## Ultimate Investing Economy, Ultimate Host Economy and Pass-through Funds

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---

### Background: purpose and measurement challenges of Direct Investment (DI)
- DI statistics measure “investment that reflects the objective of establishing a lasting interest by a resident enterprise in one economy (direct investor) in an enterprise (direct investment enterprise) that is resident in an economy other than that of the direct investor. The lasting interest implies the existence of a long-term relationship between the direct investor and the direct investment enterprise and a significant degree of influence on the management of the enterprise.” (BD4, glossary).
- Motivations for DI include strategic aims (accessing markets, key inputs, factor cost differences) and factors related to complex MNE structures such as tax optimization and use of regional headquarters.
- Complex ownership and financing structures cause DI flows that “go in and out of the country on their way to their final destination,” complicating interpretation of DI statistics compiled by immediate partner economy.
- UIE/UHE supplemental presentations address who ultimately:
  - owns or controls the investment, reaps rewards and bears risks;
  - receives income generated through Global Value Chains (GVCs);
  - creates financial linkages and interdependencies not evident in immediate-partner statistics.
- Empirical note: Seventeen economies report inward DI positions by immediate and ultimate investing economy to the OECD; comparisons show the United States, the United Kingdom, Germany, Japan, Canada, and France become larger DI sources by UIE, while the Netherlands, Switzerland, Ireland, and Luxembourg become smaller sources (OECD, 2018).
- Pass-through funds:
  - At end-2017 around 40 percent of global DI were into Special Purpose Entities (SPEs) (Damgaard, Johannesen and Elkjaer, 2019).
  - SPEs are only a portion of pass-through funds and their portion is likely declining.
  - OECD estimates pass-through funds in operating affiliates account for about one-quarter of the inward DI positions in a selection of European economies (Borga and Caliandro, 2018).

### Standards, definitions, and current treatment
- BPM6 and BD4 guidance:
  - BPM6 allows supplementary data on DI by ultimate source and host economy and immediate economies excluding pass-through funds (BPM6, paragraphs 4.156–157) and identifies capital-in-transit (paragraph 6.33).
  - BPM6 recommends including pass-through funds in DI for coverage, balance of payments accuracy, symmetry and consistency; it also recommends economies compile supplementary data on funds in transit using national definitions when pass-through identification is valuable (paragraph 6.34).
  - BD4 recommends a supplemental presentation by UIE for inward DI positions, reallocating the entire inward DI position to economies of the controlling investors (BD4, paragraph 280 and 610–617), and placed DI by UHE on its research agenda (BD4 paragraph 668–671).
  - BD4 recommended compiling DI associated with resident SPEs separately and using the extended directional principle to better capture direction and degree of influence and to remove double-counting when debt and equity pass through fellow enterprises.

### Issues for discussion — Ultimate Investing Economy (UIE)
- Conceptual choices:
  - Need to define the appropriate concept of ultimate investor for compiling UIE statistics; several concepts exist (ultimate controlling parent (UCP), ultimate beneficial owner, ultimate controlling institutional unit, ultimate investor).
  - Consistent concept choice across statistics would simplify compilers’ work and enhance international comparability.
- Two broad reallocation methods from immediate to UIE:
  - Proportional approach (PA): recommended in BD4; relies on identifying the entity that controls the direct investor to identify who makes the DI decision.
  - Control approach / “winner takes all” (WTA): identifies the entity that controls the direct investment enterprise (DIE) using the concept of the ultimate controlling institutional unit (Eurostat Manual on Foreign Affiliates Statistics, 2013).
- Alternative: IFRS consolidation method (IFRS 10):
  - Widely used by MNEs, potentially reducing reporting burden.
  - Consolidation removes intra-firm transactions and positions that DI statistics aim to measure; could still be useful to identify the controlling MNE.
- Practical note: many countries already have information on the residency of the UCP of their direct investment enterprises to apply the extended directional principle; using residency of the UCP could be a pragmatic first step.

### Issues for discussion — Ultimate Host Economy (UHE)
- Problem statement:
  - Complex ownership chains (holding companies, SPEs, holding/SPE chains) can misallocate DIE geographically and by economic activity in outward DI statistics by immediate host economy.
  - Outward DI should be reallocated from immediately held subsidiary to the economy(ies) and economic activity(ies) of the subsidiary(ies) below it in the chain to generate accurate geographical and sectoral information for the UHE.
- Possible reallocation approaches for UHE:
  1. Show how influence flows down the chain using balance sheet information and ownership shares at each link.
  2. Use the value the direct investor would receive if that subsidiary were acquired (measure ultimate investor’s position in the DIE where it is located).
  3. Define the UHE as the last economy in the chain.
  4. Define the UHE as the first operating unit even if not the end of the investment chain.
- Rationale: Identifying the economy of the operating (productive) DIE(s) is valuable because holding/SPE chains often do not make an actual economic contribution to their host economy.

