## D.10 Defining the Boundaries of Direct Investment

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### Scope and objectives
- The guidance note (GN) explores three issues relating to the boundaries of direct investment (DI):
  - (A) Consistency of criteria to determine subsidiary corporations across BPM6, BD4, and 2008 SNA and whether this leads to inconsistent application by compilers.
  - (B) Re‑examination of the DI threshold value (shifting the DI threshold from 10 percent to 20 percent).
  - (C) Whether DI relationships can be achieved other than by economic ownership of equity (e.g., through warrants or repos).
- Preparers: Sakiko Ohtsuka (Bank of Japan), Michael Abbondante (Australian Bureau of Statistics), and Brigitte Batschi (Australian Bureau of Statistics).

### Context from BPM6, BD4, and 2008 SNA
- BPM6 defines direct investment (DI) operationally as when an investor holds 10 percent or more voting power in the investee (BPM6, paragraph 6.12).
- BPM6 notes that effective control or influence may arise with less than the numerical thresholds, but prescribes the numerical thresholds for international consistency (BPM6, paragraph 6.13).
- BD4 likewise uses the 10 percent voting power criterion as evidence of a lasting interest and significant degree of influence (BD4, paragraph 117).
- 2008 SNA definitions include options beyond pure numerical shareholding:
  - A subsidiary is when an investor controls more than half the voting power or has the right to appoint or remove a majority of directors.
  - An associate is when an investor controls between 10 percent and 50 percent of the voting power (2008 SNA, paragraphs 4.73 and 4.75).
- BPM6 treats warrants and repurchase agreements (repos) as not conferring voting power if voting rights are only temporarily obtained through such instruments (BPM6, paragraph 6.19).

### Key issues identified
- SNA allows an option to classify a subsidiary via the right to appoint/remove a majority of directors, which goes beyond BPM6/BD4 numerical approach.
- BPM6/BD4 emphasize strict numerical thresholds to avoid subjective judgments and ensure consistency.
- The BPM6 research agenda and BD4 include exploring non‑equity means of acquiring voting power (e.g., warrants, repos, swaps).

### Alternatives considered
- Issue A — Definition of a Subsidiary Corporation:
  - Alternative 1 (A1): Status quo — retain a numerical threshold as in BPM6 and bring SNA into alignment with BPM6.
  - Alternative 2 (A2): Modify BPM6 criterion to include 2008 SNA references (i.e., the “right to appoint or remove a majority of the directors”).
- Issue B — DI Threshold:
  - Alternative 3 (A3): Status quo — retain 10 percent threshold.
  - Alternative 4 (A4): Shift to 20 percent threshold.
- Issue C — DI Relationship other than by Equity:
  - Alternative 5 (A5): Maintain status quo and remove the item from the research agenda (i.e., retain current treatment of warrants and repos).
  - Alternative 6 (A6): Retain the item within the research agenda for future evaluation.

### Evidence, consultations, and findings
- Historical deliberations:
  - DITEG (2004) endorsed moving the operational threshold from 10 to 20 percent in an outcome paper, but the IMF Committee on Balance of Payments Statistics rejected that proposal because of data discontinuity concerns.
- OECD 2016 metadata (on BD4):
  - 20 out of 34 respondents strictly apply the 10 percent voting power criterion;
  - nine respondents apply a value threshold in addition to voting power;
  - five respondents include enterprises that do not meet the 10 percent criterion if they have influence or exclude enterprises that meet the criterion but do not have influence.
- Drafting team contemporary assessment notes:
  - Under expanding Portfolio Investment (PI) activities, some investors hold 10 percent or more voting power without intending control; such holdings are conceptually PI but recorded as DI under BPM6.
  - Accounting standards commonly use a 20 percent threshold to indicate significant influence.
  - 20 percent may better identify investments that are less volatile and less likely to reverse in a crisis.
- DITT survey and discussions:
  - For Issue A (subsidiary criterion option in 2008 SNA): the majority view was to retain current BPM6 guidance; the proposal to include a subjective, non‑numerical element was unanimously rejected in discussions (Section II, para 24).
  - 79 percent (11 members) did not agree with applying a subjective criterion to determine effective control or influence, preferring to retain a numerical threshold (Section II, para 25).
  - For Issue B (threshold):
    - 36 percent (five members) said moving to a 20 percent threshold would have little impact.
    - 64 percent (nine members) said no analysis had been undertaken.
    - Four members commented on merits of moving from 10 to 20 percent: three wished to maintain status quo and cautioned about change; one supported a shift to 20 percent (Section II, para 28).
  - For Issue C (non‑equity DI relationships): DITT responses unanimously indicated DI relationships could not be practically identified beyond economic ownership of equity and agreed to remove the question from the research agenda while retaining the current treatment of warrants and repos (Section II, para 29).
  - Drafting team’s Annex III questionnaire results: responses indicated such non‑equity DI relationships are rare or difficult to recognize in current data compilation frameworks (Section I, paras 21–22).

