## d-6-ultimate-investing-economy

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### Background: purpose and motivation
- Direct Investment (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.” (OECD Benchmark Definition of Foreign Direct Investment, fourth edition, (BD4) glossary).
- Motivations of direct investors are strategic (access to markets, key inputs, factor cost differences). Complex financing and ownership structures of Multinational Enterprises (MNEs), including tax optimization, lead MNEs to channel investments through several economies, producing significant amounts of DI flows that pass through economies on their way to final destinations.
- UIE/UHE-based statistics provide analytical and policy information including:
  - who ultimately owns or controls the investment, reaps the rewards and bears the risk;
  - analyses of globalization by highlighting ultimate destination of income generated from integration in Global Value Chains (GVCs);
  - revealing financial linkages and interdependencies not evident in immediate-investor statistics.
- Seventeen economies report inward DI positions by immediate and ultimate investing economy to the OECD; reallocation by UIE increases DI attributed to the United States, the United Kingdom, Germany, Japan, Canada, and France and reduces DI attributed to the Netherlands, Switzerland, Ireland, and Luxembourg.
- Pass-through funds significance:
  - At end-2017 around 40 percent of global DI were into Special Purpose Entities (SPEs).
  - SPEs are only part of pass-through funds; SPE portion is likely declining due to efforts encouraging MNEs to align reporting with economic activities.
  - The OECD estimates pass-through funds in operating affiliates (not SPEs) account for about one-quarter of inward DI positions in a selection of European economies.
- BPM6 and BD4 treat pass-through funds as ordinary investment flows allocated by immediate investor; both recommend supplemental data by ultimate source and host and suggest compiling funds-in-transit where relevant. BD4 recommends:
  - a supplemental presentation by UIE for inward DI positions, reclassifying the entire inward DI position to economies where controlling investors are established;
  - separately compiling DI associated with resident SPEs and using the extended directional principle to better capture direction and degree of influence and remove double-counting when debt and equity pass through fellow enterprises.

### Issues for discussion: concepts and methods
- UIE concept choice:
  - Multiple concepts exist: ultimate controlling parent (UCP), ultimate beneficial owner (UBO), ultimate controlling institutional unit (UCI), and ultimate investor.
  - Practicality: many countries have residency information on the UCP and could use UCP residency as a pragmatic first step (second best), though other concepts may better reflect ultimate ownership and income accrual.
- Methods to reallocate inward DI from immediate to UIE:
  - Proportional approach (PA): recommended in BD4; identifies entity that controls the direct investor and allocates proportionally.
  - Control approach / winner takes all (WTA): identifies entity that controls the direct investment enterprise (DIE) and attributes all to that UIE.
  - IFRS consolidation (IFRS 10) as an alternative: widely used by MNEs and could identify controlling MNEs, but IFRS consolidation removes intra-firm transactions and positions that DI statistics measure.
- UHE definition and reallocation approaches:
  - Show how investor influence flows down the chain using balance sheet information and ownership shares at each link.
  - Use the value the direct investor would receive if that subsidiary were acquired in the specific economy (market-value or approximation such as Own Funds at Book Value).
  - Define UHE as the last economy in the chain.
  - Define UHE as the first operating unit even if not the end of the chain.
- Pass-through funds identification:
  - Practical presentation: use residency of the ultimate investor to indicate pass-through—pass-through funds are carried out by foreign-owned parent firms that are both DIEs and direct investors (middle of the chain).
  - Simple breakdown by residency of the ultimate investor for inward/outward positions and income indicates pass-through and round-tripping. Table labels preserved: inward/outward positions and income broken into residency categories (A, B, C, D, E, F, G, H).
  - Extending to DI income helps identify pass-through income and round-tripping; inward DI income breakdown distinguishes income that ultimately round-trips back to the economy (B) versus income that leaves (D).

### Outcomes from DITT deliberations
- Agreement:
  - A supplemental presentation by UIE, UHE, and identifying pass-through funds should be included in the update.
  - UIE and UHE presentation should be for positions; less support for including income, though recognized as analytically valuable.
  - Most countries agreed the proposed breakdown by residency of the ultimate investor is sufficient to indicate pass-through.
- No agreement on underlying concepts:
  - UIE: conceptual preference for PA by some, but WTA is easier in practice.
  - UHE: no clear preference; reallocating to the first operating unit(s) or to the last entity in the chain were considered most tractable.
  - Pass-through: consensus on residency-based breakdown as pragmatic indicator.

