14.23. Production undertaken by the personnel (and plant and equipment) of a resident unit outside its economic territory is to be treated as part of the production of the host country and the unit treated as a resident unit (branch or subsidiary) of that country if it meets the conditions noted above (see paragraph 14.22 above). Such a unit usually maintains a complete and separate set of accounts of local activities (i.e., income statement, balance sheet, transactions with the parent enterprise), pays income taxes to the host country, has a substantial physical presence, receives funds for its work for its own account, etc. The above considerations also apply to the particular case of construction activity carried out abroad by a resident producer. If they are not present, the activity should be classified as an export of services by the resident enterprise. Production can generate such an export only if the production is classified as domestic production (undertaken by a resident even though the physical process takes place outside the economic territory). Construction involved with major specific projects—bridges, dams, power stations, etc.—that often takes several years to complete, and is carried out and managed by non-resident units through an unincorporated site office in an economy warrants special mention. In most instances, such a site office will meet the criteria that require its production to be treated as a resident unit and to be part of the production of the host economy (as would that of a branch or affiliate), rather than as an export of services to that economy (for further discussion and treatment of installation projects, see paragraphs 14.101 to 14.103 below).

14.24. “Offshore” units engaged in manufacturing processes (including assembly of components manufactured elsewhere) are residents of the economy in which they are located. This statement applies regardless of location in special “zones” of exemption from customs or other regulations or concessions, and also applies to non-manufacturing operations (i.e., trading and financial enterprises), including so-called special purpose units.

14.25. The principles concerning the determination of resident units are likewise applicable to units using mobile equipment, such as ships, aircraft, drilling rigs and platforms, railway rolling stock, etc., that operate outside the economic territory in which the units are resident—either in (a) international waters or airspace, or (b) in other economies. In the first case (a), these activities should be attributed to the economy of residence of the operator (the same applies if the activity takes place in more than one economy during the course of, but for less than a year). In the second case (b), the unit is a resident of the economy in which the activity (production) occurs, if accounted for separately by the operator and is so recognized by the tax and licensing authorities there. Otherwise, the activity may be attributed to the country of residence of the original operator. If operations are carried out by a unit on a regular and continuing basis in two or more countries—such as the operation of a railway network—the unit is deemed to have a centre of economic interest in each country and thus separate resident units in each, subject to the qualifications for (b) above. In cases involving the leasing of mobile equipment to one unit by another for a long or indefinite period, the lessee unit is deemed to be the operator and activities are attributed to the country in which the lessee is resident.

14.26. In the particular case of ships flying flags of convenience, it is often difficult to determine the residence of the operating unit, because of complex arrangements involving the ownership, mode of operation and chartering of such ships, and the fact that the country of registry in most instances is different than the country of residence of the operator (or owner). Nonetheless, in principle, the shipping activity is to be attributed to the country of residence of the operating unit. If that unit establishes a branch (direct investment) in another country to manage the operation, for tax or other considerations, the operation is to be attributed to the resident (branch) of that country.

14.27. There are certain exceptional cases in which it may be difficult to determine the residence of a unit which operates mobile equipment because it consists of a corporation which is established by special legislation by two or more governments acting jointly and which is registered in each of the countries concerned. There are two possible ways of treating such units. One is to allocate all of the transactions to each of the countries concerned in proportion to the amounts of financial capital which they have contributed, or in proportion to their shares in the equity of the corporation. Another possibility would be to treat the corporation as resident in the country in which its headquarters are located and to treat the premises of the corporation in the other countries as foreign branches (direct investment enterprises (see paragraph 14.152 below), which are resident in the country in which they are located. On balance, the first method is preferable, but both ways of treating such corporations are consistent with the general principles of both the System and the Balance of Payments Manual and the choice between them may be made on the basis of statistical convenience, with reference to consistent treatment by partner countries.

14.28. In the case of agents, a transaction should be attributed to the economy of the principal on whose behalf a transaction is undertaken and not to the economy of the agent representing or acting on behalf of that principal. However, the services rendered by the agent to the principal represented should be attributed to the economy of which the agent is a resident.

14.36. Exports and imports of goods should be recorded at the market value of the goods at the point of uniform valuation, (the customs frontier of the economy from which they are exported), i.e., the goods are valued free on board (f.o.b.) at that frontier. The value includes that of the goods and of the related distributive services up to that point, including the cost of loading on to a carrier for onward transportation, where appropriate.