### Issues for discussion — Pass-through funds and measurement approaches
- Definition and identification challenges:
  - Pass-through funds: funds that flow into a host economy and are then invested in a subsequent economy; identification is complicated because entities receive and use financing from multiple sources and operating affiliates’ activities can blur inward/outward flow relationships.
  - Economies use varying methods to identify pass-through funds (company-level matching of inflows and outflows; linking FDI to gross fixed capital formation of foreign-owned firms; separately identifying capital outflows of foreign-owned parent companies; methods covering all functional categories). Methods vary in data/resource intensity and breadth of pass-through definition.
- Supplemental presentation using residency of the ultimate investor:
  - Pass-through funds in an economy are carried out by foreign-owned parent firms that are both DIEs and direct investors (entities in the middle of the chain).
  - Simple breakdown: outward DI positions and income by residency of the ultimate investor indicates amounts of funds and income passing through; adding residency of the ultimate investor for inward positions and income sheds light on round-tripping.
- Conceptual table labels preserved (interpretation):
  - Inward DI Position / Income; Outward DI Position / Income
  - If ultimate investor is resident: (A) (B) (E) (F)
  - If ultimate investor is nonresident: (C) (D) (G) (H)
  - Interpretations:
    - A identifies round-tripping amount;
    - E is outward investment by domestic MNEs;
    - G is outward investment by foreign-owned direct investors—an indication of inward investment that has passed through the economy;
    - C is inward investment by foreign investors while C less G indicates how much of inward DI remains in the host economy (note: this ignores possibility of negative investment positions and external financing raised by the foreign-owned direct investor).
  - Extending breakdown to DI income: B indicates income that ultimately round-trips back; D indicates income that leaves.

### Outcomes and recommended presentation choices
- Recommended inclusions in update:
  - Supplemental presentations by UIE, UHE, and identifying pass-through funds.
- Recommended preferred methods for cross-country comparability:
  - UIE: Winner Takes All (WTA) as preferred approach; Proportional Approach (PA) ranked second; IFRS consolidation method ranked third.
  - UHE: Reallocation of positions to the first operating unit(s) recommended.
- Scope of presentation:
  - UIE and UHE presentations should be produced for position statistics and explored for income and transactions.
  - An indicator of pass-through funds based on residency of the ultimate investor should be included as a supplemental presentation.
- DITT position:
  - No specific template recommended at this stage because of connections to related issues (D.9 reconciliation of DI and AMNE, B.1 nationality concept, treatment of MNEs and SPEs in national accounts) and interactions with CATT, BPTT, and GZTT discussions.

### Coordination with other Task Teams and manuals
- Development of the supplemental presentation should be coordinated with other Task Teams (TTs) and across manuals.
- Issues in this note relate to DITT topics (e.g., issue D.9 reconciling DI and AMNE statistics) and to other TTs including the BPTT, CATT, and GZTT.
- Outcomes of notes across TTs could inform the choice of concepts recommended here and vice versa, to promote consistency and comparability across countries.
- Desirability for statistics to create meaningful regional aggregates and for UIE and UHE to be symmetric implies:
  - Use of symmetric concepts for the UIE and UHE.
  - Separate identification of pass-through funds so they could be excluded.

### Recommendations (paragraph 19)
- Develop a supplemental framework for statistics by UIE, UHE, and pass-through funds:
  - Primarily applied to development of DI statistics by UIE and UHE that could derive aggregates on pass-through funds.
  - Explore links of this framework to research on the nationality concept and the presentation of MNEs in the accounts.
- Streamline definitions to include clear and unambiguous terminology in the manual; expect more specific recommendations after consultation with other TTs.
- Encourage data-sharing at the micro-level and development of detailed data on MNEs widely available to facilitate compilation.
- Develop in collaboration with GZTT a template for recording data on UIE, UHE, and pass-through funds for positions.

### Rejected alternative: a complex definition of pass-through capital and income (paragraph 20)
- Rejected because it was complicated and information intensive.
- The rejected formulation measured pass-through capital and income and accounted for possibility of negative investment positions and external financing raised in the reporting economy (Leino and Yrrko, 2014).
- Proposed formula (in source notation) for pass-through (PT) is:
  PT
  j,t
  = min(I
  j,t
  ,O
  j,t
  ) if the I
  j,t
   ≥ 0 and O
  j,t
   ≥ 0                                  (1) 
       = max(I
  j,t
  ,O
  j,t
  ) if the I
  j,t
   < 0 and O
  j,t
   < 0                                 (2)      
       = 0, otherwise                                                                     (3)
- Definitions in that formulation:
  - I
  j,t
   and O
  j,t
   represent the inward and outward positions of the direct investment enterprise j in period t, respectively.
  - From the inward DI perspective: a foreign-owned enterprise with no subsidiaries would have no pass-through funds (O
  j,t
   =0 under (1)). If it did have a foreign subsidiary, the amount of pass-through funds is the smaller of the inward and outward positions of the foreign-owned enterprise if both its positions are positive (under (1)) or negative (under (2)), and it is zero otherwise.
  - From the outward DI perspective: the same amount of pass-through would be identified for direct investors in the economy.
- Practical implications:
  - Measuring pass-through in inward DI statistics should be available for economies compiling DI statistics using surveys by linking their inward and outward DI surveys.
  - Additional information required to identify pass-through funds in outward DI statistics.
  - If interest exists in developing consolidated measures of DI by UIE and UHE, the more complicated definition could be useful in removing intra-firm positions and income and attributing them to the ultimate partner economy to present symmetric DI statistics by UIE and UHE without double-counting.