### Observed drawbacks of introducing subjective (non‑numerical) criteria
- Would not ensure:
  - a practical and unambiguous methodology for DI compilers and analysts;
  - reduction in responder burden for potentially minimal gain;
  - comparability across countries or promotion of consistency;
  - a defined separation between DI and non‑DI reducing bilateral asymmetries;
  - reconciliation of DI and Activities of Multinational Enterprises (AMNE) statistics and on both CDIS and CPIS databases (Section II, para 24).

### Recommendations (drafting team)
- Accept A1: Status quo — retain a numerical threshold as the current definition in BPM6 and support GN G.2 aims to bring the SNA definition into alignment with BPM6.
- Accept A3: Status quo — retain the 10 percent voting power threshold for establishing a DI relationship.
- Accept A5: Remove the research agenda item on whether DI relationships can be achieved other than by economic ownership of equity and retain the current treatment of warrants and repos (consistent with unanimous DITT agreement).

### Proposals and Questions for Discussion
- Proposal to accept A5: Maintain status quo and remove the item from research agenda regarding whether DI relationships can be achieved other than by economic ownership of equity (e.g., through warrants or repos).
- Questions for Discussion:
  - 1) Do you agree with the DITT recommendation to retain a numerical threshold as the current definition of subsidiary corporation in BPM6 in line with A1?
  - 2) Do you agree with the DITT recommendation to retain the current 10 percent threshold for the definition of associate corporation (proposal A3)?
  - 3) Do you agree to remove the question “whether direct investment relationships can be achieved other than by economic ownership of equity (e.g., through warrants or repos)” from research agenda (i.e., accept A5 and reject A6)?

### Annex summaries
- Annex I — Referenced documents include IFRS Foundation titles, IMF (2008) BPM6, OECD (2008) BD4, and DITEG (2004) issues paper on the 10 percent threshold.
- Annex II — Proposed update to statistical manual text: remove research agenda item (b) regarding whether DI relationships can be achieved other than by economic ownership of equity (e.g., through warrants or repos) (see paragraph 6.19).
- Annex III — DITT survey questions probed observed cases involving warrants, repurchase agreements, securities lending, and other non‑equity instruments potentially conveying influence; responses indicated such cases are rare or difficult to recognize.

*IMF Committee on Balance of Payments Statistics — Direct Investment Task Team*

### Section 1

### D.10 Defining the Boundaries of Direct Investment

### Scope and objectives
- The guidance note (GN) explores three issues relating to the boundaries of direct investment (DI):
  - (A) Consistency of criteria to determine subsidiary corporations across BPM6, BD4, and 2008 SNA and whether this leads to inconsistent application by compilers.
  - (B) Re‑examination of the DI threshold value (shifting the DI threshold from 10 percent to 20 percent).
  - (C) Whether DI relationships can be achieved other than by economic ownership of equity (e.g., through warrants or repos).
- Preparers: Sakiko Ohtsuka (Bank of Japan), Michael Abbondante (Australian Bureau of Statistics), and Brigitte Batschi (Australian Bureau of Statistics).

