into GEN1 (NACE:

152) and GEN2 (NACE: 141) based on…? f- g- Other solution

…………………………………………………………


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ANNEX VI: Example of VAT position case

Introduction It is possible for a non-resident company to have a VAT number in the reporting economy, and to import, export or sell on the domestic market. It may be that no staff is employed in the country but there is only a VAT number to comply with the necessary customs and Intrastat declarations. Usually, it is the case that dec-larations are prepared by the non-resident company or by using the services of a fiscal agent. However, according to the GGNA manual71, the value added tax (VAT) registra-tion is not a sufficient condition in the European Union for an entity to be classi-fied as a resident institutional unit. Such an entity is deemed to be resident in a country for certain administrative purposes but not for statistical purposes.

An example of a VAT position case A is a metal group whose activity centres on the early stages of metal pro-cessing. A's main products are zinc and copper. The groups' head office is in Sweden. Its factories are located in Finland, Sweden and Norway. The group has mines in Sweden and Ireland. The sales offices located in Sweden; Germany and the UK look after the sales and marketing of the products. A has two production plants in Finland: a copper smelting plant Ab and a zinc manufacturing plant Ac. The production plants operate on the tolling fee princi-ple. In addition, the group has a legal unit Aa (company form “foreign organisa-tion) in Finland, which is only registered as liable for value added tax and has no own personnel and fills no tax return to Finland. The only data available on it are those on its sales subject to VAT from the periodic tax returns, and on its im-ports and exports from the foreign trade statistics.

Aa Non-resident corporation liable for VAT Ab Copper-melting plant Ac Zinc manufacturing plant

A's Swedish company procures the necessary raw materials for the production plants through Aa. Swedish company also bears the responsibility for the mar-keting and sales of the processed products. The production plants Ab and Ac do not own the raw materials and processed products at any stage. Their turnover is comprised of the processing premium.

In the Finnish statistics, describing turnover (structural business statistics, monthly indicators of turnover, the Business Register) the turnover of the pro-duction plants Ab and Ac equals the value of processing (processing premium).

71 See pages 43-44, 269 and Chapter 9 http://live.unece.org/fileadmin/DAM/stats/groups/wggna/Guide_on_Impact_of_globalization_on_national_accounts_FINAL.pdf




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Thus, the non-resident entity Aa liable for VAT is not included in BR, SBS or STS statistics in Finland. The turnover from which the Aa is liable for VAT “be-longs” to A’s Swedish company and is included in statistics in Sweden. However, Aa is included in foreign trade statistics (FTS) in Finland as it is the entity that imports the raw material and exports the finished products. Moreover, PRODCOM statistics describe the real volume and value of produced products and used raw materials. The production plants Ab and Ac are able to provide data on volumes, but the data on values have to be estimated in the PRODCOM statistics. The estimation is performed by utilising value and volume data from the foreign trade statistics (Aa). Profiling Profiling methodology can help in identifying such VAT entities that are not resident for statistical purposes. For example, in the case presented above, Fin-land could suggest Aa to be an affiliate of the group A and report high turnover for it. However, Sweden as the GDC country, would probably question the ex-istence of such an affiliate and such a high turnover.


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ANNEX VII: Example of profiled GEG and the impact on business statistics The goal of the following example is to show the impact on the business statistics of taking into consideration the global dimension of the statistical units in the case of 2 countries C1 and C2. It also shows that several options are possible to delineate the GENs and the TENs among which one needs to choose. The impact will be measured in country C1. In this country, there are 8 legal units among which 6 belong to a global enterprise group and 2 are independent legal units (LeU 10 and LeU11). Description of the situation and the relationships between the units without taking into consideration the global enterprise group:

LeU9Nace: 7010

Empl:50OR:1500

C1

C2

LeU1Nace:151

Empl:0OR:2000

LeU3Nace:141

Empl:0OR:1800

LeU2Nace:152

Empl:0OR:4000

LeU6Nace:741Empl:150OR:500


LeU4Nace:4642

Empl:0OR:3000

LeU8Nace:4772

Empl:50OR:6000




3000

6000

800

500

500

5002000 800

12002800

1000

500

6000

380

300

300

20

1000

The above schema presents the legal units in the two countries C1 and C2, their activity and their relationships in terms of turnover. The blue arrows show intra group turnover inside a country The green arrows show export turnover The purple arrows show turnover outside the group The description of the overall activities based on legal units' observation leads to the following statistics:


