## Appendix 6aAnnex 6 — Topical Summary—Selected Issues on Direct Investment

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### A. Purpose, scope, and structure
- Focus: selected issues related to direct investment that cut across different chapters of the Manual.
- Structure: brief introductions with references to chapters for more detail; detailed treatment of:
  - ultimate ownership and pass-through funds;
  - corporate inversions;
  - public-private partnerships;
  - cash pooling;
  - greenfield investment and extension of capacity.
- Consistency: compilation of direct investment statistics described in the Manual is consistent with the OECD Benchmark Definition of Foreign Direct Investment, fifth edition.

### B. Overview of direct investment: definition, coverage, presentation
- Definition and operational criteria:
  - Direct investment arises when an investor resident in one economy makes an investment that gives control or a significant degree of influence on the management of an enterprise resident in another economy (paragraph A6.2).
  - A direct investment relationship is defined as arising when an entity has equity that gives it voting power of 10 percent or more in the enterprise (paragraph [6.12]).
  - Control = ownership of more than 50 percent of the voting power (subsidiary); significant degree of influence = ownership of 10 to 50 percent of the voting power (associate) (Box A6a.1).
  - Control or influence may be immediate or indirect through chains of ownership (paragraphs [6.11–6.14]).
- Coverage:
  - Direct investment includes associated debt (except debt between affiliated financial intermediaries specified in paragraph [6.28]) and other debt and equity between enterprises that have the same direct investor (Box A6a.1).
  - Loans and trade credit between entities in a direct investment relationship are classified as direct investment; debt included is called “intercompany lending” (paragraphs [6.25–6.36]; [6.26]).
  - Financial derivatives and debt between selected affiliated financial corporations are excluded (paragraphs [6.28–6.29]).
  - Pass-through equity and debt are included in direct investment data (paragraphs [6.33–6.34]) but may be identified separately unless classified as debt between affiliated financial intermediaries.
- Presentations and analytical principles:
  - Primary presentation is by asset or liability; alternative directional principle presentation is based on direction of the direct investment relationship (paragraphs [6.42–6.45], Box [6.4], and OECD Benchmark Definition, fifth edition).
  - Issues on positions, valuation of unlisted equity, entities borrowing on behalf of affiliates: paragraphs [7.14–7.25], [7.15–7.19], [7.20–7.22].
  - Financial account transactions, reinvested earnings, and imputed direct investment flows from distorted transfer pricing: Chapter 8 and paragraphs [8.15–8.17]; corporate inversion and restructuring: paragraphs [8.19–8.22] and [A6.24–A6.26].
- Related accounting and classification issues: Chapters 3, 4, and 5; identification of institutional units for branches, notional resident units, multiterritory enterprises, joint ventures, quasi-corporations, trusts, and SPEs: paragraphs [4.26–4.52]; SPEs: paragraphs [4.86–4.88].

### Box A6a.1 — Key direct investment terms (selected extracts)
- Direct investor, direct investment enterprise, affiliate, fellow enterprise, and reverse direct investment defined using the 10 percent and 50 percent voting-power thresholds:
  - 10 percent or more of voting power = evidence of a direct investment relationship.
  - Control = more than 50 percent of voting power.
  - Significant degree of influence = 10 to 50 percent of voting power.
- Direct investment covers investment income, financial transactions, other flows, positions, and transactions in equity and selected debt instruments between entities in a direct investment relationship.
- Direct investment includes associated debt except debt between affiliated financial intermediaries; investment funds cannot be direct investment enterprises (paragraph [6.24]).