14.37. Conceptually, the f.o.b. price can be regarded as the purchaser’s price that would be paid by an importer taking delivery of the goods after it has been loaded on to his own carrier, or other carrier, at the exporter’s frontier after payment of any export taxes or the receipt of any tax rebates. This method of valuation implicitly determines the boundary between exports of goods and exports of services in the System and in balance-of-payments statistics. The costs of transporting exported goods up to the frontier are treated in the same way as other production costs and hence are an integral part of the costs of delivering the goods at the required location. In general, the purchaser’s price for a good is an inclusive measure of the value of a good at a particular location which treats the costs of transportation no differently from other production costs. If, therefore, the transportation up to the frontier were actually carried out by a resident other than the producer or manufacturer, the transportation costs have to be added to the price received by the producer and included in the value of the goods exported. In principle, the transportation should be treated as an intermediate input into the complete process of production which terminates when the exported goods are delivered at the required location. Even if the transportation up to the frontier of the exporting country were actually carried out by the importer or other non-resident, the costs should nevertheless still be included in the value of the goods exported. Although the importer may be transporting his own goods and hence not engaging in transactions with foreigners in respect of this activity, it is necessary to recognize the transportation costs by imputing the purchase of transportation services by the exporter and increasing the price actually received by the exporter accordingly. In this way, the imputed f.o.b. price recorded for the goods minus the imputed import of transport services will equal the actual price received by the exporter, so that the balance between exports and imports of goods and services is the same whether or not the imputation is made. In general, however, it is desirable that the f.o.b. price should not be affected by the way in which transportation up to the frontier of the exporting country is organized or paid for.

14.38. Imports as well as exports of goods are to be valued f.o.b. in the System: in other words, imports are also to be valued at the customs frontier of the exporting country. Valuing exports and imports in the same way promotes consistency in the recording of trade flows at a world level and enables trade balances in goods to be shown correctly. The use of f.o.b. values for imports implies that the costs of transporting imports of goods after they have left the frontier of the exporting country have to be treated as imports of services when the transport is provided by non-resident carriers. When the goods are transported from the frontier by resident carriers there are no service imports as there are no transactions with non-residents.

14.39. In practice, importers may take delivery of the goods which they import at any convenient location which will not always coincide with the point at which they are valued for purposes of recording exports and imports in the accounts of the System. Importers need not take delivery at a frontier: they may take delivery inside their own country or possibly inside the exporting country or even in a third country. Moreover, the costs of transportation, together with the costs for storage, loading and insurance, as well as the movement of the goods, may initially be incurred wholly or partly by the exporter, wholly or partly by the importer, or by some third party. Thus, there are many different ways in which international trade in goods may be organized, so that the transactions which actually take place between residents and non-residents may sometimes require re-arrangement or manipulation to get them into the format required by the System.

14.40. In the case of most exports, it should be possible to derive the f.o.b. price with reasonable accuracy from the prices or values recorded in customs documentation submitted at the frontier, or similar documentation submitted to other administrative agencies. In the case of imports, however, the customs documentation or other administrative records often provide information on the costs, insurance, freight (c.i.f.) price rather than the f.o.b. price. Conceptually, the c.i.f. price can be regarded as the purchaser’s price that would be paid by an importer taking delivery of the good at his own frontier, before paying any import duty or other tax levied at the frontier. The difference between the c.i.f. and the f.o.b. price represents the costs of transportation, together with insurance charges, between the customs frontier of the exporting country and that of the importing country. This difference varies according to the country of origin of the exports and may be quite substantial when the exporting and importing countries are at some distance from each other. In practice it is usually difficult to convert from recorded c.i.f. prices to estimated f.o.b. prices for individual imports or categories of imports, so that adjustments can often be made only globally for large groups of imports or even total imports. Estimates of transport and insurance costs (see services below) between the frontiers of the exporting and importing countries can be made from a knowledge of average freight charges, insurance rates, average distances travelled, etc. for large groups of exports. Sample surveys of trade invoices also provide information on c.i.f./f.o.b. ratios which may be used to estimate the global adjustment needed to the c.i.f. value of imports (see Balance of Payments Compilation Guide, IMF).

14.41. Thus, while total imports of goods must be recorded f.o.b. in the System, the extent to which it may be feasible to disaggregate imports valued f.o.b. by type of good or country of origin is uncertain in practice. It may be much easier for some countries than others, but many countries find it difficult, if not impossible, to provide detailed figures of imports valued f.o.b. For this reason it is sufficient for purposes of the System to record total imports f.o.b., together with the value of associated transportation costs, included under services.

14.42. In the input-output tables of the System, including the tables which display the supply and use of goods and services at a detailed level, it may only be feasible to show detailed figures of imports c.i.f. In such tables, however, there may be analytical advantages to be derived from valuing imports c.i.f. The input-output and supply and use tables also contain the information on transportation and insurance costs needed to make the transition from the sum of detailed imports of goods valued c.i.f. to total imports of goods valued f.o.b. Aglobal c.i.f./f.o.b. adjustment for imports is made in these tables.

14.43. There are circumstances under which it may be difficult to determine appropriate prices for imports and exports of goods, such as a barter exchange of goods, transactions between affiliated enterprises (which often involve “transfer pricing”), or goods transferred under a financial lease arrangement where a legal change of ownership does not actually occur. Under such circumstances, it may be necessary to develop proxies, or substitute measures. For example, a barter exchange of commodities between two parties should be valued at the basic prices that would have been received if they had been sold. However, such an approach must be limited to those transactions to which it is readily applicable. Likewise, the substitution of an imputed or notional market value for an actual transfer value in the case of goods transactions between affiliated enterprises should be the exception rather than the rule because of both conceptual and practical difficulties involved. In any event, if it is determined that certain transfer prices are so divorced from those of similar transactions that they significantly distort measurement, they should, if possible, be replaced by market equivalents or, if not, be separately identified for analytical purposes (see Balance of Payments Manual).