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Country Activity NACE code

Employ-ment

Operating revenue

Export revenue

intra-group reve-nues

C1-LeU3 Manufacture of wearing apparel 141 0 1800 0 800 C1–LeU1 Tanning and dressing of leather 151 0 2000 0 2000 C1-LeU2 + LeU10 Manufacture of footwear 152 200 5000 500 1200 C1-LeU4 Wholesale of clothing and footwear 4642 0 3000 3000 3000 C1-LeU11 Retail sale of footwear and leather goods 4772 100 6000 0 0 C1-LeU9 Activities of head offices 7010 50 1500 1000 1500 C1-LeU5 Other human resources provision 7830 1000 1000 0 1000 C1-Total Total in country C1 1350 20300 4500 9500 C2-LeU7 Manufacture of wearing apparel 141 150 800 0 800 C2-LeU6 Specialised design activities 741 150 500 500 500 C2-LeU8 Retail sale of footwear and leather goods 4772 50 6000 0 0 C2-Total Total in country C2 400 7300 500 500

From now, we take into consideration the existence of the multinational group of enter-prises and the relationships between its legal units. The multinational EG has two global activities: one of manufacturing of wearing appar-el (NACE: 141) and one of manufacturing of footwear (NACE:152). It is composed of 9 subsidiaries and is acting in two countries: C1 and C2. The headquarters (LeU9) are in C1. In C1, the 2 global activities are represented into 2 truncated enterprises. TEN1 per-forms the activity of manufacturing of footwear and TEN2 performs the activity of manufacturing of wearing apparel. TEN1 sells a part of its production outside the group and the rest to a wholesale company in the group. TEN2 sells all its production to the same wholesale company. This company exports all the production to a retail trade company in C2. This retail trade company belongs to the group. Moreover, in C1, there is one legal unit which manages the employees for all the legal units. In C2, the two global activities are represented into 2 truncated enterprises. TEN3 per-forms the activity of specialised design and TEN4 mainly performs an activity of retail trade.


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Legal units' structure of the group

GEN1Nace:152Empl:842


LeU9Nace: 7010

Empl:50OR:1500

C1

C2

Leu1Nace:151

Empl:0OR:2000

LeU3Nace:141

Empl:0OR:1800

LeU2Nace:152

Empl:0OR:4000



LeU8Nace:4772

Empl:50OR:6000


LeU4Nace:4642

Empl:0OR:3000

It is assumed that: LeU1, LeU3, LeU4, LeU5, LeU6 and LeU7 have no access to the market LeU1 accesses the market with operating revenue of 600 LeU9 (the Headquarters) has global revenue from TEN1 and TEN4, but it is not possi-ble to split the revenue by TEN. It also has outside revenue from royalties for licensing. LeU9 is also funding the activity of TEN3. The proposed profiling takes into consideration 3 GENs: GEN1 is performing the manu-facturing of footwear (NACE:152), GEN2 is performing the manufacturing of wearing apparel (NACE: 141) and GEN3 is the constituted of the transversal activities. In that case, it is constituted only of the HQ. In that case, the activities of LeU4 and LeU5 are split into GEN1 and GEN2 and more precisely between TEN1 and TEN2 in country C1.


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Other possibilities to constitute the GENs: 1) Create only 2 GENs (GEN1 and GEN2) and split the HQ activity into the 2 GENs.

• This option needs to have information on the criteria to apply to split the activi-ty.

2) Create 3 GENs, but arrange the LeUs differently: Include LeU5 and LeU6 in GEN3

• LeU5 is working for both GEN1 and GEN2. However, it is very important to associate the employees to the production in order to calculate productivity ratio like VA/employees. Moreover, LeU5 has relations only with other subsidiaries in the same country and ancillary information to split the activity is available (number of employees by subsidiary).

• LeU6 is performing a design activity for GEN1. However, it has financial rela-tions with GEN3 which is funding it. The choice of including LeU6 in GEN1 or GEN3 is made balancing between the functional structure (LeU6 activity is used by GEN1) and the financial structure (GEN3 is funding its activity).