### C. Ultimate ownership and pass-through funds — motivation, methods, and interpretation
- Motivation:
  - Complex MNE structures can inflate reported direct investment flows and positions because each intermediate flow into and out of an economy is counted even when funds merely pass through.
  - Supplementary presentations by ultimate partner economy and identification of pass-through funds improve interpretability and usefulness; approaches are based on the directional principle and OECD Benchmark Definition, fifth edition.
- 1. Inward direct investment by the ultimate investing economy (UIE)
  - IIE: economy of each immediate counterpart.
  - UCP identification: move up ownership chain through controlling links (ownership of more than 50 percent of voting power) until an individual, household, or company not controlled by another company is reached; if none exists, the resident company may be its own UCP (paragraphs A6.16–A6.17).
  - Recommended UIE attribution methods:
    - ‘Winner takes all’ (WTA): entire inward direct investment flow or position of a resident institutional unit attributed to economy of its UCP.
    - ‘Proportional ownership’ (PO): assigns each inward direct investment flow or position of a resident institutional unit to the economy of the immediate counterpart’s UCP.
    - IFRS 10 consolidation method may assist in identifying the UCP (A6.17).
  - Example (Figure A6.1) — Economy 4 records:
    - IIE: inward direct investment of 6 from Economy 2 (Company C) and 14 from Economy 3 (Company D).
    - UIE (WTA): inward direct investment of 20 from Economy 1 since Company A is the UCP of Company F.
    - UIE (PO): inward direct investment of 6 from Economy 3 (Company E is UCP of Company C) and 14 from Economy 1 (Company A is UCP of Company D) (A6.18).
- 2. Outward direct investment by the ultimate host economy (UHE)
  - IHE: economy of the immediate counterpart to the outward direct investment.
  - UHE: economy of the first operating unit — the first unit in the investment chain whose purpose extends beyond administrative, management, or asset-holding functions (A6.19–A6.20).
  - Examples (Figure A6.2):
    - Economy 1:
      - IHE: outward direct investment of 160 to Economy 2 (investments in Company B and Company C).
      - UHE: outward direct investment of 120 to Economy 2 (investment in Company B) and 40 to Economy 3 (investment in Company C reallocated to the first operating unit, Company E).
    - Economy 2:
      - IHE: outward direct investment of 120 to Economy 3 (investments in Company D and Company E).
      - UHE: outward direct investment of 80 to Economy 4 (investment in Company D reallocated to the first operating unit, Company F) and 40 to Economy 3 (investment in Company E).
    - Economy 3:
      - IHE: outward direct investment of 100 to Economy 4 (investment in Company F).
      - UHE: outward direct investment of 100 to Economy 4 (investment in Company F) (A6.20).
  - Note: further research needed on allocation when nonoperating units invest in multiple affiliates across economies; alternative approaches discussed in OECD Benchmark Definition, fifth edition (A6.21).
- 3. Pass-through funds
  - Definition: pass-through funds (funds in transit) are funds passing through a direct investment enterprise resident in an economy to an affiliate in another economy so that the funds do not stay in the economy of the first enterprise (A6.22).
  - Identification approaches:
    - Lower-bound estimate: separately identify financial transactions, positions, and associated income flows to and from resident SPEs; targets affiliates (SPEs) typically established for that purpose (A6.22).
    - Upper-bound estimate: present inward and outward direct investment according to the UCP of resident entities using a two-by-two breakdown (Table A6.1):
      - Inward direct investment / Outward direct investment:
        - UCP is nonresident: A / B
        - UCP is resident: C / D
      - Interpretation:
        - Cell B is an upper-bound estimate of funds simply passing through the host economy.
        - Cell A minus cell B indicates how much of inward direct investment into foreign-controlled entities remains in the host economy (A6.23).

### D. Corporate inversions — definitions, types, and statistical implications
- Definition:
  - Corporate inversion: corporate restructuring of an MNE group such that the original ultimate controlling parent in one economy becomes a subsidiary of a new parent in another economy; ownership of a group of enterprises may be shifted to the new parent company (A6.24).
- Distinguishing features:
  - Inversions differ from other cross-border M&A because the acquired company takes an active role (initiates the transaction).
  - Inversions differ from other restructurings in that the original parent becomes a subsidiary of a new parent in another economy.
- Typology and common cases (A6.24; paragraphs [8.19] and [A6.24–A6.26]):
  - Pure inversion:
    - Cross-border restructuring between the original parent (inverter) and a nonresident subsidiary; new foreign parent incorporates in the economy of the subsidiary.
    - Subsidiary often holds negligible assets/liabilities pre-inversion and may have been created for the inversion.
    - Achieved by transactions in financial assets (often stock swaps) and usually recorded as financial account transactions.
  - Inversion by merger:
    - Cross-border share swap between shareholders of the original parent and those of an independent foreign company; new nonresident parent incorporates in the foreign economy.
    - Achieved by transactions in financial assets and usually recorded as financial account transactions.
  - Born inverted:
    - Establishment of a new domestic company where a nonresident entity is the owner; headquarter functions remain in the economy of the new domestic company.
    - Establishment typically leads to cross-border financial transactions.
  - Changing company residence (transfers of registered offices):
    - Change of residence without merger or transaction with another company.
    - Comparable economic effects to pure inversion, but recorded as other change in volume because no financial transactions occurred (see paragraphs [4.167 and 9.21]).
- Analytical considerations and data recommendations (A6.25–A6.26):
  - Inversions change the economy of the direct investor while leaving operational structure and ultimate shareholders effectively unchanged; the new parent typically benefits from taxation and regulatory environment of its economy of incorporation.
  - Inversions can involve large values in the financial account with little or no movement in resources; economies are encouraged to provide supplementary data where inversions are significant.
  - Suggested supplementary data: financial transactions, positions, and income associated with corporate inversions for both direct investment and portfolio investment.
  - Inversions often involve a portfolio transaction that almost exactly offsets the direct investment transaction; differing treatment of reinvested earnings on direct investment and portfolio investment tends to increase net earned income of the economy hosting the new parent company, resulting in higher gross national income.
  - Supplementary recording of reinvested earnings on portfolio investment as described in paragraph [12.36d] could address the asymmetry.