### Recommendations (paragraph 19)
- Develop a supplemental framework for statistics by UIE, UHE, and pass-through funds and income; explore links to research on the nationality concept and MNE presentation in the accounts.
- Include positions and perhaps income in the supplemental presentation to better understand distribution of globalization benefits; identify pass-through in financial transactions where useful.
- Consider reducing the number of different concepts used to identify the ultimate investor across statistics, primarily DI and AMNE statistics.
- Encourage micro-level data-sharing and development of detailed data on MNEs to facilitate compilation.

### Rejected complex pass-through measure (paragraph 20 and following)
- A complex, information-intensive definition of pass-through capital and income was rejected. The rejected measure (Leino and Yrrko (2014)) would compute pass-through as:
  - 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)
  - Where I_j,t and O_j,t represent the inward and outward positions of the direct investment enterprise j in period t, respectively.
- Practical notes:
  - Measuring pass-through in inward DI statistics should be possible where DI statistics use surveys by linking inward and outward DI surveys.
  - Additional information required to identify pass-through funds in outward DI statistics.
  - For consolidated DI by UIE and UHE to remove intra-firm positions and income, the more complicated definition could be useful.

### Questions posed for further discussion
- Do members agree with recommending a supplemental presentation on UIE, UHE, and identifying pass-through funds for (i) DI positions, (ii) DI flows, and (iii) DI income flows?
- Do members agree to streamline the number of different ultimate investor concepts in the standards?
- Do members agree to propose all three allocation methods (proportional, winner takes all, IFRS consolidation) in BPM7 for UIE, and for UHE propose tracing influence down the ownership chain, using the investor’s position in the DIE, the first operating unit, or the last unit in the chain?
- Do members agree that the proposed breakdown of financial transactions, income, and positions by residency of the ultimate investor is a sufficient indicator of pass-through?
- Do members agree to develop this as a stand-alone DI presentation within the DITT or as part of other work streams on globalization or nationality, coordinated with the Globalization Task Team?

### Definitions, conceptual choices, and comparative advantages
- UIE definitions in use:
  - "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 (BD4, Annex 10 p. 210).
  - UBO definitions differ by FATF, Statistics Finland, and U.S. BEA in formulation and thresholds; UCP and UCI definitions referenced in BD4, BPM6, and FATS Manual.
- Three broad approaches for assigning UIE (Annex Table A.2):
  - Proportional Approach (PA) — BD4.
  - Winner Takes All (WTA) — FATS/AMNE.
  - IFRS consolidation method — IFRS/IAS.
- Advantages of PA:
  - Better reflects risk/reward and financial-statistics consistency; suited to analyzing risk sharing, income accrual, joint ventures, round-tripping, and beneficiaries of globalization.
  - Provides detailed distributional information on DI positions and the MNE financial and ownership structure.
- Disadvantages of PA:
  - Incompatibility with FATS/AMNE ultimate-controlling-investor concept; compilation challenges due to limited information on ultimate owners and reconciling multiple direct investors in the same DIE.
- Advantages of WTA:
  - Better for understanding production decision-making in an economy; aligns AMNE/FATS and DI statistics and is easier to implement using existing AMNE compilations.
- Disadvantage of WTA:
  - Not appropriate for income allocation as it fails to identify where income from influence accrues.

### Empirical findings and country experiences
- Practical differences between PA and WTA may be small overall:
  - Germany’s comparisons showed little difference for larger investing economies but material differences for smaller investing economies.
  - Poland and Denmark presented similar findings.
- ESS/ESCB Task Force on FDI proposed a voluntary inward FDI UIE data collection planned for Spring 2021 adopting PA but allowing control approach (WTA) if PA not feasible.
- Brazil’s UHE implementation (2018):
  - From a total of US$357.9 billion of outward equity position in 2017, allocation by ultimate host country led to a reallocation in country positions of US$84.2 billion compared to immediate country allocation.
  - Defining UHE as the last entity in the ownership chain left a significant portion of outward position not reallocated due to (i) immediately held DI enterprises in tax havens used for portfolio investments and (ii) outward DI position ultimately held in economies along the chain that were missed.