### Supplementary definitions and approaches (UIE/UHE)
- Definitions (selected):
  - Ultimate investor: "The enterprise that has control over the investment decision to have a DI position in the DI enterprise." (BD4, Annex 10 p. 210)
  - Ultimate investing economy: "The country in which the ultimate investor is resident is the ultimate investing economy." (BD4, Annex 10 p. 210)
  - Ultimate beneficial owner (UBO): various definitions describe the natural person(s) who ultimately owns or controls, or an institutional unit at top of ownership chain not controlled by another institutional unit.
  - Ultimate controlling parent (UCP): "The entity on top of the ownership chain and which is not controlled by another entity." (BD4 and BPM6)
  - Ultimate controlling institutional unit of a foreign affiliate (UCI): Eurostat FATS definition.
- Two broad approaches to identifying UIE:
  - Proportional Approach (PA) — OECD BD4: based on identifying the country of the entity that exerts control over the direct investor to identify who makes investment decisions, bears risks, and reaps rewards.
  - Winner Takes All (WTA) — FATS/AMNE: based on control of the foreign-owned enterprise; identifies only one UIE for each direct investment enterprise.
  - IFRS consolidation method: based on international accounting consolidation methods.
- Advantages and disadvantages (high level):
  - PA advantages include better reflection of risk and reward and suitability for financial analyses; disadvantages include mismatch with FATS/AMNE and implementation difficulties.
  - WTA advantages include alignment with FATS/AMNE and easier information availability; disadvantages include unclear treatment of influence relationships and limitations for income attribution.
- Empirical comparisons:
  - In practice, little difference between PA and WTA for larger investing economies (Annex Figures A.1 and A.2 using German data); differences matter more for smaller investing economies.
  - Germany compiled statistics according to both concepts to compare results; similar findings reported by Poland and Denmark.
  - The ESS/ESCB Task Force on FDI proposed voluntary data collection of inward FDI statistics by UIE planned for Spring 2021; adopted methodology is the PA but indicates the "control approach" (WTA) can be used if PA is not feasible (ECB and Eurostat, 2020).

### Approaches for reallocating outward investment position to the UHE (annex discussion)
- Four approaches discussed:
  - Use balance sheet information and ownership shares at each link in the chain to show how influence flows down the chain (most detailed; high information requirement).
  - Use the value the direct investor would receive if that subsidiary were acquired (comprehensive view; must decide inclusion of entities below subsidiary to avoid double-counting).
  - Define the UHE as the last economy in the chain (look-through to last non-controlling affiliate; may leave significant outward positions unallocated).
  - Define the UHE as the first operating unit even if not end of chain (less burden; requires formal definition of "first operating unit").
- Practical notes:
  - Enterprises receive financing from many sources and use funding in many ways; tracing specific source to specific use is not possible—one convention is to assume all sources of funding are used equally in all uses; alternative is to assume intra-group financing is primary source for intra-group investments.
  - DI position should reflect market value of direct investor’s claim on DIE; market value often unavailable so approximations (e.g., Own Funds at Book Value) are used. Value used in UHE statistics should coincide with value reflected in DI statistics included in the IIP.
  - To avoid double-counting when attributing value of entities lower in chain, methods to identify and remove such double-counting would be needed.
  - Germany found major part of investment often remains in the first productive enterprise; allocation across multiple affiliates needs consideration when SPE holds entities in multiple countries.

### Approach to compiling statistics by UHE and practical considerations
- Statistical agencies may explore algorithms or modeling to allocate indirect holdings to UHEs where complete and accurate ownership-chain information is not available.
- Expect a higher tolerance for uncertainty in statistics allocating DI flows and positions to UHE.
- Easier to collect UHE information on outward operations from domestically-controlled direct investors than from foreign-controlled direct investors; limiting UHE presentation to domestically-controlled direct investors should be considered.
- Data exchange at micro-data level and development of publicly available detailed MNE structure data can alleviate reporting burdens.

### Brazil experience measuring DI by UHE
- Brazil published estimates by UHE in 2018.
- From a total of US$357.9 billion of outward equity position in 2017, compilation by ultimate host country led to a reallocation in country positions of US$84.2 billion compared to the immediate-country allocation.
- The look-through definition left a significant portion of outward position not reallocated because:
  - Some immediately held DI enterprises in tax havens were used to make portfolio investments and were the final host economy for the direct investment even though funds passed to other economies.
  - Some outward DI position is ultimately held in economies along the chain that were missed using the look-through method.