### Public-private partnerships (PPPs) — economic ownership, recording options, and impacts
- Definition and common forms (A6.27):
  - Long-term contracts between a private unit and a public unit for provision of a public asset and related services in which the private party acquires/builds/refurbishes an asset, operates it for the contract period, and bears significant risk and management responsibility.
  - Common forms: Private Finance Initiatives (PFIs), Build-Operate-Transfer (BOT), Build-Own-Operate-Transfer (BOOT), Design-Build-Operate (DBO), Design-Build-Finance-Operate (DBFO), concessions, etc.
- Economic ownership vs. legal ownership (A6.28):
  - Economic ownership in the SNA external accounts is based on who bears majority of risks and rewards; legal ownership during the contract period may differ from economic ownership and from business accounts.
- Key risks and factors to determine economic owner (A6.32):
  - Acquisition-related risks: degree of government control over design/quality/size/maintenance; construction risk; environmental and third-party risks.
  - Use-related risks: supply risk (government control over services, recipients, prices); demand risk; residual value and obsolescence risk; availability risk (penalties or costs if service standards not met).
  - No prescriptive rules: each PPP must be evaluated on facts and circumstances (A6.33–A6.34).
- Recording options when government becomes legal owner at contract end without explicit payment:
  - Approach 1: Government gradually builds up a financial claim and private unit accrues a corresponding liability; at contract end government records acquisition and disappearance of financial claim; private unit records disposal and disappearance of liability. Requires partitioning existing monetary transactions or imputing new transactions using assumptions about expected asset values and interest rates (A6.35).
  - Approach 2 (simpler): Record change of legal and economic ownership as a capital transfer occurring in the same period as the change in ownership; may be acceptable pragmatically given data limitations and uncertainty about residual values and contract options (A6.36).
- Imputation when government is economic owner during contract period but makes no explicit payment (A6.37):
  - Impute acquisition via a financial lease (loan structured as a financial lease) or partition actual payments into imputed principal and interest.
- PPP impacts on direct investment statistics (A6.38):
  - Direct investment income and financial flows may increase if the private unit in the PPP is a direct investment enterprise.
  - When a private nonresident unit participates and becomes economic owner of an immobile nonfinancial asset in the compiling economy, a notional resident unit must be created and treated as owner (paragraph [4.65]); a direct investment relationship emerges between the nonresident unit (direct investor) and the notional unit (direct investment enterprise).
  - Even if the nonresident unit is not economic owner, a direct investment relationship may be established (e.g., site office meeting branch criteria described in paragraph [4.60]).