### Context from BPM6, BD4, and 2008 SNA
- BPM6 defines direct investment (DI) operationally as when an investor holds 10 percent or more voting power in the investee (BPM6, paragraph 6.12).
- BPM6 notes that effective control or influence may arise with less than the numerical thresholds, but prescribes the numerical thresholds for international consistency (BPM6, paragraph 6.13).
- BD4 likewise uses the 10 percent voting power criterion as evidence of a lasting interest and significant degree of influence (BD4, paragraph 117).
- 2008 SNA provides definitions with an option beyond pure numerical shareholding: 
  - A subsidiary is when an investor controls more than half the voting power or has the right to appoint or remove a majority of directors.
  - An associate is when an investor controls between 10 percent and 50 percent of the voting power (2008 SNA, paragraphs 4.73 and 4.75).
- BPM6 treats warrants and repurchase agreements (repos) as not conferring voting power if voting rights are only temporarily obtained through such instruments (BPM6, paragraph 6.19).

### Key issues identified
- SNA allows an option to classify a subsidiary via the right to appoint/remove a majority of directors, which goes beyond BPM6/BD4 numerical approach.
- BPM6/BD4 emphasize strict numerical thresholds to avoid subjective judgments and ensure consistency.
- The BPM6 research agenda and BD4 include exploring non‑equity means of acquiring voting power (e.g., warrants, repos, swaps).

### Alternatives considered (as proposed by the drafting team)
- Issue A — Definition of a Subsidiary Corporation:
  - Alternative 1 (A1): Status quo — retain a numerical threshold as in BPM6 and bring SNA into alignment with BPM6.
  - Alternative 2 (A2): Modify BPM6 criterion to include 2008 SNA references (i.e., the “right to appoint or remove a majority of the directors”).
- Issue B — DI Threshold:
  - Alternative 3 (A3): Status quo — retain 10 percent threshold.
  - Alternative 4 (A4): Shift to 20 percent threshold.
- Issue C — DI Relationship other than by Equity:
  - Alternative 5 (A5): Maintain status quo and remove the item from the research agenda (i.e., retain current treatment of warrants and repos).
  - Alternative 6 (A6): Retain the item within the research agenda for future evaluation.

### Evidence, consultations, and findings
- Historical deliberations:
  - DITEG (2004) endorsed moving the operational threshold from 10 to 20 percent in an outcome paper, but the IMF Committee on Balance of Payments Statistics rejected that proposal because of data discontinuity concerns.
- OECD 2016 metadata (on BD4): 20 out of 34 respondents strictly apply the 10 percent voting power criterion; nine respondents apply a value threshold in addition to voting power; five respondents include enterprises that do not meet the 10 percent criterion if they have influence or exclude enterprises that meet the criterion but do not have influence.
- Drafting team contemporary assessment notes:
  - Under expanding Portfolio Investment (PI) activities, some investors hold 10 percent or more voting power without intending control; such holdings are conceptually PI but recorded as DI under BPM6.
  - Accounting standards commonly use a 20 percent threshold to indicate significant influence.
  - 20 percent may better identify investments that are less volatile and less likely to reverse in a crisis.
- DITT survey and discussions:
  - For Issue A (subsidiary criterion option in 2008 SNA): the majority view was to retain current BPM6 guidance; the proposal to include a subjective, non‑numerical element was unanimously rejected in discussions (Section II, para 24).
  - 79 percent (11 members) did not agree with applying a subjective criterion to determine effective control or influence, preferring to retain a numerical threshold (Section II, para 25).
  - For Issue B (threshold):
    - 36 percent (five members) said moving to a 20 percent threshold would have little impact.
    - 64 percent (nine members) said no analysis had been undertaken.
    - Four members commented on merits of moving from 10 to 20 percent: three wished to maintain status quo and cautioned about change; one supported a shift to 20 percent (Section II, para 28).
  - For Issue C (non‑equity DI relationships): DITT responses unanimously indicated DI relationships could not be practically identified beyond economic ownership of equity and agreed to remove the question from the research agenda while retaining the current treatment of warrants and repos (Section II, para 29).
  - Drafting team’s Annex III questionnaire results: responses indicated such non‑equity DI relationships are rare or difficult to recognize in current data compilation frameworks (Section I, paras 21–22).

