## Asymmetric Treatment of Retained Earnings

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### SECTION I: THE ISSUE — Background and core mechanics
- Retained earnings correspond to the net distributable income that has not been distributed to shareholders (2008 SNA, paragraph 7.139; BPM6, paragraph 11.34 and others).
- Retained earnings of foreign direct investment (FDI) enterprises are treated as remitted to the direct investors and reinvested by them; these are called reinvested earnings (RIE).
- BPM6 records RIE as being distributed to direct investors in proportion of their equity ownership; a direct investor is entitled to all the income generated by its subsidiaries, associates, and branches irrespective of whether the income is distributed or retained (BPM6, paragraphs 3.74, 3.17, 8.15–8.16, 11.33–11.47).
- The 2008 SNA treats retained earnings of foreign corporations included in FDI as though they had been distributed and then reinvested by the shareholder; the equal financial account entry is called reinvestment of earnings (2008 SNA, paragraphs 3.64 and 7.137–7.139; paragraph 26.88).
- As a result of the RIE treatment, the net saving of corporations which are 100 percent owned by foreign direct investors is zero (2008 SNA, paragraph 26.65).
- RIE are recorded only for equity in FDI and investment funds, but not for other types of equity; the RIE treatment is therefore not extended to all cross-border portfolio investment.
- The 2008 SNA does not classify resident-to-resident investment relationships as domestic direct investment; hence RIE treatment does not arise for domestic equity links.
- Dividends payments reduce RIE (RIE can be negative); dividends do not affect overall income paid to FDI shareholders but only the split between dividends and RIE and corresponding financial-account entries (2008 SNA, paragraph 26.64; BPM6, paragraph 11.46).
- By contrast, dividends from non-FDI corporations affect overall income paid by the corporation and the decreases in corporate value are reflected as holding losses, not as transactions.
- A similar “all distributed” treatment is applied to collective investment funds (including some pension funds), emptying the savings of these funds analogous to companies 100 percent owned by foreign direct investors (2008 SNA, paragraph 7.152; ESA 2010 sub-codification).
- Timing and recording of dividends from non-FDI corporations can deviate from strict accrual: income effectively recorded when the share price goes ex-dividend rather than when the investee’s income is earned (2008 SNA, paragraph 7.130); this raises issues at the income/revaluation boundary and becomes more salient with quarterly accounts and increased use of share buybacks.
- Share buybacks have grown substantially and in some markets exceed amounts of dividends; buybacks are perceived as substitutes for dividends, allow tax optimization, and can lead to underestimation of shareholder income (overestimation of holding gains) and distort distribution of saving across sectors.

### Inconsistency 1 — Direct Investment vs Portfolio Investment
- RIE transactions are recorded for FDI (equity ownership meeting directly or indirectly the 10 percent threshold) but not for foreign portfolio investment (nonresident owning less than 10 percent of equity).
- For FDI, increase in an enterprise’s value due to retained earnings is treated as a transaction (RIE); for portfolio investment, retained earnings are recorded as the enterprise’s saving and the investor’s increase in value is recorded as a revaluation.
- Conditioning treatment on investors’ degree of control shifts recording of financial returns between the income balance and revaluation purely based on distribution decisions; the treatment does not affect net foreign assets but affects the split of growth of net foreign assets accounted for by transactions versus revaluations.
- The asymmetry may hinder appropriate measurement of national income, particularly when net portfolio cross-border positions are large and share buybacks are prevalent.
- Counterargument: minority (portfolio) shareholders may lack influence over distribution decisions and thus treating retained earnings as corporate saving may reflect economic reality.

### Inconsistency 2 — Foreign vs Domestic Investment Relationship
- Except for FDI, 2008 SNA treats retained corporate earnings as saving of the corporation; domestic direct investment is not an SNA concept, so RIE transactions are never imputed for resident-to-resident investment relationships.
- The 2008 SNA explored extending RIE to domestic equity relationships (notably public corporations) as part of its research agenda (2008 SNA, paragraph 7.140), but such extension was previously rejected in favor of rules on superdividends and capital injections.
- The 2008 SNA warns that extending RIE to domestic links “would have serious implications for interpretation of the accounts since it would be built on a different paradigm from the current treatment of dividends and corporate saving” (2008 SNA, paragraph A4.29).
- SNA’s paradigm treats corporations as independent institutional units that own assets and are responsible for liabilities; accruing income to owners at dividend declaration time is seen by many as consistent with this paradigm, yet this paradigm is not followed for FDI and investment funds.

