## Issue Note: D.17 Identifying Superdividends and Establishing the Boundary Between Dividends and Withdrawal of Equity in the Context of Direct Investment

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**Canonical URL:** [Issue Note: D.17 Identifying Superdividends and Establishing the Boundary Between Dividends and Withdrawal of Equity in the Context of Direct Investment](https://www.imf.org/-/media/files/data/statistics/bpm6/approved-guidance-notes/issue-note-d17-identifying-superdividends-and-establishing-the-boundary.pdf)

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### The issue
- The Guidance Note (GN) D.17 on “Identifying Superdividends and Establishing the Borderline Between Dividends and Withdrawals of Equity in the context of [Foreign] Direct Investment” was prepared by the Balance of Payments Direct Investment Task Team and circulated to the AEG in May 2022 for review.
- The GN noted that its recommendations were approved by the Committee in its February 2021 meeting.
- The GN proposes three alternative treatments for “superdividends” in the recording of foreign direct investment (FDI) equity income:
  - Option A1: maintain the status quo (identify superdividends as disproportionately large compared to past levels).
  - Option A2: adopt the treatment in ESA 2010, treating any distribution out of accumulated reserves as a superdividend.
  - Option A3: discard the concept of superdividends for FDI enterprises and treat any distributions of accumulated reserves from ordinary earnings as dividends.
- The GN recommended Option A3 on the grounds that:
  - It best preserves the integrity of the measurement of DI income in balance of payments statistics and reduces potential misinterpretation of DI equity income, recognizing that distribution of income of DI enterprises is recorded on a full accrual basis.
  - For FDI enterprises, unlike other enterprises, reinvested earnings (RIE) is also recorded as income.
  - Option A3 overcomes operationalization difficulties that may lead to international inconsistencies.
- The GN concluded that “since there is no proposal to change how DI income is measured, the consistency with the National Accounts will be retained, even if DI dividends will not be measured in the same way as other dividends” (paragraph 20).
- Stakeholder feedback:
  - Six AEG members responded to the May 2022 review: five did not support Option A3 and preferred Option A2; one AEG member supported Option A3.
  - The SNA 2025 editor (Peter van De Ven) expressed concerns similar to the five AEG respondents.
  - At the ISWGNA/TT leads meeting on 6 June 2022 it was decided that the AEG concerns warranted further discussion between the SNA and BPM editorial teams.

### Key conceptual and practical concerns
- Consistency concern:
  - Option A3 would leave one component of FDI income—dividends—recorded on a different basis to dividends distributed by other corporations in the national accounts.
  - The 2008 SNA explicitly addresses “superdividends” in paragraph 7.131 and 7.132, stating that excess dividends should be treated as a financial transaction (withdrawal of owners’ equity) and that this treatment applies to all corporations.
  - GN D.17 proposes a different treatment for FDI enterprises while not proposing a change for other corporations.
- Practicality concern:
  - Without detailed analysis of corporations’ financial accounts, distinguishing dividends paid out of operating activities from dividends paid from non-operating activities or from accumulated past profits may be difficult.
- Fiscal and public corporation concerns:
  - Changing treatment for non-FDI enterprises could enable manipulation of key fiscal measures for public corporations, since GFSM 2014, like the 2008 SNA, excludes dividends declared greatly in excess of recent levels of dividends and earnings (paragraph 5.115).
  - Extending RIE to public corporations would pose “new, and serious, conceptual and practical challenges” for fiscal data users and compilers, according to the IMF Government Finance Division, although it could be beneficial to encourage supplementary compilation on an RIE basis where feasible.