### Cash pooling — types, recording, and counterpart identification
- Nature: bank-provided services allowing corporate groups to externalize intra-group cash management for centralized global liquidity management (A6.39).
- Three main types (A6.40):
  1. Single legal account (SLA):
     - Virtual operational sub-accounts used by individual companies; a top/master group account usually held by the parent company constitutes the bank’s obligation to the beneficiary and concentrates group funds.
     - From the bank’s perspective, only changes in the top/master account should be reported; the parent company is the direct client.
  2. Physical cash pool:
     - Each participating company holds an account with the pooling bank plus a master account usually held by the parent. Balances of surplus accounts are transferred to the master account regularly; parent transfers liquidity to deficit accounts.
     - Two types: zero-balancing (full surplus transfer to master account) and target-based (transfers when balances exceed or fall below a specified threshold).
  3. Notional cash pool:
     - Bank creates a notional top/master account consolidating positions virtually; top account does not represent a resource or obligation of the bank. No liquidity transfers that result in inter-company loans take place; funds remain as bank assets (loans to participating entities). Loans are typically guaranteed by pool members and can be drawn only if overall pool has a positive net balance.
- Recording principles (A6.41–A6.42):
  - Identification of actual debtor and creditor determines classification; internal booking entries should be reported as intercompany lending (assets or liabilities) depending on direction of funds.
  - If an overdraft or loan is received by a participating subsidiary and covered by SLA or physical cash pool, the creditor is the parent company (holder of top/master account): record as intra-group loans in direct investment (except debt between affiliated financial intermediaries).
  - If overdraft or loan is based on a notional cash pool, the creditor is the pooling bank: record as other investment between bank and participating entities.
  - Note: in a target-based physical cash pool, the creditor is the pooling bank for amounts up to the target threshold and recorded as other investment between the pooling bank and participating entities.

### Greenfield investment (GI) and extension of capacity (EC) — definitions, recommended data, and methods
- Definitions (A6.43):
  - Greenfield investment (GI): investments in direct investment enterprises established within the last three years.
  - Extension of capacity (EC): capital injections used to expand capacity of direct investment enterprises that have existed for three years or more.
- Data and presentation recommendations:
  - Economies are encouraged to provide supplementary data on GI and EC transactions for:
    - (i) equity (other than reinvestment of earnings),
    - (ii) reinvestment of earnings,
    - (iii) debt instruments.
  - Recording should be on net transactions in inward direct investment and should exclude pass-through funds if possible.
  - Ideally, GI and EC statistics should include industry breakdown by the direct investment enterprise and geographical breakdown by the ultimate controlling economy.
- Methodological approaches (A6.44):
  - Recommended method in the Manual: transaction approach focusing on direct investment funds received by the direct investment enterprise.
  - Alternative capital approach: considers gross fixed capital formation expenditures by direct investment enterprises; provides a direct measure of new capacity but extends beyond direct investment boundaries by measuring gross fixed capital formation regardless of source of financing and may include domestic or unrelated nonresident financing.

*International Monetary Fund — Appendix 6aAnnex 6, Topical Summary—Selected Issues on Direct Investment*

### Appendix 6aAnnex 6

### Appendix 6aAnnex 6 — Topical Summary—Selected Issues on Direct Investment

### A. Purpose of Topical Summaries and Scope
- Focus: selected issues related to direct investment that cut across different chapters of the Manual.
- Structure: brief introductions with references to chapters for more detail; detailed treatment of specific issues particularly relevant to direct investment statistics, namely:
  - ultimate ownership and pass-through funds;
  - corporate inversions;
  - public-private partnerships;
  - cash pooling;
  - greenfield investment and extension of capacity.
- Consistency: compilation of direct investment statistics described in the Manual is consistent with the OECD Benchmark Definition of Foreign Direct Investment, fifth edition.