### UHE compilation approaches and practical considerations
- Four approaches for allocating outward investment positions to UHE:
  - Trace influence down the ownership chain using balance sheet information and ownership shares at each link (most detailed, data intensive).
  - Use the value the direct investor would receive if the subsidiary were acquired in the specific economy (market-value or Own Funds at Book Value); may risk double-counting if entities below are included.
  - Define UHE as the last economy in the chain (may fail to reallocate portions if end-of-chain entity cannot support full outward position).
  - Define UHE as the first operating unit (less burden, moves outward DI from pass-through economies; "operating unit" defined by purpose not solely administrative/holding).
- Compilation issues:
  - Blurred ownership chains where no single immediate controller exists.
  - Residence difficult to determine for collective investment institutions, individuals, tax havens, and offshore financial centers.
  - Valuation and accounting conventions can create asymmetries (Own Funds at Book Value versus market value; reinvestment of earnings).
- Practical compilation options:
  - Explore algorithms or modeling to allocate indirect holdings to UHEs when ownership-chain information is incomplete.
  - Consider higher tolerance for uncertainty in UHE allocations.
  - Limiting UHE presentation to domestically-controlled direct investors may be easier since countries find it simpler to collect outward operations from domestic investors.
  - Micro-data exchange across countries and public data on MNE structure (e.g., Legal Entity Identifier, OECD ADIMA database) can assist compilation and reduce pass-through effects.

### Pass-through funds, aggregation, and symmetry
- Example implications (Annex Figure A.5 and discussion):
  - Under the extended directional principle, inward and outward positions can be globally additive but reallocation to UIE can cause inward investment attributed to a UIE to exceed that UIE’s outward DI due to pass-through funds (example totals: inward reallocated summing to 340 versus outward DI of 250).
  - Loans between fellow enterprises recorded as reductions in inward investment under immediate-partner recording can create bilateral asymmetries.
- Consolidated DI statistics that net out pass-through funds and reallocate positions to the ultimate partner country eliminate double-counting and enable meaningful regional aggregates:
  - If countries identify outward investment of foreign-owned parents in their economy as pass-through and net it from both outward and inward DI statistics, pass-through funds are eliminated and UIE and UHE can report symmetric totals (example: after netting, Economy 1 reports outward investment of 250 and inward DI attributed to Economy 1 equals 250).
- For symmetric UHE and UIE compilation, reallocation to UHE could be based on intragroup funding received net of intragroup funding provided, or require consolidating DI positions and income within the MNE for complex ownership structures.

*International Monetary Fund — d-6-ultimate-investing-economy (excerpt).*

### SECTION I: THE ISSUE

### SECTION I: THE ISSUE

### BACKGROUND

- Direct Investment (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.” (OECD Benchmark Definition of Foreign Direct Investment, fourth edition, (BD4) glossary).
- Motivations of direct investors are strategic (access to markets, key inputs, factor cost differences). Complex financing and ownership structures of Multinational Enterprises (MNEs), including tax optimization, lead MNEs to channel investments through several economies, producing significant amounts of DI flows that pass through economies on their way to final destinations (Blanchard and Acalin, 2016).
- UIE/UHE-based statistics provide valuable analytical and policy information (OECD, 2019a), including:
  - who ultimately owns or controls the investment, reaps the rewards and bears the risk of the investment;
  - analyses of globalization by highlighting the ultimate destination of the income generated from integration in Global Value Chains (GVCs);
  - revealing financial linkages and interdependencies between economies that are not evident in statistics by immediate investing economy.
- Supplemental DI presentations by ultimate partner economy help identify pass-through economies and inform policies to encourage businesses to record related income where it was generated.
- Seventeen economies report inward DI positions by immediate and ultimate investing economy to the OECD. When reallocated by UIE, the United States, the United Kingdom, Germany, Japan, Canada, and France become larger sources of DI while the Netherlands, Switzerland, Ireland, and Luxembourg become smaller sources (OECD, 2018).
- Pass-through funds are significant:
  - At end-2017 around 40 percent of global DI were into Special Purpose Entities (SPEs), which have little or no real links to the local economy (Damgaard, Johannesen and Elkjaer, 2019).
  - SPEs are only part of pass-through funds; their portion is likely declining due to efforts encouraging MNEs to align where they report income with where they have economic activities.
  - The OECD estimates that pass-through funds in operating affiliates (not SPEs) account for about one-quarter of inward DI positions in a selection of European economies (Borga and Caliandro, 2018).
- Current international standards (BPM6 and BD4) treat pass-through funds as any other investment flow and allocate by immediate investor. BPM6 (para. 4.156–157; para. 6.33–6.34) recommends supplementary data by ultimate source and host economy and suggests compiling funds-in-transit using national definitions where relevant. BD4 recommends:
  - a supplemental presentation by UIE for inward DI positions, reclassifying the entire inward DI position to economies where controlling investors are established (BD4, para. 280 and 610 to 617);
  - separately compiling DI associated with resident SPEs and using the extended directional principle to better capture direction and degree of influence and remove double-counting when debt and equity pass through fellow enterprises; capital-in-transit remains on BD4’s research agenda (BD4, para. 668 to 671).
- The BD4 recommends the extended directional principle for compilation by partner economy because it better reflects motivations and nature of DI. The IMF’s Coordinated Direct Investment Survey uses the extended directional principle. A directional presentation is therefore recommended for supplemental UIE and UHE presentations.
- Supplemental presentations by UIE and UHE, and identifying pass-through funds, are closely related to reconciling DI and Activities of Multinational Enterprises (AMNE) statistics (D.9), the nationality concept (B.1), and treatment of MNEs and SPEs in national accounts by the Globalization Task Team.