### Options considered
- Five possible options were considered (numbering follows the Issue Note):
  1. Keep the definition of FDI dividends unchanged (Option A1): retain existing treatment of “superdividends” in measurement of FDI equity income.
  2. Adopt Option A3 for FDI equity income and leave the treatment of “superdividends” unchanged for other corporations (alternatively adopt ESA 2010 treatment (Option A2) for non-FDI enterprises).
  3. Adopt Option A2 for both FDI equity income and for dividends payable from non-FDI enterprises.
  4. Change the treatment of dividends payable from non-FDI enterprises to that proposed for FDI enterprises (record dividends paid out of accumulated ordinary earnings as dividends for all corporations).
  5. Expand the scope of RIE beyond foreign direct investment enterprises.
- Editorial assessments of options:
  - Option 1: rejected because it fails to address current recording concerns for FDI equity income.
  - Option 2: creates inconsistency between FDI enterprises and other corporations but may be justifiable because FDI equity income is recorded differently (due to RIE); however, consistency across the system as an identified component of income is important to avoid confusion and misinterpretation.
  - Option 3: rejected because it does not adequately address concerns with current recording of FDI equity income.
  - Option 4: problematic for two reasons:
    - Treatment of dividends from public corporations: allowing distributions of accumulated reserves from ordinary earnings to be recorded as dividends could enable fiscal manipulation; GFSM 2014 currently excludes excessive dividends.
    - Practicality: distinguishing operating versus non-operating dividend sources without detailed financial-account analysis is difficult.
  - Option 5: conceptually most appealing because recording RIE for all equity would:
    - Ensure equity income is properly accounted for on a full accrual basis.
    - Eliminate scope for manipulating equity income via dividend distribution decisions.
    - Resolve the inconsistency between FDI equity income and other equity income.
    - But Option 5 entails important practical challenges and would affect interpretation of aggregates such as the current account balance, national saving and household saving (see paragraph 36 of F.2), and would extend RIE to potentially large numbers of corporations for which information may not be readily available.

### The way forward (recommendations and transitional arrangements)
- The Issue Note considers Option 5 should be strongly pursued.
- Recognizing practical and fiscal challenges, especially for public corporations, the editorial teams propose a pragmatic intermediate approach:
  - Adopt Option A3 for FDI equity income and Option A2 for other equity income. This is described as the “least-worst” alternative: it produces an undesirable inconsistency in treatment of income but can be justified because FDI investments are already treated differently in the system.
  - Foreshadow in the next editions of the SNA and BPM a possible extension of the concept of RIE to all equity positions, subject to extensive testing and practical experience.
  - Provide supplementary information (balance of payments and national accounts) to include RIE information beyond FDI enterprises (including public corporations), subject to testing, to:
    - Allow countries to resolve practical measurement issues.
    - Build a body of knowledge on interpretation within a fiscal context.
    - Enable users to become accustomed to analyzing and interpreting RIE-based statistics.
- The IMF Government Finance Division does not support including RIE for public corporations in core accounts in the next update, but supports encouraging countries able to compile supplementary RIE data to begin doing so.

### Consultation and alternative proposals
- Consultation summary:
  - The Issue Note was circulated to the Balance of Payments Task Team (BPTT) and the ISWGNA/SNA Task Team Leads.
  - The majority of BPTT members supported the Issue Note recommendation; two members voiced concerns (one on practicality of applying A3 to FDI, another on inconsistency concerns).
  - Three ISWGNA/SNA Task Team lead responses raised concerns about inconsistency in dividends treatment; the remaining leads supported the Issue Note recommendation.
- Alternative suggestions received:
  - One respondent proposed creating a new direct investment income item “distribution of accumulated reserves” and record dividends on the basis of A2.
  - Another respondent proposed recording only total equity income for FDI (removing disaggregation into dividends and RIE) and in the financial account showing total equity income as an increase in FDI liabilities and “repatriation of capital” (equal to dividends—including superdividends—and withdrawals of income from quasi corporations) as a decrease in FDI liabilities.
  - A third possibility raised: discontinue the RIE treatment for FDI (i.e., remove current RIE recording for FDI).

### Outcomes of the October 2022 Committee and AEG meeting
- The Committee and the AEG agreed with the recommendations of the SNA and BPM editorial teams presented in the Issue Note.
- GN D.17 was finalized reflecting the outcomes of the Issue Note.
- The SNA and BPM editors will incorporate the recommended treatment, taking into account comments made during the discussion, into the updated versions of the manuals.
- Editors will consider the advantages of a voluntary breakdown of DI income to separately identify superdividends to provide users with consistent information on dividends and RIE across the statistics.

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_Source: https://www.imf.org/-/media/files/data/statistics/bpm6/approved-guidance-notes/issue-note-d17-identifying-superdividends-and-establishing-the-boundary.pdf_