14.44. Exports and imports of services are to be valued at the actual prices agreed upon, subject to the above-mentioned limitations. Two specific service components warrant special mention as to valuation: insurance services and financial services. International insurance services are valued by the amount of service charges and not by the total premiums earned. Also, by convention because of data constraints, estimates of the insurance service charge in the external account of goods and services are calculated ignoring investment income on technical reserves. As for international financial services, in addition to explicit commissions and fees, there are “financial intermediation services indirectly measured”, derived from and valued according to the difference between the property income received from loans or debt securities and the interest paid on deposits (see exports and imports of goods and services below).

14.45. Primary income payments and receipts are valued at the current price on the market. For investment income, holding gains and losses are excluded in that they are not considered to be part of the income on investment but rather to be part of the value of investments included under revaluations in the other changes in assets accounts. Any income in kind included in compensation of employees is valued at purchasers’ prices when the goods and services involved are purchased by the employer, and at basic prices when produced by the employer.

14.46. One type of transaction that, by definition, is non-commercial and thus has no market price, is the provision of economic values as transfers. For resources transferred by government, NPIs, or individuals of an economy to non-residents without a quid pro quo, the same values must be reflected in the external transactions accounts of both the recipient and the donor. Such resources should be valued at the basic prices that would have been received if they had been sold. Such imputations may not always approximate the desired basis of valuation, often because the values of these transactions as they appear to the donor may be quite different from those that the recipient would be inclined to impute. Thus, it is suggested that, as a rule of thumb, the values assigned by the donor be used as a basis for recording.

14.47. Changes in financial assets should be recorded in the external financial account at the prices at which the assets are acquired or disposed of. For financial items that are traded in an organized market, with the buyer and seller dealing with each other through an agent, the price established in the market—which will probably be the one that is recorded in the statistics in any case—will be appropriate for purposes of the rest of the world Account. For financial items not traded in the market, however, the relevant price may not be so apparent. In fact, cash items, i.e., currency and transferable deposits that can be redeemed on demand, at their nominal value, have only one value which could be assigned for any purpose, so that this value could be regarded as the actual market price. The price that is to be attributed to non-marketable financial items, which are primarily loans in one form or another, is their nominal value. However, if a secondary market in such items is created, and they become marketable—often, as in the case of loans to some heavily debt-burdened countries, at substantial discounts from nominal value—that market price should be recorded for transactions in such loans. Valuation of financial items in the external financial account should exclude any service charges, fees, commissions, or income, which should be recorded in the appropriate component of the external account of goods and services.

14.48. In principle, all stocks of external assets and liabilities that comprise a country’s external balance sheet or international investment position should be measured at current market values, as of the date involved, i.e., the beginning or end of the reference period. This concept assumes that such stocks are continuously (regularly) revalued at current prices—e.g., by reference to actual market prices for financial assets such as shares and bonds, or by reference to enterprise balance sheets in the case of direct investment.

14.49. For those financial items (e.g., shares and other equity securities other than shares, etc.) included in the category of direct investment (see paragraphs 151 to 153 in the Balance of Payments Manual), it is recognized that, in practice, book values from the balance sheets of direct investment enterprises (or of direct investors) generally are utilized to determine the value of the stock of direct investment. These balance sheet values, if on a current market value basis, would be in accordance with the principle. If based on historical cost or on an interim but not current revaluation, they would not conform to the principle, and thus market prices may have to be estimated or approximated (see paragraph 14.158 below). However, because balance sheet values of enterprises often represent the only basis of valuation available in most countries, the Balance of Payments Manual recommends that they may be utilized to determine the value of the stock of direct investment both for individual economies and for international comparisons, and that it would be desirable to have such data collected and available on a current market value basis. In instances where the shares of direct investment enterprises are listed on stock exchanges, the listed prices should be used as the market value of shares in those enterprises.

14.50. Investment in other equity securities, debt securities, and financial derivatives is to be recorded at current market values at the appropriate reference date (for details, see chapter XIII).

14.51. Those financial items that are not readily transferable among transactors—e.g., loans, deposits, miscellaneous accounts receivable and payable—are to be recorded at nominal value (as is the case for currency). In recent years, loans to a number of heavilyindebted countries often have been subject to significant discounts quoted in secondary markets that emerged for the trading of such debt, bringing into question the valuation of these loans. The secondary market quotations should, in principle, be the basis of valuation of both transactions and stocks of assets and liabilities. However, the basis of valuation of the latter on the debtor side is nominal value, i.e., the amount of principal that the debtor is contractually obliged to repay the creditor when the loan matures, representing a departure from the market price principle. In this particular case, the departure is associated with the contractual restrictions usually applicable to such loans that prohibit the debtor from buying back the loans in secondary markets, unless the restrictions are waived (these limitations usually do not apply to bonds or other securities). The use of market value on the creditor side and nominal value on the debtor side results in an asymmetry between debtor and creditor positions. In order to deal with that asymmetry, if feasible, creditors should provide supplementary data on nominal values of discounted loans, and debtors should provide such data on market value, as follows:

• (a) An exchange of such loans for equity (i.e., debt/equity swap), in which case two transactions are recorded in the financial accounts, one in loans and one in shares and other equity, valued at the (lesser) value of the equity obtained, with the difference between the nominal value of the loan and the (lesser) value of the equity obtained treated as a holding gain/loss;

• (b) Forgiveness of the loans, where a capital transfer offsets the reduction of the debtor’s liability and the position is reduced on the liability side;

• (c) Rescheduling of the loan, so that a new arrangement in effect replaces the old loan, with the new loan’s nominal value to be the basis of valuation and a holding gain/loss recorded if the new nominal value is less than the old value; or

• (d) Unilateral cancellation of the loan by the creditor, to be recorded in the other changes in volume of assets account.