### B. Overview of Direct Investment
- Definition and operational criteria:
  - Direct investment arises when an investor resident in one economy makes an investment that gives control or a significant degree of influence on the management of an enterprise resident in another economy (paragraph A6.2).
  - A direct investment relationship is defined as arising when an entity has equity that gives it voting power of 10 percent or more in the enterprise (paragraph [6.12]).
  - Control: ownership of more than 50 percent of the voting power (subsidiary); significant degree of influence: ownership of 10 to 50 percent of the voting power (associate) (Box A6a.1).
  - Control or influence may be immediate or indirect through chains of ownership (paragraphs [6.11–6.14]).
- Coverage:
  - Direct investment includes associated debt (except debt between affiliated financial intermediaries specified in paragraph [6.28]) and other debt and equity between enterprises that have the same direct investor (Box A6a.1).
  - Loans and trade credit between entities in a direct investment relationship are classified as direct investment (paragraphs [6.25–6.36]); debt included is called “intercompany lending” (paragraph [6.26]).
  - Financial derivatives and debt between selected affiliated financial corporations are excluded (paragraphs [6.28–6.29]).
  - Pass-through equity and debt are included in direct investment data (paragraphs [6.33–6.34]) but may be identified separately unless classified as debt between affiliated financial intermediaries.
- Presentations and analytical principles:
  - Primary presentation is by asset or liability; an alternative directional principle presentation is based on direction of the direct investment relationship (paragraphs [6.42–6.45], Box [6.4], and OECD Benchmark Definition, fifth edition).
  - Issues on positions, valuation of unlisted equity, entities borrowing on behalf of affiliates: paragraphs [7.14–7.25], [7.15–7.19], [7.20–7.22].
  - Financial account transactions, reinvested earnings, and the possibility of imputed direct investment flows from distorted transfer pricing: Chapter 8 and paragraphs [8.15–8.17]; corporate inversion and restructuring: paragraphs [8.19–8.22] and [A6.24–A6.26].
- Related accounting and classification issues: Chapters 3, 4, and 5 (general accounting rules; residence, institutional units and sectors; classification of instruments); identification of institutional units for branches, notional resident units, multiterritory enterprises, joint ventures, quasi-corporations, trusts, and SPEs: paragraphs [4.26–4.52]; SPEs: paragraphs [4.86–4.88].

### Box A6a.1 — Key Direct Investment Terms (selected extracts)
- Direct investment: cross-border investment associated with a resident in one economy having control or a significant degree of influence on management of an enterprise resident in another economy; ownership of 10 percent or more of the voting power is evidence of a direct investment relationship. Includes associated debt (except debt between affiliated financial intermediaries) and other debt and equity between enterprises with the same direct investor.
- Direct investment relationship: arises when an investor resident in one economy makes an investment that gives control or a significant degree of influence (paragraph 6.9). Covers investment income and financial transactions, other flows, positions, and transactions in equity and selected debt instruments between entities in such relationship.
- Direct investor: entity or group of related entities able to exercise control or a significant degree of influence over another entity resident of a different economy (paragraph [6.11]).
- Direct investment enterprise: enterprise in one economy subject to control or significant degree of influence by a direct investor (paragraph [6.11]); exception: investment funds cannot be direct investment enterprises (paragraph [6.24]).
- Control and influence: control = more than 50 percent of voting power; significant degree of influence = 10 to 50 percent of voting power (paragraphs [6.11–6.14]).
- Fellow enterprise: enterprises under the influence or control of the same direct investor, but neither controls or influences the other (paragraph [6.17]).
- Affiliate: entities in an immediate or indirect direct investment relationship with each other, or that have the same immediate or indirect direct investor.
- Reverse direct investment: direct investment enterprise lending funds to or acquiring equity in its immediate or indirect direct investor provided it does not own equity comprising 10 percent or more of the voting power in that direct investor (paragraph [6.40]).