3) The treatment of trade activities can be made on several ways:

• In C1, LeU4 sells production from both TEN1 and TEN2, and its activity is split into the two TENs

• In C2, LeU8 sells production from both GEN1 and GEN2 and it is integrated into TEN4 that belongs to GEN2.

• The choice between these two solutions depends on the information transmitted by the group itself and the ancillary information available to split the activity of one legal unit into two different TENs.

Observation by activity: One important question is how to treat the part of the GENs outside the country of the GDC. In the example, GEN1 (NACE:152) can be split into one TEN in C1 (NACE:152) and one TEN in C2. It has been chosen to attribute to TEN3 in C2 the NACE corresponding to the design activity, and not the NACE of the GENs it belongs to since no production takes place in the country. Proceeding that way does not make any difference between including TEN3 in GEN1 or including TEN3 in GEN3. In C2, again for TEN4, the NACE 4772 corresponding to the retail trade activity has been chosen rather than the NACE code of the GEN (manufacturing of wearing appar-el). This decision is based on the fact that the most part of the revenue is generated by the retail trade activity (the production activity is marginal in TEN4). The treatment of LeU8 in country 2 differs from the one of LeU4 in country1. Indeed, the retail trade activity report both to GEN1 and GEN2, but in country 2, GEN1 does not have any production activity (but only a service activity). Treatment of intra-group flows Several options are possible:


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• Remove the intra-TEN flows • Remove the flows inside a country, even extra-TEN • Remove all intra-group flows, including between 2 countries

In the example, the intra-country flows have been removed, except intra-flows between TEN1 and TEN5 but intra-group flows between 2 countries have been kept in the oper-ating revenue. Economic structure of the group



TEN5Nace: 7010

Empl:50OR:1500

C1

C2 TEN3Nace:741Empl:150OR:500

GEN3Nace:7010

Empl:50

TEN1Nace:152Empl:692OR:4600



Taking into consideration this new economic structure leads to the following schema of the economies and the flows between the new economic entities. TEN1 to TEN5 belong to the group and TEN6 and TEN7 are respectively the same than LeU9 and LeU10.


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Description of the situation and the relationships between the units taking into consideration the global and truncated enterprise:



TEN5Nace: 7010

Empl:50OR:1500

C1

C2 TEN3Nace:741Empl:150OR:500




500

5006000

6000

500

1000

500 28001200

1800

1000

The description of the activities based on truncated enterprises' observation leads to the following statistics:

country

NACE code

Employ-ment

consolidated operating revenue

Export rev-enue

C1 Manufacture of wearing apparel 141 308 2200 1200 C1 Manufacture of footwear 152 892 5600 1800 C1 Retail sale of footwear and leather goods 4772 100 6000 0 C1 Activities of head offices 7010 50 1500 1000 Total in country C1 1350 15300? 4000 C2 Specialised design activities 741 150 500 500 C2 Retail sale of footwear and leather goods 4772 200 6000 0 Total in country C2 350 6500 500

The changes in the figures between the statistics based on legal units and statistics based on enterprises are, in this particular example, the following: The activity of "tanning and dressing of leather" disappears, since it was an integrated activity of the manufacture of footwear. The support activities in country C1 disappear as well ("retail sale of footwear and leather goods" and "other human resources provision") since they were serving only economic entities in the group.


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The comparison between the figures by TEN and the figures at the global level of the group are not consistent on the level of the revenue and on its split by activity codes. Indeed, the group presents its results according to 3 segments: Manufacture of wearing apparel Manufacture of footwear Administrative services (completely internal to the group) According to the group, no operating revenue is dedicated to an activity of sales, but the total revenue is split between the manufacture of wearing apparel (4100) and the manu-facture of footwear (5700). Moreover, the group removes all intra-group flows, so the global revenue (9800) is lower than the sum of the countries revenue (14800). This problem of inconsistencies by activities can be solved by the double codification. Depending on the geographical level the figures are relating to, the NACE code of the TEN or the NACE code of the GEN can be used. The following graphics allow comparing the situations by using legal units or truncated enterprises as statistical units:

Figures on employment by activity according to the statistical unit

0

200

400

600

800

1000

1200

1400

1600

Manufactureof wearing

apparel

Tanning anddressing of

leather

Manufactureof footwear

Wholesale ofclothing and

footwear

Retail sale offootwear and

leathergoods

Activities ofhead offices

Other humanresourcesprovision

total countryC1

Legal unitsTruncated enterprises

The use of the enterprise rather than the legal units allows giving a picture of the em-ployment more in line with the economic activity.