### Issues for Discussion — Conceptual and practical considerations
- Whether enterprises should have saving
  - Arguments for enterprise saving:
    - Consistent with corporations as distinct institutional units making independent management decisions.
    - Legal independence and limited liability support enterprises holding their own saving.
    - Enterprise saving indicates intent to fund investment from internal resources; some analysts exclude RIE from FDI when measuring foreign capital inflows because RIE is not new foreign capital to the economy.
  - Arguments against enterprise saving:
    - Transaction imputation reflects that owners benefit from earnings as they are earned; retained earnings increase market value of corporations and could be recorded as transactions rather than revaluations.
    - Owners can, in principle, realize economic equivalent (e.g., selling shares) to mimic distribution.
    - Dividend-in-kind (extra shares) is economically similar to retaining earnings and is recorded as income (2008 SNA, paragraph 7.129).
- Communication and terminology:
  - Users often interpret “saving” in household terms; describing corporate “saving” as “retained earnings” can be clearer (2008 SNA, paragraph 9.11).
  - Extending RIE to all equity links would set net saving (B.8n) of corporations to zero, but retained earnings would remain observable via net RIE, preserving information for users.
  - For households, increases in share prices from retained earnings contribute to consumption incentives; current non-RIE treatment may understate household income and depress measured saving ratios.
- Practical asymmetries and economic effects:
  - Recorded saving of an enterprise depends on investor mix (FDI, portfolio, resident).
  - Net saving of an enterprise 100 percent owned by foreign direct investors equals zero (2008 SNA, paragraph 26.65); by contrast, an enterprise 100 percent owned by portfolio or resident investors records all retained earnings as corporate saving and records investor wealth growth as revaluation.
  - Corporate inversions can shift net primary income receipts and related national accounts indicators (e.g., GNI).

### Problem statement and conceptual issues specific to public corporations
- The 2008 SNA research agenda identifies the asymmetry as particularly relevant for public corporations (2008 SNA, paragraphs A4.29 and 7.140).
- Practical distortions:
  - Governments can use ownership of controlled corporations to optimize deficit figures by distributing large dividends to meet specific deficit targets and later recapitalizing the companies through capital injections described as subscriptions of equity.
  - Superdividend and capital injection rules (2008 SNA, paragraphs 7.131 and 22.138) contain ad-hoc deviations from general principles and are subject to contestation.
- Expected effect of extending RIE to public corporations:
  - Government deficit would be reduced when investees’ earnings are earned (rather than when distributed) and increased when investees’ losses occur (rather than when actually covered), ensuring a better measurement of government net lending/net borrowing at any particular point in time.
- Logical-consistency argument:
  - The treatment of FDI presumes control or influence by the foreign investor and direct access to net income; public corporations also have a controlling shareholder, so routing retained earnings of public corporations to the government would improve internal consistency.
- Potential benefits of imputing retained earnings to all shareholders:
  - Makes role of saving in growth of shareholders’ assets more visible.
  - Institutional sector saving, national saving, and the current account balance would better reflect resources available to residents (e.g., economies with a large net negative position in foreign portfolio investment).

### Practical and data challenges
- Estimation of retained earnings requires uncertain assumptions, including:
  - service lives used to model consumption of fixed capital;
  - definition and location of software and other intellectual property assets;
  - assignment of prices to inventory additions and withdrawals.
- These assumptions are routinely made for RIE on FDI and allocation of retained earnings on collective investment schemes.
- Implementation challenges:
  - Distinguishing enterprises with a local controlling shareholder requires adapted databases and knowledge of ownership chains.
  - Many statistical institutes/central banks lack complete resident ownership breakdowns by sector except with security-by-security databases.
  - Extension to domestic links could be done via macro-adjustments using equity cross-sector whom-to-whom positions.
- Risks of resolving a single asymmetry in isolation:
  - Applying RIE to foreign portfolio investment only would increase the difference between cross-border and domestic investment treatment.
  - Extending FDI treatment to domestic controlling shareholders would expand differences between direct and portfolio relationships.