### ISSUES FOR DISCUSSION

- UIE concept choice:
  - Multiple ultimate investor concepts exist for statistical, financial accounting, and regulatory uses, including ultimate controlling parent (UCP), ultimate beneficial owner, ultimate controlling institutional unit, and ultimate investor (annex Table A.1).
  - Identifying the most appropriate concept for compiling DI positions and income by UIE is necessary. Consistent choice across statistics would simplify compilers’ work and enhance comparability.
  - Many countries already have residency information on the UCP of their direct investment enterprises to apply the extended directional principle; using UCP residency could be a practical first step (second best approach) though other concepts (e.g., ultimate beneficial owner) may better reflect ultimate ownership and income accrual.
- Methods to reallocate inward DI from immediate to UIE:
  - Proportional approach (PA): recommended in BD4; relies on identifying the entity that controls the direct investor and thus the decision-maker for DI.
  - 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).
  - Annex I paragraphs 3–7 and Table A.2 compare PA and WTA. Conceptually PA preferred by some, WTA easier to implement.
  - IFRS consolidation (IFRS 10) could be an alternative, as it is widely used by MNEs and would not require additional company reporting, but IFRS consolidation removes intra-firm transactions and positions that DI statistics measure; it could still help identify controlling MNEs.
- UHE definition and reallocation:
  - Complex ownership structures, holding companies, and SPEs can misallocate geographic and sectoral patterns in outward DI by immediate host economy.
  - Reallocating outward DI from immediately held subsidiaries to the economy(ies) and economic activity(ies) of subsidiaries below them is necessary to generate geographical and sectoral information for UHE.
  - Possible reallocation approaches:
    - Show how investor influence flows down the chain using balance sheet information and ownership shares at each link.
    - Use the value the direct investor would receive if that subsidiary were acquired by another enterprise (measuring the investor’s position in the DIE in the specific economy).
    - Define UHE as the last economy in the chain.
    - Define UHE as the first operating unit even if not the end of the chain.
  - Annex I paragraphs 8–10 discuss these UHE concepts further.
- Pass-through funds identification:
  - Pass-through funds flow into a host economy and are then invested in a subsequent economy; identifying them in practice is complicated because entities receive financing from various sources and use funds in various ways, particularly operating affiliates.
  - Several economies presented methods to the OECD WGIIS to separately identify pass-through funds; methods varied in data intensity and breadth of definition (examples include Hungary, Finland, Austria, Switzerland, Poland).
  - A practical presentation uses residency of the ultimate investor to indicate pass-through: pass-through funds are carried out by foreign-owned parent firms that are both DIEs and direct investors (middle of the chain).
  - A simple breakdown of outward DI positions and income by residency of the ultimate investor provides an indication of funds and income passing through an economy; adding residency for inward positions and income sheds light on round-tripping.
  - Table 1 breakdown (labels preserved):
    - Inward DI / Outward DI columns; Position / Income rows; Residency of ultimate investor: If ultimate investor is resident (A) (B) (E) (F); If ultimate investor is non-resident (C) (D) (G) (H).
  - Extending the breakdown to DI income indicates pass-through income and round-tripping: inward DI income breakdown identifies income payments that ultimately round-trip back to the economy (B) versus those that leave (D). This DI income breakdown was proposed in the Final Report of the IMF/OECD Working Group on Balance of Payments Statistics Relevant for GVC Analysis (WG-GVC).
  - Annex tables A.6 and A.7 show combinations of UIE/UHE breakdowns with breakdown by residency of the ultimate investor to reveal:
    - most important ultimate investors in the economy;
    - extent to which they use the host economy for pass-through;
    - amount of round-tripping;
    - most important destinations for outward investment by domestic direct investors.
  - The DITT did not make a specific template recommendation due to connections with DITT, CATT, BPTT, and GZTT issues and implications for UIE, UHE, and pass-through concepts and presentation.