14.52. Monetary gold and Special Drawing Rights (SDRs) issued by the IMF are financial assets for which there are no outstanding financial liabilities. Monetary gold is to be valued at its prevailing price on the market, and SDRs are to be valued at market rates calculated by the IMF.

14.55. In line with the general principles adopted in the System, the exports and imports of goods should be recorded at the time at which ownership of the goods in question passes from a resident to a non-resident, or vice versa. This principle is sufficient to determine the coverage of international trade in goods, but in practice certain exceptions, which are specified below, are made to the principle, at least when ownership is interpreted in a strict legal sense. In any case it is useful to indicate how the coverage of international trade in goods between resident and non-resident units relates to international trade in the sense of actual movements of goods between countries. When the ownership of a good is exchanged between a resident and non-resident, there is a strong presumption that the good will cross the frontiers of the countries concerned either shortly before, or soon after, the change of ownership takes place, but not all exports and imports do so. Conversely, many goods cross frontiers without any change in ownership taking place, so that they are not to be counted as exports or imports. It is therefore useful to specify the different coverage of the flows in some detail.

14.56. Statistics of international trade in goods in most countries rely heavily on customs documentation submitted at the time goods are cleared at the frontier. This constitutes a further reason for clarifying the differences between the coverage of exports and imports as defined in the System and the actual physical movements of goods between countries. However, it should also be noted that when countries belong to a free trade area, customs union or common market, most goods may cross the frontiers between different member countries without any kind of customs clearance or documentation at the frontier and quite different methods of recording exports and imports may be required. Some kind of documentation may still be needed for customs or tax purposes, especially when a VAT system is in operation, but it may be submitted to a central office within a country instead of being cleared at the frontier. Alternatively, or in addition, direct inquiries may be made to exporters or importers or records of foreign exchange transactions may be utilized. It should not be assumed, therefore, that documentation submitted at a frontier invariably constitutes the principal source of data on exports or imports.

14.70. The time at which the export or import of a service is to be recorded is the time at which it is rendered (delivered or received), which mostly coincides with the time at which the service is produced. In some instances (e.g., freight and insurance, port services, etc.), as may be the case with trade in goods, there may be pre-payments or post-payments for such services. Entries in the appropriate accounts should then be made as explained in paragraph 14.75 below. For processing and repairs excluded from goods, the value added is to be recorded as services at the time performed.

14.71. Income in the form of interest is to be recorded on an accrual basis, i.e., as accruing continuously over time on the amount of principal outstanding (see chapter VII, paragraphs. 7.94 to 7.104 for discussion). If the interest is not actually paid, an entry is required in the external account of primary incomes and current transfers, together with an offsetting entry in the financial account for the claim associated with non-payment, i.e., an increase in liabilities.

14.72. Dividends are to be recorded as of the moment they are payable. Reinvested earnings on direct foreign investment are to be recorded in the period when they are earned. Distributed (remitted) earnings of branches and other unincorporated enterprises, i.e., withdrawals from income of quasi-corporations, are to be recorded as of the time that they are transferred. In explanation of this difference in time of recording between earnings that are formally distributed and other earnings, it should be noted that reinvested earnings represent the net income accruing during a given period. In contrast, remitted earnings of branches are discretionary distributions that can be made at any time—even in a period when a net loss is sustained—and therefore are not attributable to the earnings of a particular period. To determine the period in which those reinvested earnings are earned or other investment income becomes payable, reference to balance sheets, annual reports, and similar documents of the direct investor or the enterprise may be helpful.

14.73. Various taxes, fines, etc., and other components of transfers that are imposed by one party on another are to be recorded at the moment at which the underlying transactions or other flows occur which give rise to the liability to pay. In some instances, taxes on income may be recorded in a subsequent period. Other transfers are to be recorded at the time that the resources (e.g., goods, services, financial items) to which they are offsets change ownership.

14.74. The time at which external transactions in financial items is considered to take place is when both the creditor and debtor enter the claim and liability, respectively, on their books (see chapter XI). A date (the “value date”) may actually be specified for the very purpose of ensuring that the timing agrees in the books for both parties. If no precise date can be fixed, the date on which the creditor receives payment (or some other financial claim) is decisive. Loan drawings are to be entered in the accounts when actual disbursements are made; loan repayments are to be entered when due for payment. In the case of overdue repayments, entries are to be recorded for the repayment of the contractual obligation involved as if it were made and (a) its replacement by a new liability that is short-term (for immediate payment), or (b) if under rescheduling or other special financing arrangements associated with balance of payments difficulties of an economy, replacement by a new loan.