### C. Ultimate Ownership and Pass-Through Funds
- Motivation:
  - Complex MNE structures can inflate direct investment flows and positions because each flow into and out of an economy is counted even when funds merely pass through; immediate partner economy compilation can obscure ultimate sources and destinations.
  - Supplementary presentations by ultimate partner economy and identification of pass-through funds improve interpretability and usefulness; based on the directional principle (see Box [6.4]) and OECD Benchmark Definition, fifth edition.
- 1. Inward direct investment by the ultimate investing economy (UIE)
  - IIE (immediate investing economy): economy of each immediate counterpart.
  - UIE attribution: economy of the ultimate controlling parent (UCP), identified by moving up ownership chain through controlling links (ownership of more than 50 percent of voting power) until an individual, household, or company not controlled by another company is reached. If none exists, the resident company may be its own UCP. UIE may equal host economy (paragraphs A6.16–A6.17).
  - Recommended methods to identify UIE:
    - ‘Winner takes all’ (WTA): entire inward direct investment flow or position of a resident institutional unit attributed to economy of its UCP.
    - ‘Proportional ownership’ (PO): assigns each inward direct investment flow or position of a resident institutional unit to the economy of the immediate counterpart’s UCP.
    - IFRS 10 consolidation method may assist in identifying the UCP (A6.17).
  - Example (Figure A6.1): Economy 4 would record under various methods:
    - IIE: Inward direct investment of 6 from Economy 2 (Company C) and 14 from Economy 3 (Company D).
    - UIE (WTA): Inward direct investment of 20 from Economy 1 since Company A is the UCP of Company F.
    - UIE (PO): Inward direct investment of 6 from Economy 3 (Company E is UCP of Company C) and 14 from Economy 1 (Company A is UCP of Company D) (A6.18).
- 2. Outward direct investment by the ultimate host economy (UHE)
  - IHE (immediate host economy): economy of the immediate counterpart to the outward direct investment.
  - UHE: economy of the first operating unit — the first unit in the investment chain whose purpose extends beyond administrative, management, or asset-holding functions (A6.19–A6.20).
  - Example (Figure A6.2) — Economy 1:
    - IHE: Outward direct investment of 160 to Economy 2 (investments in Company B and Company C).
    - UHE: Outward direct investment of 120 to Economy 2 (investment in Company B) and 40 to Economy 3 (investment in Company C reallocated to the first operating unit, Company E).
  - Economy 2:
    - IHE: Outward direct investment of 120 to Economy 3 (investments in Company D and Company E).
    - UHE: Outward direct investment of 80 to Economy 4 (investment in Company D reallocated to the first operating unit, Company F) and 40 to Economy 3 (investment in Company E).
  - Economy 3:
    - IHE: Outward direct investment of 100 to Economy 4 (investment in Company F).
    - UHE: Outward direct investment of 100 to Economy 4 (investment in Company F) (A6.20).
  - Note: More research needed on allocation when nonoperating units invest in multiple affiliates across economies; alternative approaches are discussed in OECD Benchmark Definition, fifth edition (A6.21).
- 3. Pass-through funds
  - Definition: pass-through funds (funds in transit) are funds passing through a direct investment enterprise resident in an economy to an affiliate in another economy so that the funds do not stay in the economy of the first enterprise (A6.22).
  - Identification approaches:
    - Separately identifying financial transactions, positions, and associated income flows to and from resident SPEs provides a lower-bound estimate of pass-through funds; targets affiliates (SPEs) typically established for that purpose (A6.22).
    - Presenting inward and outward direct investment according to the UCP of resident entities produces an upper-bound estimate of funds simply passing through the host economy using a two-by-two breakdown (Table A6.1):
      - Inward direct investment / Outward direct investment:
        - UCP is nonresident: A / B
        - UCP is resident: C / D
      - Interpretation:
        - Cell B is an upper-bound estimate of funds simply passing through the host economy.
        - Cell A minus cell B indicates how much of inward direct investment into foreign-controlled entities remains in the host economy (A6.23).

### D. Corporate Inversions
- Definition:
  - Corporate inversion: corporate restructuring of an MNE group such that the original ultimate controlling parent in one economy becomes a subsidiary of a new parent in another economy; ownership of a group of enterprises may be shifted to the new parent company (A6.24).
- Distinguishing features:
  - Corporate inversions differ from other cross-border mergers and acquisitions because the acquired company takes an active role (initiates the transaction) rather than being passive.
  - Corporate inversions differ from other corporate restructurings in that the original parent becomes a subsidiary of a new parent in another economy.
- Typology: a typology of the most usual cases of corporate inversions or other restructurings with comparable economic effects includes four cases (A6.24). Further discussion and references are provided in paragraphs [8.19] and [A6.24–A6.26].

*International Monetary Fund — Appendix 6aAnnex 6, Topical Summary—Selected Issues on Direct Investment*

### 1. Pure inversion: A cross-border restructuring between the original parent company (the inverter) and a

### bpm7-annex-6-v7-selected-issues-on-direct-investment - 1. Pure inversion: A cross-border restructuring between the original parent company (the inverter) and a

### Types of corporate inversion and immediate statistical implications
- Pure inversion: cross-border restructuring between the original parent company (the inverter) and a nonresident subsidiary, with the new foreign parent company incorporating in the economy of the subsidiary. The subsidiary often holds a negligible amount of assets and liabilities before the inversion and might have been created for the sole purpose of the inversion. The inversion is achieved by transactions in financial assets (often through stock swaps) and usually results in financial transactions being recorded in the financial account.
- Inversion by merger: cross-border share swap between the shareholders of the original parent company (the inverter) and those of an independent company in a foreign economy, with the new nonresident parent company incorporating in the foreign economy. Achieved by transactions in financial assets and usually results in financial transactions being recorded in the financial account.
- Born inverted: establishment of a new domestic company where a nonresident entity is the owner. The headquarter functions of the MNE remain in the economy of the new domestic company. The establishment typically leads to cross-border financial transactions.
- Changing company residence (transfers of registered offices): a change of residence that does not involve any merger or transaction with another company. Comparable economic effects to pure inversion, but recorded as other change in volume because no financial transactions occurred (see paragraphs [4.167 and 9.21]).