### OUTCOMES

- The DITT agreed that a supplemental presentation by UIE, UHE, and identifying pass-through funds should be included in the update.
- No agreement on the underlying concepts:
  - For UIE: conceptual preference for PA by some, but WTA is easier to implement in practice.
  - For UHE: no clear preference; reallocating positions to the first operating unit(s) or to the last entity in the chain were recognized as the most tractable approaches.
  - For pass-through: most countries agreed the proposed breakdown by residency of the ultimate investor was sufficient to indicate pass-through.
- Presentation scope:
  - Agreement that UIE and UHE presentation should be for positions.
  - Less support for including income, despite its value for globalization analysis.
  - Identification of pass-through in financial transactions was seen as useful despite interpretation issues for financial flows by ultimate partner.

*Prepared by Emilie Kothe (OECD), Fedor Kharlashin (Bank of Russia), Robert Pupynin (Bank of Russia), Lee Mallett (UK Office for National Statistics), Andrew Jowett (UK Office for National Statistics), Mirco Lattwein (Deutsche Bundesbank), Thomas Elkjaer (IMF), and Maria Borga (IMF, formerly of the OECD).*

### 18.      DITT members raised two other important issues. First, the issues in this note relate to other

### d-6-ultimate-investing-economy - 18.      DITT members raised two other important issues. First, the issues in this note relate to other

### Key issues raised by DITT members
- The issues in the note relate to other topics within the DITT and other Task Teams, including BPTT, CATT, and GZTT, and could be informed by outcomes from those notes and vice versa.
- Benefits of common concepts across datasets: compilers and users would benefit from common concepts to promote consistency and comparability across countries.
- Desirability of meaningful regional aggregates and symmetric UIE and UHE:
  - Symmetry requires symmetric concepts for the UIE and UHE.
  - Pass-through funds and income should be separately identified so they can be excluded to avoid double-counting (Annex references: Annex 1, paragraph 14; Annex 1, paragraphs 15 to 19).

### Recommendations (paragraph 19)
- Develop a supplemental framework for the statistics by UIE, UHE, and pass-through funds and income.
  - Explore links of this framework to research on the nationality concept and the presentation of MNEs in the accounts.
- Include positions and perhaps income in the supplemental presentation to better understand distribution of globalization benefits.
  - Identification of pass-through in financial transactions would be useful.
- Consider reducing the number of different concepts used to identify the ultimate investor across different statistics, primarily in DI and AMNE statistics.
- Encourage micro-level data-sharing and development of detailed data on MNEs that are widely available to facilitate compilation.

### Rejected alternative: pass-through definition and rationale (paragraph 20 and following)
- A complex definition of pass-through capital and income that measured the phenomenon directly was rejected because it was complicated and information intensive.
- The rejected measure (Leino and Yrrko (2014)) measured pass-through capital and income and accounted for negative investment positions and external financing raised in the reporting economy:
  - 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)
  - Where I_j,t and O_j,t represent the inward and outward positions of the direct investment enterprise j in period t, respectively.
- Practical notes on measurement:
  - Measuring pass-through in inward DI statistics should be possible for economies compiling DI statistics using surveys by linking inward and outward DI surveys.
  - Additional information would be required to identify pass-through funds in outward DI statistics.
  - If there is interest in consolidated measures of DI by UIE and UHE, this more complicated definition could be useful to remove intra-firm positions and income and attribute them to the ultimate partner economy to present symmetric DI statistics without double-counting.