14.75. Recording trade in goods and other current external transactions on a change of ownership basis requires that timing differences between the flow of goods, services and income, and the corresponding flow of payments should give rise to corresponding claims and liabilities, i.e., payments made in advance of change of ownership (pre- or progress-payments) represent a claim on the payee; payments made subsequent to the change of ownership (post-payments) represent the extinguishing of a liability incurred at the time of change of ownership. In other words, when the counterpart to an entry in the financial account is non-financial, the time of recording of financial claims is to be aligned with the time of recording, in the other accounts of the SNA, the transactions that generate the financial claim. For example, when exports of goods or services give rise to a trade credit, an entry in the financial account should be made at the time when the entry is made in the relevant component of the external account of goods and services.

14.76. The time of recording stocks of external financial assets and liabilities (the international investment position) is at the moment to which the account relates, typically the beginning or the end of the accounting period.

14.80. Under an official multiple exchange rate regime, i.e., when two or more exchange rates are applicable to different categories of transactions, favouring some and discouraging others, those rates incorporate elements similar to those of taxes or subsidies. Thus, because the multiple rates influence the undertaking of and values of transactions that are expressed in national currency, the net proceeds implicitly accruing to the authorities as a result of these transactions are to be calculated as implicit taxes and subsidies in the System. The amount of the implicit tax or subsidy can be calculated for each transaction as the difference between the value of the transaction converted into national currency at the actual exchange rate applicable and the value of the transaction converted at a “unitary rate”, the latter calculated as a weighted average of all official rates used for external transactions. The System records external transactions using the actual rate applicable to specific transactions. However, implicit taxes/subsidies appear as global adjustments in the rest of the world account with counterpart entries under current and capital transfers in the central bank or government accounts. (For a detailed explanation of multiple exchange rates, including the complete accounting treatment in the System, see chapter XIX, annex A.)

14.81. The “unitary rate” approximates a single official rate that would exist in the absence of multiple rates. However, because this single calculated rate may not approximate any sort of equilibrium or market rate, the calculated implicit taxes/subsidies/transfers may not fully reflect the impact of a multiple rate system.

14.82. As to conversion of stocks of external financial assets and liabilities in an official multiple rate system, the actual exchange rate applicable to specific assets or liabilities is to be used.

14.83. Until this point in the discussion of multiple exchange rates, no mention has been made of (unofficial) parallel or black market rates. The latter rates cannot be ignored in the context of a multiple rate regime and can be treated in different ways. For instance, if there is one official rate and a parallel market rate, the two should be handled separately, with transactions converted at the exchange rate for each. If there are multiple official rates together with a parallel rate, the two should be treated as distinct markets in any calculation of a unitary rate. That is, the multiple official rates—which involve implicit official taxes and subsidies—should be used to calculate a weighted average rate that can serve as the basis for estimating the tax or subsidy component of the various official rates. Transactions effected at the parallel rate usually should be converted at that rate separately. No implicit taxes/subsidies are involved in parallel markets which are not part of the official exchange rate regime. However, in some instances, parallel markets may be considered to be effectively integrated with the official exchange rate regime. Such is the case when most or all transactions in the parallel market are sanctioned by the authorities and/or when the authorities actively intervene in the market to affect the parallel rate. In this instance the calculation of the unitary rate should include both the official and parallel market rates. If only limited transactions in the parallel market are sanctioned by the authorities, the parallel rate should not be included in the calculation of the unitary rate.

14.84. The midpoint between buying and selling rates in the parallel market should be calculated (separately from official rates) for conversion, as is recommended for official rates, so that any service charge is excluded. (Revenues obtained from trading currencies between official and parallel markets are to be treated as holding gains, except when revenues accrue to the monetary authorities as a result of such transactions between authorized parallel and official markets (see paragraph 35, chapter XIX, annex A).

14.91. Apart from discrepancies due to the fact that the physical movements of goods across frontiers may not coincide with the times at which changes of ownership occur, as mentioned above, there are also differences in coverage between exports and imports of goods as recorded in the System and the flows of goods across frontiers.

14.94. The export or import of a service requires some kind of contact between a resident producer and a non-resident consumer at the time production actually takes place. In the case of transportation, the contact between producer and consumer is made possible by the mobility of the transport equipment itself. For other types of services, including information services, the contact may be established by means of telecommunications links of one kind or other. However, the production of most services, both producer services and consumer services, requires the producer and consumer to come together in some manner and in a convenient location: this is the case for a wide range of services such as most business and financial services, health, education, recreation, entertainment, etc. At an international level the producer may have to travel to the country of the consumer, or vice versa. The mobility of service producers has been greatly enhanced by fast and frequent air travel, while telecommunication links enable staff abroad to continue to draw on the resources of expertise of staff in head offices.