### Combining UIE and UHE with pass-through funds; aggregation issues and illustrative example
- Presentation by UIE for inward and outward DI can reveal how much investment from partner economies remains in the host economy.
- Pass-through funds cause double-counting when reallocating inward positions to UIE under the extended directional principle:
  - Example summary: In a simple five-entity, four-economy MNE example, global inward and outward positions each sum to 340 under the extended directional principle.
  - Reallocating inward positions to Economy 1 (the UIE) results in Economies 2, 3, and 4 recording inward investment from Economy 1 totaling 340, exceeding Economy 1’s total outward DI of 250 because of pass-through funds.
  - Loans between fellow enterprises treated under the extended directional principle can create asymmetries: a loan that does not confer influence may nonetheless be recorded as outward investment in the immediate partner country and produce bilateral asymmetries.
- Consolidated DI statistics that identify and net out pass-through funds produce symmetric and aggregatable results:
  - If countries separately identify outward investment of foreign-owned parents as pass-through funds and net them from both outward and inward DI statistics, pass-through funds are eliminated.
  - In the simple example, after netting pass-through and reallocating to the UIE, Economy 1 reports outward investment of 250 and inward DI attributed to Economy 1 equals its outward DI of 250, enabling meaningful regional aggregates without double-counting.

### Valuation conventions and asymmetries in measures of round-tripping
- Applying Own Funds at Book Value (OFBV) valuations can result in different values of round-tripping in outward and inward investment:
  - Inward DI presented according to UIE reflects current valuation: OFBV for unlisted or market value for listed companies.
  - Valuation of the DIE in the host economy reflects reinvestment of earnings.
  - Outward DI under standards uses the OFBV of the SPE, which often reflects historical cost and not reinvestment of earnings.
- These valuation conventions lead to asymmetries between UIE and UHE measures of round-tripping.

### Compilation issues and special cases
- Blurred ownership chains occur when all foreign direct investors of the reporting enterprise are not subject to immediate control by any entities (e.g., multiple influence relationships).
- Special cases in determining residence of direct investors include collective investment institutions, individuals, tax havens, and offshore financial centers.
- Compilation guidance should address these special cases alongside BPM6 updates.

*International Monetary Fund — Guidance Note (SECTION I: THE ISSUE).*

### SECTION I: THE ISSUE

### SECTION I: THE ISSUE

### Background: purpose and measurement challenges of Direct Investment (DI)
- DI statistics measure “investment that reflects the objective of establishing a lasting interest by a resident enterprise in one economy (direct investor) in an enterprise (direct investment enterprise) that is resident in an economy other than that of the direct investor. The lasting interest implies the existence of a long-term relationship between the direct investor and the direct investment enterprise and a significant degree of influence on the management of the enterprise.” (BD4, glossary).
- Motivations for DI include strategic aims (accessing markets, key inputs, factor cost differences) and factors related to complex MNE structures such as tax optimization and use of regional headquarters.
- Complex ownership and financing structures lead to DI flows that “go in and out of the country on their way to their final destination,” complicating interpretation of DI statistics compiled by immediate partner economy.
- UIE/UHE supplemental presentations address who ultimately:
  - owns or controls the investment, reaps rewards and bears risks;
  - receives income generated through Global Value Chains (GVCs);
  - creates financial linkages and interdependencies not evident in immediate-partner statistics.
- Seventeen economies report inward DI positions by immediate and ultimate investing economy to the OECD; comparisons show the United States, the United Kingdom, Germany, Japan, Canada, and France become larger DI sources by UIE, while the Netherlands, Switzerland, Ireland, and Luxembourg become smaller sources (OECD, 2018).
- Pass-through funds are substantial:
  - At end-2017 around 40 percent of global DI were into Special Purpose Entities (SPEs) (Damgaard, Johannesen and Elkjaer, 2019).
  - SPEs are only a portion of pass-through funds and their portion is likely declining.
  - OECD estimates pass-through funds in operating affiliates account for about one-quarter of the inward DI positions in a selection of European economies (Borga and Caliandro, 2018).

### Standards, definitions, and current treatment
- BPM6 and BD4 guidance:
  - BPM6 allows supplementary data on DI by ultimate source and host economy and immediate economies excluding pass-through funds (BPM6, paragraphs 4.156–157) and identifies capital-in-transit (paragraph 6.33).
  - BPM6 recommends including pass-through funds in DI for coverage, balance of payments accuracy, symmetry and consistency; it also recommends economies compile supplementary data on funds in transit using national definitions when pass-through identification is valuable (paragraph 6.34).
  - BD4 recommends a supplemental presentation by UIE for inward DI positions, reallocating the entire inward DI position to economies of the controlling investors (BD4, paragraph 280 and 610–617), and placed DI by UHE on its research agenda (BD4 paragraph 668–671).
  - BD4 recommended compiling DI associated with resident SPEs separately and using the extended directional principle to better capture direction and degree of influence and to remove double-counting when debt and equity pass through fellow enterprises.