### Analytical considerations and data recommendations (A6.25–A6.26)
- Corporate inversions change the economy of the direct investor while leaving operational structure and ultimate shareholders effectively unchanged; the new parent company typically benefits from taxation and regulatory environment of its economy of incorporation.
- Inversions can involve large values in the financial account with little or no movement in resources, creating analytical interest in separating them from other direct investment (A6.25).
- Economies are encouraged to provide supplementary data on corporate inversions if significantly impacted by them. Supplementary data could include:
  - financial transactions,
  - positions, and
  - income associated with corporate inversions,
  - not only for direct investment but also for portfolio investment (A6.26).
- Corporate inversion often involves a portfolio transaction that almost exactly offsets the direct investment transaction; differing treatment of reinvested earnings on direct investment and portfolio investment tends to increase net earned income of the economy hosting the new parent company, resulting in higher gross national income (A6.26).
- Supplementary recording of reinvested earnings on portfolio investment as described in paragraph [12.36d] could address the asymmetry (A6.26).

### Public-Private Partnerships (PPPs): definitions, economic ownership, and recording issues (A6.27–A6.38)
- Definition: long-term contracts between a private unit and a public unit for the provision of a public asset or set of assets and related services in which the private party acquires, builds, or refurbishes an asset, operates it for the contract period, and bears significant risk and management responsibility (A6.27).
- Common PPP forms: Private Finance Initiatives (PFIs), Build-Operate-Transfer (BOT), Build-Own-Operate-Transfer (BOOT), Design-Build-Operate (DBO), Design-Build-Finance-Operate (DBFO), concessions, etc. (A6.27).
- Economic ownership vs. legal ownership: economic ownership in the SNA external accounts is based on who bears majority of risks and rewards; legal ownership during the contract period may differ from economic ownership and from business accounts (A6.28).
- Typical contract features and variations:
  - Private enterprise acquires fixed assets, produces services delivered to the government or public; payments often performance-based (A6.29).
  - Concessions: private enterprise sells services to the public (e.g., toll roads); payments expected to cover costs and allow adequate rate of return (A6.29).
  - At contract end, government may gain legal and economic ownership, sometimes without payment (A6.30).
  - Financing may be provided by government or guaranteed by government; contracts may specify design, use, maintenance, and future disposition of assets (A6.31).
- Determination of economic owner: assess which unit bears majority of risks and receives majority of rewards. Consider factors associated with acquiring the asset and with using it in production (A6.32).
  - Acquisition-related risks include:
    - a. degree to which government controls design, quality, size, and maintenance;
    - b. construction risk (late delivery, not meeting specifications, environmental and other third-party risks).
  - Use-related risks include:
    - a. supply risk (government control over services, recipients, and prices);
    - b. demand risk (actual demand higher or lower than expected);
    - c. residual value and obsolescence risk (value at end vs. agreed transfer price);
    - d. availability risk (penalties or costs if service volume/quality standards not met).
- No prescriptive set of rules; each PPP must be evaluated on its facts and circumstances to decide economic ownership (A6.33–A6.34).
- Recording options when private enterprise is legal owner during contract period but government obtains ownership at end without explicit payment (A6.35–A6.36):
  - Approach 1: Government gradually builds up a financial claim and private unit accrues a corresponding liability; at contract end government records acquisition and disappearance of financial claim; private unit records disposal and disappearance of liability. Requires partitioning of existing monetary transactions or imputing new transactions using assumptions about expected asset values and interest rates (A6.35).
  - Approach 2 (simpler): Record change of legal and economic ownership as a capital transfer occurring in the same period as the change in ownership. May be acceptable on pragmatic grounds given data limitations and uncertainty about residual values and contract options (A6.36).
- If government is economic owner during contract period but makes no explicit payment at beginning, impute transactions to cover acquisition (A6.37):
  - Acquisition via an imputed financial lease (loan structured as a financial lease) is a common approach.
  - If actual government payments exist, partition payments into imputed principal and interest; if no actual payments (concession), part of public payments for use may be routed through government, with imputed revenue used for imputed principal and interest payments.
- PPP impacts on direct investment statistics (A6.38):
  - Direct investment income and financial flows may increase if the private unit in the PPP is a direct investment enterprise.
  - When a private nonresident unit participates and becomes economic owner of an immobile nonfinancial asset in the compiling economy, a notional resident unit must be created and treated as owner (see paragraph [4.65]); a direct investment relationship emerges between the nonresident unit (direct investor) and the notional unit (direct investment enterprise).
  - Even if the nonresident unit is not economic owner, direct investment relationship may be established (e.g., site office meeting branch criteria described in paragraph [4.60]).