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Figures on operating revenue by activity according to the statistical unit

0

5000

10000

15000

20000

25000

Manufactureof wearing

apparel


leather

Manufactureof footwear

Wholesaleof clothing

andfootwear

Retail saleof footwearand leather

goods


Otherhuman

resourcesprovision

total countryC1


The use of enterprises instead of legal units reduces the operating revenue by removing intra-group flows between the operating units in country C1. The revenue in the support and integrated activities disappears since it was internal revenue inside the group.

Figures on exportation by activity according to the statistical unit

0

500

1000

1500

2000

2500

3000

3500

Manufacture ofwearingapparel


leather

Manufacture offootwear

Wholesale ofclothing and

footwear

Retail sale offootwear and

leather goods


Other humanresourcesprovision


The figures on exportation do not change in total, but the share between activities changes, the exportations are affected to the production activities rather than to a wholesale activity.


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ANNEX VIII: Manual European profiling strategy paper for communication

with MNE’s.

Manual European Profiling Strategy Paper for Communicating with the MNEs Sarah Eaton

International Business Profiler Office for National Statistics

Contents: Introduction to Theme

1. Material Self Interest - What is in it for me? 1.1 Reduction of Burden 2.1 Better Quality Data

2. Reciprocation 2.1 Providing a Service to Support the GEGs 2.2 Feedback to GEGs 2.3 Reciprocation with User 2.4 Reciprocation with Profiling Partners

3. Commitment and Consistency 3.1 Verbal or Written Commitments 3.2 Regular contact

4. Social Proof – Cite co-operation rates from other competitors 4.1 Referencing Competitors 4.2 New NSIs

5. The “Liking” Principle 5.1 Being Liked by Businesses 5.2 Inter-Personal Skills 5.3 Face to face Communication 5.4 Liked by Users and Partners 5.5 Like you because you like me!

6. Authority 6.1 Conveying Roles and Responsibilities of NSIs 6.2 Conveying Importance of the ESSnet on Manual European Profiling 6.3 Contacting Authoritative Personnel 6.4 Security of Data

7. Scarcity – If there is less of something, then it is more valuable 8. Timing of Contact

Conclusions References


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Introduction to Theme The following paper discusses how the ESSnet on Manual Europe-an Profiling may apply research and best practice techniques to improve and build upon relationships with respondents (Multi Na-tional Enterprises, MNEs), statistical users within National Statis-tics Institutes (NSIs) and also to enhance communication between fellow international profilers. Communication with MNEs, statistical users and partnering NSIs are all vital parts of the process required to succeed in carrying out an manual European profile. It is therefore important that we reflect and learn from well-established techniques to improve these rela-tionships. There have been numerous studies carried out by statis-tical organisations across the world which focus on improving the relationships between the statistical collector and the respondent. This paper discusses how we may use this research and apply it to the methodology of profiling. Many of these methods can also ap-ply to communication within NSIs between statisticians and users of the data and also between the partnering NSIs involved in the profiling project. It must be noted that due to different approaches and structures within NSIs, it may not be possible to utilise some of the recommendations contained in this paper. Therefore it should be treated as a list of possible techniques and not specified guide-lines. Much of the research which focuses on improving response rates is based upon work carried out by an American psychologist called Robert Cialdini. He has produced several papers on the topic of The Science of Persuasion and Influence. Other sources of information include Jackie McCarthy from the National Agricultural Statistics Service (NAAS) in the USA who presented a paper at the ICES (International Conference on Estab-