### Issues for discussion — Ultimate Investing Economy (UIE)
- Need to define the appropriate concept of ultimate investor for compiling UIE statistics; several concepts exist (ultimate controlling parent (UCP), ultimate beneficial owner, ultimate controlling institutional unit, ultimate investor).
- Consistent concept choice across statistics would simplify compilers’ work and enhance international comparability.
- Two broad methods to reallocate DI from immediate to UIE:
  - Proportional approach (PA): recommended in BD4; relies on identifying the entity that controls the direct investor to identify who makes the DI decision.
  - Control approach / “winner takes all” (WTA): identifies the entity that controls the direct investment enterprise (DIE) using the concept of the ultimate controlling institutional unit (Eurostat Manual on Foreign Affiliates Statistics, 2013).
- IFRS consolidation method (IFRS 10) is an alternative: widely used by MNEs, potentially reducing reporting burden, but consolidation removes intra-firm transactions and positions that DI statistics aim to measure; still could be useful to identify the controlling MNE.
- Practical note: many countries already have information on the residency of the UCP of their direct investment enterprises to apply the extended directional principle; using residency of the UCP could be a pragmatic first step.

### Issues for discussion — Ultimate Host Economy (UHE)
- Complex ownership chains (holding companies, SPEs, holding/SPE chains) can misallocate DIE geographically and by economic activity in outward DI statistics by immediate host economy.
- Outward DI should be reallocated from the immediately held subsidiary to the economy(ies) and economic activity(ies) of the subsidiary(ies) below it in the chain to generate accurate geographical and sectoral information for the UHE.
- Possible reallocation approaches for UHE:
  1. Show how influence flows down the chain using balance sheet information and ownership shares at each link.
  2. Use the value the direct investor would receive if that subsidiary were acquired (measure ultimate investor’s position in the DIE where it is located).
  3. Define the UHE as the last economy in the chain.
  4. Define the UHE as the first operating unit even if not the end of the investment chain.
- Identifying the economy of the operating (productive) DIE(s) is valuable because holding/SPE chains often do not make an actual economic contribution to their host economy.

### Issues for discussion — Pass-through funds and measurement approaches
- Pass-through funds: funds that flow into a host economy and are then invested in a subsequent economy; identification is complicated because entities receive and use financing from multiple sources and operating affiliates’ activities can blur inward/outward flow relationships.
- Several economies presented varying methods to identify pass-through funds (e.g., company-level matching of inflows and outflows, linking FDI to gross fixed capital formation of foreign-owned firms, separately identifying capital outflows of foreign-owned parent companies, methods covering all functional categories). Methods vary in data/resource intensity and breadth of pass-through definition.
- One possible supplemental presentation uses residency of the ultimate investor to indicate pass-through:
  - Pass-through funds in an economy are carried out by foreign-owned parent firms that are both DIEs and direct investors (entities in the middle of the chain).
  - A simple breakdown of outward DI positions and income by residency of the ultimate investor indicates amounts of funds and income passing through.
  - Adding residency of the ultimate investor for inward positions and income sheds light on round-tripping.
- Table 1 conceptual breakdown (labels preserved):
  - Inward DI Position / Income; Outward DI Position / Income
  - If ultimate investor is resident: (A) (B) (E) (F)
  - If ultimate investor is nonresident: (C) (D) (G) (H)
  - Interpretations: A identifies round-tripping amount; E is outward investment by domestic MNEs; G is outward investment by foreign-owned direct investors—an indication of inward investment that has passed through the economy; C is inward investment by foreign investors while C less G indicates how much of inward DI remains in the host economy (note: this ignores possibility of negative investment positions and external financing raised by the foreign-owned direct investor).
- Extending breakdown to DI income indicates pass-through income and round-tripping of income (B indicates income that ultimately round-trips back; D indicates income that leaves).
- Annex tables A.3 and A.4 show combinations of UIE/UHE breakdowns with residency of ultimate investor to indicate major ultimate investors, extent of pass-through, round-tripping, and destinations for outward investment by domestic direct investors.

### Outcomes and recommended presentation choices
- The update should include supplemental presentations by UIE, UHE, and identifying pass-through funds.
- To support cross-country comparability, recommended preferred methods:
  - UIE: Winner Takes All (WTA) as preferred approach; Proportional Approach (PA) ranked second; IFRS consolidation method ranked third.
  - UHE: Reallocation of positions to the first operating unit(s) recommended.
- These methods are preferred for practical reasons; other methods should be described to illustrate concepts and guide interpretation.
- Presentation scope:
  - UIE and UHE presentations should be produced for position statistics and explored for income and transactions.
  - An indicator of pass-through funds based on residency of the ultimate investor should be included as a supplemental presentation.
- The DITT did not make a specific recommendation on a template at this stage because of connections to related issues (D.9 reconciliation of DI and AMNE, B.1 nationality concept, treatment of MNEs and SPEs in national accounts) and interactions with CATT, BPTT, and GZTT discussions.