### Questions for discussion (listed in the note)
- Do members agree with the recommendation for a supplemental presentation on UIE, UHE, and identifying pass-through funds for (i) DI positions, (ii) DI flows, and (iii) DI income flows?
- Do members agree with the proposal to streamline the number of different concepts in the standards for ultimate investor?
- Do members agree that we propose all three methods as alternatives (proportional, winner takes all, or IFRS consolidation) in BPM7 for allocating data to the UIE, and for UHE (tracing influence down the ownership chain, the position of the ultimate investor in the DIE located in the host economy, the first operating unit, or the last unit in the chain)?
- Do members agree that the proposed breakdown of financial transactions, income and positions by residency of the ultimate investor is a sufficient indicator of pass-through?
- Do members agree to consider this as a stand-alone presentation for DI statistics to be developed within the DITT or as part of other work streams on globalization or nationality, including coordination with the Globalization Task Team?

### Supplemental information on UIE/UHE: definitions and conceptual choices (Annex material)
- Multiple definitions of ultimate investor and related concepts are in use (examples provided 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 (BD4, Annex 10 p. 210).
  - "Ultimate beneficial owner (UBO)" definitions from FATF, Statistics Finland, and U.S. Bureau of Economic Analysis differ in formulation and thresholds.
  - "Ultimate controlling parent (UCP)" and "Ultimate controlling institutional unit of a foreign affiliate (UCI)" definitions referenced (BD4, BPM6, FATS Recommendations Manual).
- Three broad approaches for assigning UIE (Annex Table A.2):
  - Proportional Approach (PA) — BD4: identifies country of entity that exerts control over the direct investor; potentially identifies a different UIE for each direct investor.
  - Winner Takes All (WTA) — FATS/AMNE: based on control of the foreign-owned enterprise; identifies only one UIE per direct investment enterprise.
  - IFRS consolidation method — IFRS/IAS: based on international accounting consolidation methods.

### Advantages and disadvantages of Proportional Approach (PA) versus Winner Takes All (WTA)
- Advantages of PA:
  - Better reflects risk and reward aspects of DI; more consistent with financial statistics where values are based on each direct investor’s claim on the DIE.
  - Suited to financial analyses such as risk sharing, identifying where DI income accrues, and analyzing beneficiaries of globalization.
  - Deals better with influence relationships and joint ventures, resulting in better measures of round-tripping and risks associated with implicit dependencies between economies.
  - Provides more information on distribution of DI positions and the financial and ownership structure of the MNE; helpful for identifying countries benefitting from international trade and investment agreements.
- Disadvantages of PA:
  - Does not match the concept used in FATS and AMNE, complicating joint use of data sets.
  - Potentially confusing to users familiar with AMNE/FATS ultimate controlling investor concept.
  - Compilation challenges due to lack of information on ultimate owners of influence positions; hard to reconcile information from multiple direct investors in the same DIE.
- Advantages of WTA:
  - Better for understanding decision-making regarding production in an economy.
  - Helps align AMNE/FATS and DI statistics — useful for identifying foreign-controlled firms and domestic MNEs in the accounts.
  - Easier to find information on the ultimate investor based on control; statistical agencies may already have this from AMNE compilation.
- Disadvantage of WTA:
  - Not appropriate for income allocation because it does not identify where income from influence ultimately accrues.

### Empirical findings and country experiences
- Practical differences between PA and WTA may be small overall:
  - Germany’s comparisons (Annex Figures A.1 and A.2) showed little difference for larger investing economies but more material differences for smaller investing economies.
  - Poland and Denmark presented similar findings in comparisons of PA and WTA.
- ESS/ESCB Task Force on FDI proposed a voluntary inward FDI UIE data collection planned for Spring 2021 with adopted methodology PA, but indicating that the 'control approach' (WTA) can be used if PA is not feasible (ECB and Eurostat, 2020).
- Country-specific implementations:
  - Brazil published 2018 estimates defining the UHE as the last entity in the ownership chain that did not control any other affiliate (impact illustrated in Annex Figure A.3).
  - Germany found that the major part of the investment often remains in the first productive enterprise.