lishment Surveys) in Montreal in June 2012. McCarthy demon-strated that Cialdini’s social psychology techniques could be ap-plied to persuading respondents for statistical data collection pur-poses. Cialdini states in his research that there are 6 main principles of persuasion and influence and McCarthy adds an additional princi-ple of Material Self Interest. 1. Material Self Interest - What is in it for me? 1.1 Reduction of Burden For most people, this will be the main motivator for responding to a data request. In terms of manual European profiling, the main draw for large multi-national businesses to co-operate in profiling would be for profilers to explain that a long term goal would be to reduce response burden placed on the business. NSI’s can and often do, place a large amount of administrative burden on the largest of GEGs. Some of the largest businesses can receive hundreds of question-naires from NSIs every year. Therefore, the main motivator for responding to a data request is the possibility (now in the future) of a reduction in this burden. It is suggested that profilers could explain that one of the long term goal of this ESSnet is to test the possibility of collecting data at a higher level than which is done currently. (i.e. Global Enterprise and Truncated Enterprise level rather than at an LEU level) which could potentially reduce burden. It could also be made clear that the project is testing if all data could be collected once by the NSI GDC (from the GEGs Group Accounts). It can also explained that the ESSnet is looking at the feasibility of changing the all EUS


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NSIs statistical structure for data collection to bring it in line with the GEGs operational structure (IFRS if applicable) which could make it easier for GEGs to provide accurate statistics to NSIs. However, the issue of response burden needs to be treated with caution. This project is still only in a testing phase and therefore profilers should not promise the GEGs that cooperation will lead to a reduction in response burden. Profilers could explain that the project is aiming to improve the quality of national data and therefore could result in them receiving fewer queries. Profilers could also explain that analysing the busi-ness at a global level could result in the removal of duplicate in-formation and the completion of missing information. As a result this could benefit the business as less information will need to be gathered. 1.2 Better Quality data For the statistical users, profilers can draw upon the aims of the project and to the collection of better quality data from MNEs. A global Top Down approach could result in the elimination of dupli-cation, omissions and inconsistencies. As manual European profil-ing will improve the quality of units on the EuroGroups Register (EGR), this will directly affect the Outward Foreign Affiliates Sta-tistics (OFATS) and Foreign Direct Investment (FDI) surveys. Therefore profilers could demonstrate these improvements in order to better relationships with these users. It should also be noted to users that there will an increase in the level of quality for their cus-tomers which include Central Governments, Treasuries and the Central Banks. 2. Reciprocation.

This principle is based upon a favour being provided in return. One small favour will often provide a sense of obligation to return it with a large favour at a later date. Reciprocation can work both ways. Respondents may already feel obliged to help if in the past the NSI has helped them on a previous matter. Plus if a reward can also be given in advance then the business may feel obliged to help as they may have received something for nothing. 2.1 Providing a Service or Support the GEGs There are many reciprocating techniques that can be applied to manual European profiling, especially in relation to offering help and services to the businesses. For example techniques that profil-ers could adopt include providing the MNE with information about particular surveys and the likely timings of receiving national sur-vey forms. Profilers could also offer that the team be a point of contact for any queries that the business may have with any of the surveys. One of the biggest incentives for the MNE participation in the project is the offer to examine the MNEs current national re-porting structure and to investigate if there is any opportunity to reduce the number of survey questionnaires they receive. It is also worth explaining to the business that there is an opportuni-ty to ensure that all contact information is kept up to date and that the right surveys are going to the correct contacts at the business. Profilers could also offer if possible, an option to return survey data in an electronic format rather than in paper form. 2.2 Feedback to GEGs Studies have shown that providing positive feedback to the re-spondent on actions they may have carried out in the past also strengthens relationships. For example if a business is a consistent


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responder to surveys then profilers could explain this and thank them for their commitment. Profilers could also provide examples of the good quality of data being returned to the NSI. 2.3 Reciprocation with Users Convincing statistical users of the new methodology of profiling and in particular the changes to the definition of Enterprise is not an easy task. However there are principles we could apply which may help them in their decision. In the short term, profiling of the most important MNEs in the economy can result in immediate improve-ments to quality of outputs. Therefore users could be consulted in order to establish which cases are most important to our users and if they meet the currently manual European profiling criteria these could be targeted as a test case. 2.4 Reciprocation with Profiling Partners The Manual European Profiling process relies heavily on the co-operation between NSIs. MNE groups have to be analysed by mul-tiple partners and data shared amongst partners. Therefore recipro-cation features heavily in the profiling process. An NSI may send a file to a partnering country, requesting data. They would then want to action data that is sent to them in return. 3. Commitment and Consistency 3.1 Verbal or Written Commitments This principle is based upon concrete research which states that if people commit to something, more often or not they will follow through on their actions in order to maintain their self image. Peo-