14.95. For example, it is common for producers of business services, such as consultancy or other advisory services, to send teams of staff to work abroad on assignments resulting from specific contracts negotiated with non-residents. As explained in paragraphs 14.22 and 14.23 above, such production units operating abroad are considered to be integral parts of the parent corporation to which they belong, provided that the volume of production which they carry out abroad does not become so large and the length of time over which that production takes place so long that the unit cannot reasonably be treated as not having a centre of economic interest in the country concerned. When a production unit operating abroad establishes a substantial physical presence in a foreign country by purchasing or renting business premises, acquiring capital equipment, recruiting local staff, etc., with the intention of engaging in production over a long period of time (a guideline is one year or more, applied flexibly), the production unit in question must be treated as a foreign branch—i.e., as a quasi-corporation which is resident in the country in which it is operating. In these circumstances, the output of the branch counts as part of the GDP of the country in which it is located so that it cannot be treated as an export of a service from the parent which owns and controls it.

14.96. The criterion of residence outlined above, that was described in detail earlier in this chapter (see paragraph 14.23 above) applies equally to all corporations, whether engaged in the production of goods or services. However, the issue is particularly relevant to services producers because establishing a foreign branch (or subsidiary) which supplies services directly to the residents of a foreign country may be the only means by which a unit engaged in service production can expand its sales to non-residents. A corporation which creates a foreign branch for this purpose may regard itself as continuing to “export” services, even when the branch is established on an indefinite, or permanent, basis. However, such a branch is classified in the System as a quasi-corporation which is resident in the country in which it operates, so that there may be an important difference between the way in which exports and imports of services are recorded in the System—and in the balance of payments—and the way in which some corporations themselves may perceive them. Corporations may not recognize any threshold beyond which the production is classified as contributing to the GDP of the country in which the branch is located instead of contributing to the GDP of the country in which the parent is located.

14.97. From a national accounts viewpoint, the central issue is not so much the exact definition, or coverage, of exports or imports as the definition and coverage of GDP itself. When a branch office is producing services on a permanent basis inside a country, the value added must be considered part of the GDP of that country, not of the country of residence of the parent corporation.

14.98. The services which enter into exports and imports of services must have been produced as outputs from processes of production. They do not include incomes which are sometimes described as payments for “services” rendered in the course of production. Payments of compensation of employees from residents to non-residents, or vice versa, are international flows of primary incomes. Such payments occur, for example, in the case of seasonal or border workers who work in a different country from that in which they are resident. Similarly, flows of property income, such as interest and dividends, between residents and non-residents are excluded from international trade in services.

14.99. The coverage of exports and imports of services corresponds broadly to the types of services which are described in sections 6 to 9 of the CPC. However, whereas the CPC treats all repairs and processing as service activities, the System does not, as already noted. As the CPC provides a comprehensive listing of the other kinds of services which may enter into international trade, and the Balance of Payments Manual describes a list of standard components of such services, it is not necessary to give all such details here. Nevertheless, it is useful to indicate how some of the more important types of trade in services are treated in the System.

14.117. A full discussion of compensation of employees appears in chapter VII. In the external account of primary incomes and current transfers, compensation of employees comprises wages, salaries, and other remuneration, in cash or in kind, earned by individuals in an economy other than the one in which they are resident for work performed for (and paid by) a resident of that economy. Included are contributions paid by employers on behalf of employees to Social Security schemes or to private insurance schemes or pension funds—including imputed contributions to unfunded pension schemes—to secure benefits for employees. Employees in this context include seasonal or other short-term workers (less than one year) and border workers (with a centre of economic interest in their own economies). In the case of local (host country) staff of embassies, consulates, bases, etc., because these are extraterritorial enclaves, the compensation received by local staff is that of a resident from a non-resident.

14.118. Compensation paid to employees by international organizations (also extraterritorial enclaves) represent payments to residents from a non-resident, (a) if the employees are residents of the economy of location, or (b) if the employees are from other economies but are employed for one year or more and thus are treated as residents of the economy of location. In the case of employees from other economies who are employed for less than one year, there is no payment to a resident involved. (For the treatment of technical assistance personnel working on assignments of one year or more, see paragraph 14.18 above.)

14.119. Personal expenditures by non-resident workers in the economy where employed, including those on installation projects, are to be recorded under direct purchases in the domestic market by non-residents, and taxes paid, contributions to social insurance schemes, etc., in that economy are to be recorded as current transfer payments. Gross recording of compensation and expenditures is recommended, although, this may not always be possible in practice.

14.120. The distinction between those individuals whose earnings are to be classified as “compensation of employees” (persons who are not residents of the economy where they work) and migrants (persons who have become residents of that economy by virtue of being expected to live there for a year or more) is often hard to draw in practice. The transactions of the compiling economy with the rest of the world as the result of an individual’s activities will be in balance whether that individual is regarded as a resident or a non-resident. An effort should nonetheless be made to observe the distinction between foreign workers and migrants if possible, as lack of uniformity in the statistical treatment of the same individuals by the two compiling economies concerned can create problems of comparability between the external transactions accounts or balance of payments statements for those economies.

14.121. A discussion of the various types of taxes on production and imports and subsidies appears in chapter VII, including links with the IMF and the Organisation for Economic Co-operation and Development (OECD) tax classifications and references to taxes and subsidies resulting from multiple exchange rates. (A more detailed discussion of the latter, together with the guidelines for conversion, appears in section C.3. of this chapter.)