### Four approaches for allocating outward investment positions to the UHE (Annex discussion)
- Trace influence down the ownership chain using balance sheet information and ownership shares at each link:
  - Provides most detailed financial structure information; may require considerable ownership-structure information and recording conventions due to fungibility of financing.
- Use the value the direct investor would receive if the subsidiary were acquired in the specific economy (market-value or approximation such as Own Funds at Book Value):
  - Provides comprehensive view of foreign operations; would produce statistics symmetric to UIE.
  - Would need determination whether value should reflect only the subsidiary or include entities below it (risk of double-counting if including entities below).
- Define the UHE as the last economy in the chain:
  - Could fail to reallocate portions of positions when end-of-chain entity cannot support whole outward position.
  - May attribute positions to small entities at bottom of chain and pass over larger entities higher up.
- Define the UHE as the first operating unit (even if not the end of chain):
  - Less burden on respondents and compilers; moves outward DI from pass-through economies.
  - "Operating unit" should not be simply the first non-SPE but the first unit whose purpose was not solely administrative/management/holding assets.
  - Germany found the major part of investment often remains in the first productive enterprise; further evidence across countries would be useful.
  - Need to determine allocation across multiple affiliates when an SPE holds entities in multiple countries.

*International Monetary Fund — d-6-ultimate-investing-economy (excerpt).*

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

### Ultimate Host Economy (UHE) and Ultimate Investor Economy (UIE) statistics

### Approaches to compiling UHE statistics
- Statistical agencies may explore the use of algorithms or modeling to allocate indirect holdings to UHEs when 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 have found it is easier to collect UHE information on the outward operations from domestically-controlled direct investors than from foreign-controlled direct investors; therefore, limiting the presentation by UHE to domestically-controlled direct investors should be considered.
- Data exchange among countries at the micro-data level could alleviate reporting burdens on companies and resource demands on statistical offices.
- Development of publicly available detailed data on MNE structure (e.g., Legal Entity Identifier, OECD ADIMA database) can assist compilation and reduce pass-through effects.

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

### Combining UIE and UHE presentations with pass-through funds
- Table constructs:
  - A and B represent values of the inward and outward positions at the global level.
  - C represents the amount of round-tripping in the economy.
  - D represents the amount of outward investment by domestic MNEs.
  - E represents total inward investment from economy A in the reporting economy.
  - F represents how much affiliates owned by investors in economy A invest abroad (indication of pass-through).
- Annex Table A.3 (Inward and Outward DI Positions by the UIE) and Annex Table A.4 (Outward DI Positions by the UIE and UHE) provide schematic breakdowns by ultimate investor and ultimate host.
- Combining UHE with nationality information yields a complete picture of outward DI from the reporting economy; useful when UHE statistics are only compiled for domestic MNEs.

### Compilation issues encountered with UIE and UHE
- Blurred ownership chains: arises 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 where residence is difficult to determine even if identity is known: collective investment institutions, individuals, tax havens, and offshore financial centers.
- Valuation and accounting conventions can create asymmetries:
  - Applying Own Funds at Book Value (OFBV) valuations might result in different values of round-tripping in outward and inward investment.
  - Inward DI presented according to UIE reflects current valuation following OFBV for unlisted or market value for listed companies; valuation of the DIE in the host economy would reflect reinvestment of earnings.
  - Outward DI following the standards uses the OFBV of the SPE, which often reflects historical cost and not reinvestment of earnings, producing asymmetries between UIE and UHE measures of round-tripping.

### Pass-through funds, aggregation, and symmetric statistics
- Example structure (Figure A.5) illustrates an MNE with five enterprises in four economies where A (Economy 1) is the UIE (ultimate controlling parent) owning B and C directly and D and E indirectly.
- Under the extended directional principle:
  - Inward and outward positions are globally additive (each summing to 340 in the example).
  - Reallocation of inward positions to the UIE can lead to inward investment from Economy 1 being recorded by Economies 2, 3, and 4 totaling 340, exceeding Economy 1’s total outward DI of 250 due to pass-through funds, thus preventing meaningful regional aggregation without identifying and excluding pass-through funds.
  - Loans between fellow enterprises (e.g., B to C) can be recorded as reductions in inward investment under immediate-partner recording even when they do not confer influence—creating bilateral asymmetries.
- Consolidated DI statistics that net out pass-through funds and reallocate positions to the ultimate partner country eliminate double-counting:
  - If countries identify outward investment of foreign-owned parents in their economy as pass-through funds and net it from both outward and inward DI statistics, pass-through funds are eliminated.
  - In the 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 250, enabling meaningful regional aggregates.
- 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 received net of intragroup funding provided, 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 for symmetric UHE and UIE compilation.

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_Source: https://www.imf.org/-/media/files/data/statistics/bpm6/ditt/d-6-ultimate-investing-economy.pdf_