ple think that it is right or morally correct to follow up on a com-mitment. Applying this technique to profiling, it may be productive to seek a verbal or written commitment from a MNE to help at the beginning of the process. For example ONS seek to agree a date for a visit even though it may be 5 to 6 months until both parties are able to meet. A few weeks before the meeting is due to take place the pro-filer will contact the business again to confirm the arrangements for the meeting are still suitable. This was a successful tactic as all 8 visits during 2012 went ahead as planned. If the MNE has already agreed to help with the project, ensure you have at least a verbal understanding from them, that there is an expectation that the business will have to carry out some adminis-trative (desk) work, for example providing or checking legal units in the group. Therefore if they agree to supply this at the outset of the project, this may improve the chance of success in obtaining information at a later date. 3.2 Regular contact “Consistency is a principle that states that people want to be and to be seen as consistent with their existing commitments," says Cialdini. Therefore when profiling, involving the same profilers or personnel will allow for the building of more effective relationships with all involved parties. (Group Accountants at GEGs, statistical users and profiling partners). It is also very important that if there has been an agreement to pro-vide something, then profilers must ensure that it is done. For ex-ample if you have stated that you will answer questions or concerns


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after a visit, then ensure that these are always answered. It will also be very important to keep regular communication with all involved. It is suggested that regular meetings are held, for example every month with the main data users including statisticians from Nation-al Accounts, Foreign Direct Investment, Structural Business Statis-tics (SBS) and OFATS. During this meeting, all ongoing cases are discussed including cases received from partners and feedback is provided from any developments discussed at each co-ordination meeting or workshops. 4. Social Proof (Cite co-operation Rates from other Competi-tors) 4.1 Referencing Competitors Cialdini’s research proved that people have a tendency to do things that they see others doing and this technique can quite easily be applied to the work with manual European profiling. A simple method which relates to conformity is when profilers are attempt-ing to recruit an MNE to help with the testing. Profilers could men-tion which other large MNEs (even better, their competitors) who have also agreed to participate in the project. An example of this is mentioning to Oil Company One that Oil Company 2 was already involved. This technique needs to be treated with a little caution as due to confidentiality reasons it may be sensitive in some NSIs to reference others in the project. 4.2 New NSIs More controversially, this technique could be applied to encourage other NSIs to participate in the project and to help the participation levels from partnering NSIs. For example if the performance of a

particular partnering country is falling behind the others it could encourage them to raise their output to match the other partnering countries. Additionally profilers could explain to users that NSIs across Eu-rope are meeting with their own stakeholders and users to encour-age involvement. Profilers could also stress how important users are to the success of the project and highlight the need to get all their views and feedback. 5. The “Liking” Principle This principle can be interpreted in two ways. Firstly, it is well proven that people are more willing to comply with people they like. 5.1 Being Liked by Businesses For many NSIs, it may be difficult to be liked by businesses espe-cially for the largest MNEs where NSIs often place large adminis-trative burden on them. Respondents are often frustrated by NSIs requests to collect data from them and in extreme cases employ staff just to complete survey questionnaires for the NSI. This is sometimes reflected in the relationship that profilers have with businesses. However, this difficulty could be used as an advantage. Using the “liking” technique, profilers should listen and trying to resolve any concerns they may have and this may give some opportunity to build better relationship. Listening to the respondent’s issues re-garding burden, and then if possible take these issues forward, can result in a more positive image of the NSI. Profilers could show