*International Monetary Fund — Guidance Note (SECTION I: THE ISSUE).*

### 18.        The development of the supplemental presentation should be coordinated with other Task Teams

### d6-ultimate-investing-economyultimate-host-economy-and-passthrough-funds - 18.        The development of the supplemental presentation should be coordinated with other Task Teams

### Coordination with other Task Teams and manuals
- The development of the supplemental presentation should be coordinated with other Task Teams (TTs) and across manuals.
- Issues in this note relate to other topics within the DITT, such as issue D.9 on reconciling DI and AMNE statistics, and to other TTs including the BPTT, CATT, and GZTT.
- Outcomes of notes across TTs could inform the choice of concepts recommended in this note and vice versa, to promote consistency and comparability across countries.
- Example synergy: possible collection of some financial variables on DI surveys discussed in the GN on issue D9 could also be relevant to presentation by UHE.
- DITT members raised desirability for statistics to create meaningful regional aggregates and for the UIE and UHE to be symmetric; achieving symmetry would imply:
  - Use of symmetric concepts for the UIE and UHE.
  - Separate identification of pass-through funds so they could be excluded.

### Recommendations (paragraph 19)
- Develop a supplemental framework for the statistics by UIE, UHE, and pass-through funds.
  - Primarily, the supplemental framework will be applied to the development of DI statistics by UIE and UHE that could be used in turn to derive aggregates on pass-through funds (Table 1 above).
  - The links of this framework to the research on the nationality concept and the presentation of MNEs in the accounts should be explored.
- Streamline the definitions of all concepts to include clear and unambiguous terminology in the manual.
  - More specific recommendations would probably come up after consultation with other TTs.
- Encourage data-sharing at the micro-level and the development of detailed data on MNEs that are widely available to facilitate compilation of these statistics.
- Develop in collaboration with GZTT a template for recording the data on UIE, UHE, and pass-through funds for positions.

### Rejected alternative: a complex definition of pass-through capital and income (paragraph 20)
- A definition that specifically measured pass-through capital and income was rejected because it was complicated and information intensive.
- The rejected formulation measured pass-through capital and income and accounted for the possibility of negative investment positions as well as external financing raised in the reporting economy and can be found in Leino and Yrrko (2014).
- The proposed formula (in source notation) for pass-through (PT) is:
  PT
  j,t
  = min(I
  j,t
  ,O
  j,t
  ) if the I
  j,t
   ≥ 0 and O
  j,t
   ≥ 0                                  (1) 
       = max(I
  j,t
  ,O
  j,t
  ) if the I
  j,t
   < 0 and O
  j,t
   < 0                                 (2)      
       = 0, otherwise                                                                     (3)
- Definitions in that formulation:
  - I
  j,t
   and O
  j,t
   represent the inward and outward positions of the direct investment enterprise j in period t, respectively.
  - From the inward DI perspective: a foreign-owned enterprise with no subsidiaries would have no pass-through funds (O
  j,t
   =0 under (1)). If it did have a foreign subsidiary, the amount of pass-through funds is the smaller of the inward and outward positions of the foreign-owned enterprise if both its positions are positive (under (1)) or negative (under (2)), and it is zero otherwise.
  - From the outward DI perspective: the same amount of pass-through would be identified for direct investors in the economy.
- Practical implications:
  - Measuring pass-through in inward DI statistics should be available for economies compiling DI statistics using surveys by linking their inward and outward DI surveys.
  - Additional information would be required to identify pass-through funds in outward DI statistics.
  - If interest exists in developing consolidated measures of DI by UIE and UHE, the more complicated definition could be useful in removing intra-firm positions and income and attributing them to the ultimate partner economy to present symmetric DI statistics by UIE and UHE without double-counting.