### Cash pooling: types, recording, and counterpart identification (A6.39–A6.42)
- Cash-pooling arrangements: bank-provided services allowing corporate groups to externalize intra-group cash management for centralized global liquidity management (A6.39).
- Three main types of cash-pooling arrangements (A6.40):
  1. Single legal account (SLA):
     - Virtual operational sub-accounts used by individual companies; a top/master group account usually held by the parent company constitutes the bank’s obligation to the beneficiary and concentrates group funds.
     - From the bank’s perspective, only changes in the top/master account should be reported; the parent company is the direct client.
  2. Physical cash pool:
     - Each participating company holds an account with the pooling bank plus a master account usually held by the parent. Balances of surplus accounts are transferred to the master account regularly; parent transfers liquidity to deficit accounts.
     - Two types: zero-balancing (full surplus transfer to master account) and target-based (transfers when balances exceed or fall below a specified threshold).
  3. Notional cash pool:
     - Bank creates a notional top/master account consolidating positions virtually; top account does not represent a resource or obligation of the bank. No liquidity transfers that result in inter-company loans take place; funds remain as bank assets (loans to participating entities). Loans are typically guaranteed by pool members and can be drawn only if overall pool has a positive net balance.
- Recording depends on identification of actual debtor and creditor; internal booking entries should be reported as intercompany lending (assets or liabilities) depending on direction of funds. Presence of SLA or physical cash pool should be identified via direct investment surveys (A6.41).
- Summary guidance (Table A6.2 referenced in source) for compiling-economy perspective:
  - If an overdraft or loan is received by a participating subsidiary and covered by SLA or physical cash pool, the creditor is the parent company (holder of top/master account): record as intra-group loans in direct investment (except debt between affiliated financial intermediaries).
  - If overdraft or loan is based on a notional cash pool, the creditor is the pooling bank: record as other investment between bank and participating entities (A6.42).
- Note: In a target-based physical cash pool, the creditor is the pooling bank for amounts up to the target threshold and recorded as other investment between the pooling bank and participating entities (Table A6.2 note).

### Greenfield Investment (GI) and Extension of Capacity (EC) guidance (A6.43–A6.44)
- Definitions:
  - Greenfield investment (GI): investments in direct investment enterprises established within the last three years (A6.43).
  - Extension of capacity (EC): capital injections used to expand capacity of direct investment enterprises that have existed for three years or more (A6.43).
- Data recommendations:
  - Economies are encouraged to provide supplementary data on GI and EC transactions for:
    - (i) equity (other than reinvestment of earnings),
    - (ii) reinvestment of earnings,
    - (iii) debt instruments (A6.43).
  - Recording should be on net transactions in inward direct investment and should exclude pass-through funds if possible (A6.43).
  - Ideally, GI and EC statistics should include industry breakdown by the direct investment enterprise and geographical breakdown by the ultimate controlling economy (A6.43).
- Methodological approaches:
  - Recommended method in the Manual: transaction approach focusing on direct investment funds received by the direct investment enterprise (A6.44).
  - Alternative: capital approach, which considers gross fixed capital formation expenditures by direct investment enterprises; provides a direct measure of new capacity but extends beyond direct investment boundaries by measuring gross fixed capital formation regardless of source of financing and may include domestic or unrelated nonresident financing (A6.44).

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_Source: https://www.imf.org/-/media/files/data/statistics/bmp7/draft-chapters/bpm7-annex-6-v7-selected-issues-on-direct-investment.pdf_