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empathy with the MNE in relation to the amount of burden placed on them and how complex some of the NSIs data requests are. It is also valuable to find something in common with the business to use as a starting point when attempting to build a relationship. For example, it would be advantageous to understand their business as much as possible especially if you are due to telephone the busi-ness or are planning a visit. Profilers could ask questions about the MNEs structure and main operations and based upon experience, contacts often thrive when talking about their own businesses. Showing how much you understand about the business can really help start a good relationship. 5.2 Inter-Personal Skills. Profilers require a variety of skills in order to build up sustainable relationships with all customers. For example, a profiler needs to be friendly, polite and professional but also needs to balance this with being clear and direct on their ambitions. Often the language used in statistics is very different to the accountancy terminology used by the contacts at the business. Manual European Profiling could be said to be a difficult topic to explain and therefore it can be difficult to convey what it is we are trying to achieve. Therefore it is vital that profilers try to use business language and try to keep the termi-nology as simple as possible. It is also important to avoid acronyms and terms only applicable to NSIs. The language barriers can also be a hindrance that some NSI will experience especially as in some cases, multiple languages are spo-ken within the same country. Therefore the most appropriate lan-

guage to be used in order to make the subject as clear as possible should also be taken into consideration. The main aims and objectives should be clearly explained to the MNE. It should also be made clear what is expected from the busi-ness at an early stage. For example, a profiler would indicate an-other meeting may be required and how much information would be required from the business. This could be checking of the legal unit perimeter of the global group or the provision of employment and turnover data from the business. 5.3 Face to face Communication Profilers also see the benefit in meeting with the business face to face. It is not always possible but some of the benefits to visiting the business include:- • Easier to build up a rapport with the business if meeting up in

person. • Enforces trust between NSIs and the Business. • It raises the profile of NSIs. • It is much easier to discuss complex subjects on a face to face

business. • Visual tools could be used to make the subject much easier to

get the message across. For MNE’s which act predominantly in more than one NSI, it is also very advantageous to carry out a dual visit where more than one NSI can meet up the business. This has been extremely useful in several testing cases including EADS where DESTATIS and INSEE attending a meeting in Germany. Also Nestle which operate


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predominantly in Switzerland and France also carried out a com-bined visit to a head office. For some NSI’s Business Federations can heavily influence coop-eration from the large Multi-National. For example in Belgium, The Federation of Enterprises is the “voice” for over 80% of the workforce in the private sector, representing more than 50,000 businesses. Therefore for some NSIs it may be vital to meet up with business federations in order to get their support, approval and un-derstanding of the project in order to help get buy in from MNE’s. 5.4 Liked by Users and Partners When liaising with users, being liked by them may not be as vital to a successful relationship as they already have a commitment to help and contribute as they work to the same visions and values within an organisation. However it is possible being liked may help the cause. There are many benefits to meeting with users and fellow profilers on a face to face basis on a regular basis. As the topic can be com-plex, it is worth considering carry out presentations with practical case examples which clearly defines the aims, the methodology and the issues with profiling. It is suggested that profilers present the test cases to the users show-ing the positives of the method and outstanding issues and then given them the opportunity to ask questions and feedback their views. All main points are then documented and are taken forward with partnering NSIs and the businesses. For partnering NSIs, meetings often take place at training seminars and workshops. Profiling has already realised the benefits of meet-ing up as new countries to the project have been paired up with an

ESSnet NSI. Most have held a coaching meeting which has signifi-cantly helped the training process. The new “Top Down Approach” to Manual European Profiling and including the Global and Truncated Enterprise definitions are a complex topic to discuss in detail and often users have many ques-tions that they need to be answered. For example some of the ques-tions from Users in the Latvian Statistical Office included, how will profiling ensure a time series of variables, what will be the benefits, when will the MNE have to report data in this new way. Profilers should try address some of these concerns and if there are outstand-ing questions, then they should be noted and then addressed to the ESSnet team who should then take all these outstanding issues for-ward. It is very important to let all users know that all unanswered questions will be taken forward and addressed by the project team. 5.5 I like you because you like me! The other side of the liking principle is that people like people who like them. Therefore, profilers should always show that they like and appreciate the customer. For example it is worth reiterating how valued they are as a customer and how important their help is in the success of the project. A profiler could refer to the outputs that the MNE are generating for the NSI and they are one of a se-lect few businesses that have been targeted for the testing process. 6. Authority This principle is based on the fact that people respond to and re-spect authority. People want to follow the lead of others especially those who portray an image of importance and professionalism.