14.122. Property income covers income derived from a resident entity’s ownership of foreign financial assets. The most common types of such income are interest and dividends. (Property income is fully discussed in chapter VII.) Interest, including discounts in lieu of interest, comprises income on loans and debt securities, i.e., such financial claims as bank deposits, bills, bonds, notes, and trade advances. Net interest flows arising from interest rate swaps are also included. Dividends, including stock dividends, are the distribution of earnings in respect of the shares and other forms of participation in the equity of public and private corporations.

14.123. Among other types of property income are the earnings of branches and other unincorporated direct foreign investment enterprises (see paragraphs 14.152 to 14.154 below), and the direct investor’s portion of the earnings of incorporated direct foreign investment enterprises that are not formally distributed, i.e., earnings other than dividends or withdrawals from income of quasi-corporations. The part of those reinvested earnings that is attributed to the direct investor is proportionate to his participation in the equity of the enterprise. Another type of property income is that attributed to insurance policyholders, as described in chapter VII, paragraphs 7.126 and 7.127.

14.124. Three main types of current transfers are distinguished in the external account of primary incomes and current transfers, as in the secondary distribution of income account: (a) current taxes on income and wealth, etc.; (b) social contributions and benefits; and (c) other current transfers. (A full discussion of these transfers appears in chapter VIII.) It is sufficient to note here that many of the taxes included in (a) above are payable regularly every tax period (as distinct from capital taxes levied infrequently), while others include taxes on international transactions such as on foreign exchange purchases or sales, travel, etc.; that (b) consists of current transfers in the form of contributions made under social insurance schemes organized by government units (Social Security schemes) or by public or private employers, and of transfers in the form of social benefits, e.g., pensions; and that (c) consists of various other current transfers between general government and foreign governments, etc. Before the current external balance can be calculated, an adjustment item for the change in net equity of households in pension funds must be recorded (see chapter IX, paragraphs 9.14 to 9.16). The adjustment reflects the net result of both the change in net equity held by resident households in non-resident pension funds (liability of the rest of the world) on the uses side, and the change in net equity held by non-resident households in resident pension funds (financial asset of the rest of the world) on the resources side.

14.131. Although an extensive discussion of financial assets appears in chapter XI, and is fully applicable to the external financial account, those items of particular importance to the external account will be elaborated upon here. In particular it is appropriate to note that although monetary gold and IMF SDRs are included among foreign financial assets, they have no counterpart liabilities in that they do not represent claims on other units. Also, for corporate equity shares, the liability does not represent a fixed redemption value. In addition, for certain financial derivatives, such as options, liabilities are attributed by convention to the issuer.

14.132. In the determination of which financial assets constitute claims on or liabilities to non-residents, the creditor and debtor (or transactors) must be residents of different economies. The unit in which the claim or liability is denominated—whether the national currency, a foreign currency, or a unit like the SDR—is not relevant. Furthermore, assets must represent actual claims that are legally in existence. The authorization, commitment, or extension of an unutilized line of credit or the incurrence of a contingent obligation does not establish such a claim, and the pledging or setting aside of an asset (as in a sinking fund) does not settle a claim or alter the ownership of the asset. Although contingent assets and liabilities are excluded from financial items, as noted above, options and related derivatives are included among financial assets and transactions when they are tradable and have a current market value (see chapter XI).

14.133. By convention, the ownership of some non-financial assets is transformed into the ownership of financial assets, i.e., claims. Three specific cases may be noted:

• (a) Immovable assets, such as land and structures (except when the land and structures are owned by foreign government entities and thus are not part of the economic territory), are construed as always being owned by residents of the economic territory where they are located. When the owner of such assets is a non-resident, therefore, that entity is considered to have a financial claim on a resident entity that is construed as being the owner;

• (b) An unincorporated enterprise that operates in a different economy from the one in which its owner resides is considered to be a separate entity; that entity is a resident of the economy where it operates rather than of the economy of its owner. All assets, non-financial as well as financial, attributed to such an enterprise are to be regarded as foreign financial assets for the owner of the enterprise;

• (c) Any goods transferred under a financial leasing arrangement are presumed to have changed ownership. This change in ownership is financed by a financial claim, i.e., an asset of the lessor and a liability of the lessee. The financial asset should be classified as a loan.

14.134. Transactions in monetary gold between residents and non-residents, i.e., transactions between the authorities and their counterparts in other economies, or with international monetary organizations, are recorded on the left (changes in assets) side of the financial account. A purchase by the rest of the world is recorded as a positive entry, a sale by the rest of the world as a negative entry. (Transactions in non-monetary gold between residents and non-residents are recorded as exports or imports of goods.) Monetary gold, like SDRs, (see paragraph 14.135 below), is an asset for which there is no outstanding financial liability.

14.135. Transactions in SDRs, international reserve assets created by the IMF to supplement other reserve assets of official holders, also are recorded on the left (changes in assets) side of the financial account. Changes in the authorities’ holdings of SDRs can arise through: (a) transactions involving SDR payments to or receipts from the IMF, other participants in the SDR department of the IMF, or other IMF-designated holders, or (b) allocation or cancellation. Transactions such as those enumerated under (a) above are included in the financial account, while allocations/cancellations are not entered in the financial account but rather are included in the other changes in volume of assets account.