### Supplementary information on UIE/UHE: definitions and conceptual approaches
- Ultimate investor and related definitions (as presented in Annex Table A.1):
  - Ultimate investor: "The enterprise that has control over the investment decision to have a DI position in the DI enterprise." (BD4, Annex 10 p. 210)
  - Ultimate investing economy: "The country in which the ultimate investor is resident is the ultimate investing economy." (BD4, Annex 10 p. 210)
  - Ultimate beneficial owner (UBO): definitions from FATF, Statistics Finland, and U.S. BEA describing natural person(s) who ultimately owns or controls, or institutional unit at top of ownership chain not controlled by another institutional unit.
  - Ultimate controlling parent (UCP): "The entity on top of the ownership chain and which is not controlled by another entity." (BD4 and BPM6)
  - Ultimate controlling institutional unit of a foreign affiliate (UCI): Eurostat FATS definition.
- Two broad approaches to identifying UIE (Annex Table A.2):
  - Proportional Approach (PA) — OECD BD4: based on identifying the country of the entity that exerts control over the direct investor to identify the entity that makes investment decisions, bears risks, and reaps rewards.
  - Winner Takes All (WTA) — FATS/AMNE: based on control of the foreign-owned enterprise; identifies only one UIE for each direct investment enterprise.
  - IFRS consolidation method: based on international accounting consolidation methods.
- Advantages and disadvantages:
  - Proportional Approach (PA):
    - Advantages:
      - Better reflects risk and reward aspects of DI; consistent with financial statistics where values are based on each direct investor’s claim on the DIE.
      - Suited to financial analyses (e.g., risk sharing), identifying where DI income ultimately accrues, and who benefits from globalization.
      - Deals better with influence relationships and joint ventures than WTA; results in better measures of round-tripping and risks associated with implicit dependencies between economies.
      - Gives a more accurate image of distribution of DI positions and more information on financial and ownership structure of the MNE.
      - Helpful in identifying countries benefiting from international trade and investment agreements.
    - Disadvantages:
      - Does not match concept used in FATS and AMNE statistics, making it more difficult or impossible to use those data sets together.
      - Could confuse users familiar with AMNE/FATS ultimate controlling investor concept.
      - Lack of information, particularly on ultimate owner of influence positions, can make implementation harder.
      - Difficult to reconcile information from multiple direct investors in the same DIE.
  - Winner Takes All (WTA):
    - Advantages:
      - Better for understanding who is making production decisions in an economy.
      - A step toward aligning AMNE/FATS and DI statistics; useful for identifying foreign-controlled firms and domestic MNEs in the accounts.
      - Easier to find information based on control of the DIE; statistical agencies may already have information from AMNE compilation.
      - Enables analysis of links between foreign financing and operations of DIEs.
    - Disadvantages:
      - DI covers both influence (≥10 percent and ≤50 percent ownership) and control (>50 percent); attribution of influence relationships is unclear.
      - Difficulty measuring round-tripping: could miss round-tripping through minority investments or incorrectly label true minority foreign investments as round-tripping depending on treatment of minority investments.
      - Not appropriate for income because it does not identify where income from influence ultimately accrues.
- Empirical comparisons:
  - In practice, little difference between PA and WTA for larger investing economies (Annex Figures A.1 and A.2 using German data); differences matter more for smaller investing economies.
  - Germany compiled statistics according to both concepts to compare results; similar findings reported by Poland and Denmark.
  - The ESS/ESCB Task Force on FDI proposed a voluntary data collection of inward FDI statistics by UIE planned for Spring 2021; adopted methodology is the PA but indicates the "control approach" (WTA) can be used if PA is not feasible (ECB and Eurostat, 2020).

### Approaches for reallocating outward investment position to the UHE (Annex discussion)
- Four possible approaches discussed for reallocating outward positions of a country to the UHE:
  - Use balance sheet information and ownership shares at each link in the chain to show how influence of the ultimate direct investor flows down the chain.
    - Would require considerable information on ownership structure of entire MNE and conventions in recording given fungible nature of financing.
    - Provides most detailed information on financial structure of MNE.
  - Use the value the direct investor would receive if that subsidiary were acquired by another enterprise (measure the ultimate investor’s position in the DIE in the specific economy where it is located).
    - Provides comprehensive view of foreign operations of direct investors (directly and indirectly owned).
    - Would result in statistics by UHE symmetric to UIE.
    - Need to decide whether subsidiary value should reflect only its value or include entities below it; including below would be easier but lead to double-counting.
  - Define the UHE as the last economy in the chain.
    - Would not reallocate a portion of position in immediate investing economy when the end-of-chain entity is not large enough to support whole outward position.
    - Can attribute position to smaller entities at bottom of chain (e.g., retail) while passing over larger entities (e.g., manufacturing).
    - Example: Brazil published estimates in 2018 defining UHE as last entity in ownership chain that did not control any other affiliate.
  - Define the UHE as the first operating unit even if it is not the end of the investment chain.
    - Places less burden on respondents and compilers while moving outward DI from pass-through economies.
    - "Operating unit" would not simply be the first non-SPE but the first unit whose purpose was not only administrative/management/holding assets.
    - If recommended, a formal definition of first operating unit should be developed as part of related compilation guidance.
- Practical notes:
  - Enterprises receive financing from many sources and use funding in many ways; tracing specific source to specific use is not possible.
    - One convention: assume all sources of funding are used equally in all uses.
    - Alternative: assume intra-group financing is primary source of funding for intra-group investments.
  - DI position should reflect market value of direct investor’s claim on DIE; market value often unavailable in DI statistics, so approximations (e.g., Own Funds at Book Value) are used. Value used in UHE statistics should coincide with value reflected in DI statistics included in the IIP.
  - To avoid double-counting when attributing value of entities lower in chain, methods to identify and remove such double-counting would be needed (e.g., Borga and Caliandro (2018) approach).
  - Germany found that major part of investment often remains in the first productive enterprise; useful to learn if this holds in other countries.
  - Allocation across multiple affiliates needs consideration when SPE holds entities in multiple countries.