### Observed drawbacks of introducing subjective (non‑numerical) criteria
- Would not ensure:
  - a practical and unambiguous methodology for DI compilers and analysts;
  - reduction in responder burden for potentially minimal gain;
  - comparability across countries or promotion of consistency;
  - a defined separation between DI and non‑DI reducing bilateral asymmetries;
  - reconciliation of DI and Activities of Multinational Enterprises (AMNE) statistics and on both CDIS and CPIS databases (Section II, para 24).

### Recommendations (drafting team)
- Accept A1: Status quo — retain a numerical threshold as the current definition in BPM6 and support GN G.2 aims to bring the SNA definition into alignment with BPM6.
- Accept A3: Status quo — retain the 10 percent voting power threshold for establishing a DI relationship.
- Accept A5: Remove the research agenda item on whether DI relationships can be achieved other than by economic ownership of equity and retain the current treatment of warrants and repos (consistent with unanimous DITT agreement).

*IMF Committee on Balance of Payments Statistics — Direct Investment Task Team*

### Section 2

### d10-defining-the-boundaries-of-direct-investment - Section 2

### Proposals and Questions for Discussion
- Accept A5: Maintain status quo and remove the item from research agenda – This proposal seeks to remove from the research agenda the question of “whether direct investment relationships can be achieved other than by economic ownership of equity (e.g., through warrants or repos)”.
- Questions for Discussion:
  - 1) Do you agree with the DITT recommendation to retain a numerical threshold as the current definition of subsidiary corporation in B PM6 in line with A1?
  - 2) Do you agree with the DITT recommendation to retain the current 10 percent threshold for the definition of associate corporation (proposal A3)?
  - 3) Do you agree to remove the question “whether direct investment relationships can be achieved other than by economic ownership of equity (e.g., through warrants or repos)” from research agenda (i.e., accept A5 and reject A6)?

### Annex I — Supplementary Information (Referenced Documents)
- TITLE OF REFERENCED DOCUMENT
  - IFRS Foundation (2018) “Use of IFRS Standards around the world (2018)", London
  - IFRS Foundation “IAS28”
  - IFRS Foundation “IFRS10”
  - IMF (2008), Balance of Payments and International Investment Position Manual, sixth edition, Washington, DC.
  - OECD (2008), Benchmark Definition of Foreign Direct Investment, fourth Edition, Paris
  - OECD and Luxembourg (2004) "DITEG Issues Paper # 2 Direct Investment – 10 Percent Threshold of Voting Ower/Equity Ownership, Employment"

### Annex II — List of Chapters to Update
- STATISTICAL MANUAL – CHAPTER AND PARAGRAPH(S)
  - Balance of Payments and International Investment Position Manual, sixth edition: 1.43 A research agenda has been identified for possible future work. It includes the following:
    - Remove
      - (b) whether direct investment relationships can be achieved other than by economic ownership of equity (e.g., through warrants or repos) (see paragraph 6.19)

### Annex III — Survey — DITT
- DITT members have answered the following survey during the preparation of this note.
  - Q1 Have DITT members observed cases when an investor acquires influence by purchasing warrants that would convert to more than 10 percent equity ownership once exercised?
  - Q2 Have DITT members observed the following cases related to repurchase agreements or securities lending? If yes, please mention the frequency of the cases observed (e.g., very rare to frequently observed).
    - a) The case where an investor accumulates more than 10 percent voting power of an entity via repurchase agreements or securities lending and vice versa.
    - b) Any other cases involving influence as a result of warrants and repurchase agreements.
  - Q3 Moving beyond equity, have DITT members observed cases when an investor, regardless of equity holdings in an enterprise acquires significant influence through the purchase of other financial instruments?
    - If yes
      - a) Did the investor company have an up or down stream customer relationship with the investee company?
      - b) Did the investor company have an up or down stream customer relationship with the investee company and lend on favourable terms?
      - c) Did the investor have a traditional commercial (arm’s length) relationship (e.g., where the investor counterparty is a financial institution)?
      - d) Did the investor company already have a minor equity stake (i.e., below 10 percent)?
      - e) Any other scenario? Please describe:

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_Source: https://www.imf.org/-/media/files/data/statistics/bpm6/ditt/d10-defining-the-boundaries-of-direct-investment.pdf_