14.136. Trade credits are a sub-item of “other accounts receivable/payable” and reflect trade credit for goods and services extended directly (not loans to finance trade credit, which are classified under “loans”) and advances for work-in-progress. Such credits from suppliers may be measured by the difference between the entries for the underlying goods and services recorded as of the date of change of ownership and the entries for payments related to these transactions.

14.137. Use of IMF credit and loans from the IMF is a component of “loans”, and comprises the compiling country’s drawings on the Fund (except from the “reserve tranche”, i.e., a reserve deposit in the Fund). Included are purchases and borrowings under stand-by, extended and various structural adjustment arrangements, together with Trust Fund loans. A reduction in the Fund’s holdings of the compiling country’s currency that are in excess of the country’s quota in the Fund minus its reserve tranche position reflects a repayment of the use of Fund credit. Claims on the IMF that are a component of international reserves and that are not evidenced by loans are to be recorded under “other deposits”.

14.138. Direct foreign investment-related transactions in financial assets and liabilities, for both inward and outward investment, are to be recorded under the appropriate classifications, i.e., equity capital under “shares and other equity”, loans and other intercompany transactions under “other accounts receivable/payable”. The above transactions also are to be recorded separately as a memorandum item.

14.139. Reinvested earnings of direct foreign investment enterprises (see paragraph 14.152 below for definition of the latter), wholly or partly owned by non-residents (unincorporated branches, subsidiaries and, when so decided, associates as defined) are recorded in the external account of primary incomes and current transfers as property income paid to the parent or direct investor, and in the financial account as reinvested in the enterprise, thus adding to the net equity of that enterprise.

14.141. The left side of the account records those changes in assets of the rest of the world, the right side those changes in liabilities that are not due transactions between residents and non-residents as recorded in the preceding external account. One type of entry on the left side relates to non-financial assets. There may be instances of uncompensated seizures, e.g., for intangible non-financial assets, the seizure of patents, software, or other originals owned by non-residents. For tangible assets, there may be uncompensated seizures associated with territorial annexations. For financial assets, there may be entries for a variety of uncompensated seizures, other volume changes in financial assets and liabilities n.e.c. (e.g., writing off bad debts), and for changes in classification and structure. A possible example of the latter might be changes resulting from the merger of a non-resident corporation, in which a resident owns shares and on which he has claims (loans), with another non-resident corporation, i.e., the resident receives shares in the new corporation equal to the shares in, plus loans to, the original corporation. On the right side of the accounts (changes in liabilities), there are entries for uncompensated seizures, for other volume changes in financial assets and liabilities n.e.c. (e.g., the counterpart to the writing off of bad debt by the creditor on the left side), and for changes in classification and structure (see example above).

14.142. The above-noted types of changes in the volume of assets as shown on the left side (changes in assets of the rest of the world) and right side (changes in liabilities of the rest of the world) of the account, result in the balancing item “changes in net worth due to other changes in volume of assets”.

14.143. The revaluation account, for the System as a whole, is described in chapter XII. It is sufficient here to summarize the aspects of the account that pertain particularly to external financial assets and liabilities. While the revaluation account in the System records the holding gains/losses accruing to the owners of financial and non-financial assets and liabilities during the accounting period involved, the external revaluation account applies only to financial assets and liabilities.

14.144. The account first shows nominal holding gains/losses, with a subsequent breakdown into two components—neutral holding gains/losses and real holding gains/losses. (The term “capital gains” is sometimes used elsewhere, rather than holding gains, but the latter is used in the System.) The nominal holding gain/loss is that value accruing to the non-resident creditors and debtors as a result of a change in their assets’/liabilities’ monetary value, during the time that they are held, from the beginning to the end of the accounting period. The change in the monetary value of the asset may reflect a change in its price (in national currency) and/or a change in the relevant exchange rate. As to the latter, the value of the nominal holding gains accruing from a period may be calculated by the difference between the opening and closing balance sheet values minus the value of transactions or other volume changes for the period. For this calculation, transactions in foreign assets are to be converted into national currency using the exchange rate prevailing at the time of transaction, i.e., the midpoint between buying and selling rates, while the opening and closing balance sheet values are to be converted using the exchange rates prevailing at the respective dates the balance sheets are drawn up.

14.145. The neutral holding gain component is defined as the value of the holding gain that would be required to maintain the purchasing power of the asset—expressed in national currency—over the time period involved, i.e., the holding gain needed to keep pace with the overall change in the general price level. The real holding gain/loss component is that value—expressed in national currency—of the asset resulting from the difference between the nominal and the neutral gain/loss. The real holding gains (losses) of creditors in one economy may not be equal to the real holding losses (gains) of debtors in another economy, in regard to the same asset, if the rate of change in the general price level in the two economies differs.

14.146. The balancing item in the external revaluation account is “changes in net worth due to nominal holding gains/losses”, representing the difference between the sum of holding gains/losses on the financial assets owned by non-residents and the sum of holding gains/losses on their liabilities. (A holding gain (loss) may reflect a positive (negative) revaluation of an asset or a negative (positive) revaluation of a liability.) The balancing item is subdivided into two components, neutral holding gains/losses, reflecting changes in net worth due to changes in the general price level, and real holding gains/losses due to changes in relative prices (including the effects of exchange rate changes on conversions into national currency).