*International Monetary Fund*

### 9.      Any approach to statistics by UHE could take into account the work of economies to

### Ultimate Host Economy and Pass-Through Funds

### Approach to compiling statistics by Ultimate Host Economy (UHE)
- Statistical agencies may explore algorithms or modeling to allocate indirect holdings to UHEs where complete and accurate ownership-chain information is not available.
- There might need to be a higher tolerance for uncertainty in statistics allocating DI flows and positions to UHE.
- Countries report it is easier to collect UHE information on outward operations from domestically-controlled direct investors than from foreign-controlled direct investors; limiting UHE presentation to domestically-controlled direct investors should be considered.
- Data exchange among countries at the micro-data level and development of publicly available detailed data on MNE structure can alleviate reporting burdens and resource demands.

### Brazil experience measuring DI by UHE
- Brazil published estimates by UHE in 2018.
- From a total of US$357.9 billion of outward equity position in 2017, compilation by ultimate host country led to a reallocation in country positions of US$84.2 billion compared to the immediate-country allocation.
- The definition that looked through ownership chains to the entity at the end of the chain left a significant portion of the outward position not reallocated, for two main reasons cited by the Central Bank:
  - Some immediately held DI enterprises in tax havens were used to make portfolio investments and were the final host economy for the direct investment even though funds passed to other economies.
  - Some outward DI position is ultimately held in economies along the chain that were missed using the look-through method.

### Combining the UIE and UHE with pass-through funds
- Presentation by Ultimate Investor Economy (UIE) for inward and outward DI can reveal how much investment from partner economies remains in the host economy.
- Definitions in the schematic:
  - A and B represent global-level inward and outward positions.
  - C is round-tripping in the economy.
  - D is outward investment by domestic MNEs.
  - E is total inward investment from economy A in the reporting economy.
  - F is how much affiliates owned by investors in economy A invest abroad (pass-through indication).
- Annex table structures suggested:
  - Inward and Outward DI Positions by the UIE with global total (A) (B) and rows for reporting economy (C) (D) and partner economies (E)-(H).
  - Outward DI Positions by the UIE and UHE splitting ultimate investor non-resident (B) and residents (C) with breakdown by ultimate partner economy (D)-(E).

### Compilation issues encountered compiling UIE statistics
- Blurred ownership chains: occurs when all foreign direct investors of the reporting enterprise are not subject to immediate control by any entities (e.g., multiple influence relationships).
- Special cases in determining residence of direct investors include collective investment institutions, individuals, tax havens, and offshore financial centers.
- Compilation guidance should address these issues to accompany BPM6 updates.

### Valuation conventions and asymmetries in measures of round-tripping
- Applying Own Funds at Book Value (OFBV) valuations can result in different values of round-tripping in outward and inward investment:
  - Inward DI presented according to UIE reflects current valuation: OFBV for unlisted or market value for listed companies.
  - Valuation of the DIE in the host economy reflects reinvestment of earnings.
  - Outward DI under standards uses the OFBV of the SPE, which often reflects historical cost and not reinvestment of earnings.
- These valuation conventions lead to asymmetries between UIE and UHE measures of round-tripping.

### Pass-through funds, aggregation challenges, and illustrative example
- Pass-through funds cause double-counting when reallocating inward positions to the UIE under the extended directional principle; example totals are globally additive but can exceed the ultimate investor’s outward DI because of pass-through.
- In a simple five-entity, four-economy MNE example:
  - Global inward and outward positions each sum to 340 under the extended directional principle.
  - Reallocating inward positions to Economy 1 (the UIE) results in Economies 2, 3, and 4 recording inward investment from Economy 1 totaling 340, exceeding Economy 1’s total outward DI of 250 because of pass-through funds.
  - Loans between fellow enterprises treated under the extended directional principle can create asymmetries: a loan that does not confer influence may nonetheless be recorded as outward investment in the immediate partner country and produce bilateral asymmetries.
- Consolidated DI statistics that identify and net out pass-through funds produce symmetric and aggregatable results:
  - If countries separately identify outward investment of foreign-owned parents as pass-through funds and net them from both outward and inward DI statistics, pass-through funds are eliminated.
  - In the simple example, after netting pass-through and reallocating to the UIE, Economy 1 reports outward investment of 250 and inward DI attributed to Economy 1 equals its outward DI of 250, enabling meaningful regional aggregates without double-counting.
- Table outcomes in the example:
  - Under the extended directional principle: totals include values such as 340 and 250 appearing in global sums and reallocations.
  - Under consolidated statistics by ultimate partner economy: the total outward for Economy 1 is 250 and inward allocations to Economy 1 sum to 250 after netting pass-through funds.

### Symmetry of UHE and UIE statistics and implications
- If UHE is defined as the country where the foreign-owned asset is ultimately located and reallocation to UHE is based on total intragroup funding each foreign affiliate receives net of intragroup funding it provides, then DI positions by UHE would be symmetric to those by UIE and can be derived using mirror relationships.
- More complicated ownership structures require consolidating DI positions and income within the MNE; detailed treatment for complex structures is discussed in referenced methodological work.

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_Source: https://www.imf.org/-/media/files/data/statistics/bpm6/approved-guidance-notes/d6-ultimate-investing-economyultimate-host-economy-and-passthrough-funds.pdf_