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6.1 Conveying Roles and Responsibilities of NSIs In terms of manual European profiling, (unlike for national data collection) there is currently no legal requirement for businesses to comply. In actual fact, mentioning legal requirement may be seen as a threat and be detrimental to a relationship. The threat of apply-ing legal action should only be used as a last resort if there is a legal requirement in place. However, it should be emphasised that they are dealing with a legit-imate and trustworthy organisation. The main roles and responsibil-ities of NSIs should be conveyed to the MNE and include how they contribute to the data that is used by Central Governments. For example data collected is used in the production of Gross Domestic Product (GDP) estimates and by the Central Banks to set Interest Rates. As profilers, there will be many experiences where it will be diffi-cult to get compliance from the GEGs. With no legal back up, it may take several attempts to convince businesses of the benefits. Therefore in some cases profilers may need to make several calls in order to influence and convince then of the benefits for them. The message is not to give up when one reaches the first hurdle. 6.2 Conveying Importance of the ESSnet on Manual European Profiling For relationships with both MNE and internal users, the potential impact this would have on National and EU statistics should be clearly defined. For MNEs this would be in terms of the production of much more accurate data for global companies. For users, it should be shown the potential impact of changes to data collection, statistical unit and the improvement in quality of the data.

6.3 Contacting Authoritative Personnel The profiling guidelines state that a letter could be sent from the Director General of the NSI to the Chief Executive Officer (CEO) of the MNE requesting their help and involvement in the project. Using high level contacts indicate the importance and stature of the project and have already been put into practice by INSEE who have had a high success rate with this strategy. 6.4 Security of Data It is also important to explain that the data collected is treated with the upmost of security. The data collected is confidential and there are strict processes in place to keep the data secure. There is also a need to explain the process involved in how the data is securely transferred from NSI to NSI. 7. Scarcity – If there is less of something, then it is more valua-ble Profilers can use the very limited opportunity to be involved in the testing phase of the project. For example, profilers could advise the GEG that they are 1 of only a few (average of 5) involved in the project with only 100 of the most crucial MNEs across Europe involved. Larger companies may understand to a certain extent how im-portant their contributions are to both national and global statistics but this could be reiterated to them. 8. Timing of Contact An additional practice that is a vital ingredient to having a success-ful relationship with a business is the timing of the initial contact with them. Evidence from the initial testing phases of profiling has


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shown that initial contact should be made with the business after the release of their Annual Consolidated Accounts. This is for sev-eral reasons; i. the most likely contacts required for profiling are often at the group accounts level and are usually very busy during the period running up to the publishing of Annual consolidated accounts. An approach during the period of time when the ac-counts are being produced is more likely to be met with a refusal. ii. Once their accounts have been published there is far less data sensitivity and more likely to be prepared to share their data. It is also very important to contact our statistical customers at the very start of the profiling of cases. Profiling could establish if there are any concerns with the particular cases that could be addressed by profiling. Conclusions This paper demonstrates that there are a number of tools and tech-niques available that can be used and adapted to improve commu-nication with all of the various users, stakeholders and MNE con-tacts that we interact with during the Manual European Profiling Project. This list is not exhaustive and there are always new tech-niques and ideas that could be added to. However, the suggestions in this paper are a good starting point in terms of building success-ful relationships with all relevant parties. It is also important to note how communication differs between NSIs due to cultural differ-ences and therefore there is no strict methods that can be applied to every country. Each NSI should use the most appropriate tech-niques depending on existing experience and knowhow.

To conclude, communication with each of the different actors is all as vital as each other. Regular, clear communication is a key ele-ment to the success of the ESSnet on Manual European Profiling project. References Cialdini R.B. (2006) Using the Science of Influence to improve the Art of Persuasion. www.Influenceatwork.com 6 July 2006 Berkenbosch B (2011) Data Collection Strategy. (Response Enhancing Surveys). Statistics Netherlands Heerlen Mccarthy J (2012) USDA/NASS. Why Should I? Employer Social Pshy-cology to Increase Cooperation from Large Establishments. Powerpoint Presentation. ICES IV Meeting Montreal. 11 – 14 June 012.

http://www.influenceatwork.com/

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Methodological Report on Profiling: “Methodology for ...ec.europa.eu/eurostat/cros/system/files/essnet-esbrs1_del-wp3-a1.1... · 2.0.p1 22/07/2013 Commented on chapter VI Simone