### Options considered (five)
- Option 1: Keep the status quo (i.e., the current treatment in both BPM6 and 2008 SNA).
- Option 2: Leave core balance of payments accounts and national accounts unchanged, but add supplementary information on portfolio investment RIE to the balance of payments (and possibly memorandum items) and national accounts and supplementary information on public corporations RIE and overall investment in resident enterprises RIE to the national accounts.
- Option 3: Extend the concept of RIE that is currently applied to foreign direct investors to public controlled corporations and/or to cross-border portfolio investors.
- Option 4: Extend the concept of RIE that is currently applied to foreign direct investors to all equity holdings in the national accounts and balance of payments accounts.
- Option 5: Eliminate asymmetries by discontinuing the current treatment of RIE for FDI (with the possibility to keep the treatment in supplemental tables or memorandum items).

### Summary of comparative effects across options (textual)
- Option 5: no RIE in core accounts; Option 5 may have RIE in supplemental tables/memorandum items.
- Option 1 to 4: RIE applied to FDI enterprises in core accounts.
- Option 3 and 4: RIE applied to public corporations in core accounts.
- Option 4: RIE applied to foreign portfolio investment and private domestic equity stakes in core accounts.

### FITT and DITT views; recommended pragmatic approach
- Majority FITT conceptual/practical view: need for enhancing coherence and internal consistency; reject Option 1.
- Conceptual consistency approach: apply RIE treatment uniformly to controlling/influencing shareholders, both foreign and domestic (owner control/influence rationale).
- Practical preference and feasibility:
  - Extending RIE only to public corporations (Option 3) is more practical than extending to all domestic controlling shareholders and would improve coherence slightly for some economies; for others, it could be significant given prominence of general government deficit and could allow dropping superdividend and capital injection rules.
  - Extending RIE to all cross-border equity links (Option 3 alternative) would better measure national income (GNI etc.) and may pose compilation challenges that are not necessarily more severe than for FDI.
  - Removing current RIE in FDI (Option 5) would enhance methodological consistency but hamper analytical and policy usefulness of GNI in globalization context, as RIE in FDI partially corrects distortions in geographical allocation of operating surplus and corporate income.
  - Extending RIE to all enterprises regardless of owners’ residency and control (Option 4) would be conceptually coherent and attribute saving to ultimate beneficiaries, but presents significant practical challenges and could produce significant effects on aggregates such as current account balance, national saving, and household saving; potential for delays, reduced reliability, and breaks in time series unless simplifying assumptions are used.
- Option 2 merits:
  - Items published as supplemental information can be based on alternative definitions without affecting internal consistency, international comparability, and time series continuity of core accounts.
  - Pragmatic outcome recommended: conceptually accept that RIE should apply to all equity investments, but recommend universal application only in supplementary information; for balance of payments statistics, RIE on cross-border portfolio investment could be added as memorandum items.
  - Under Option 2 in supplementary tables:
    - RIE treatment continues to be applied to FDI in core accounts.
    - Supplementary information presents alternative balance of payments with RIE applied to portfolio investment and alternative measures of income, saving, and investment at national and institutional sector levels.
    - An alternative measure of government deficit could be compiled and labeled as such.
- FITT consultation results:
  - Majority favored Option 4 or 3 from a conceptual viewpoint, but expressed preference for Option 2 as a pragmatic solution.
  - Out of 13 FITT views, eight supported Option 2 either as a first choice or as a preferred option for feasibility reasons (and another member indicated support for Option 2 as a second-best alternative). Among those that did not expressly support Option 2 as a recommended solution, three supported Option 4 (another one as a second choice), one Option 3, and another one Option 5.
- DITT subsequent consultation:
  - Split views between Option 1 (keep status quo) and Option 5 (remove RIE in FDI); Option 2 received some substantial support given feasibility difficulties of Options 3 and 4.

### Implementation considerations and next steps
- Testing recommended:
  - Given practical difficulties in implementing Option 2, its feasibility should be tested, especially if options affecting core accounts (Options 3 or 4) are adopted due to larger resource implications and impacts on headline macro indicators.
- Compilation aids and simplifications:
  - Proxies (e.g., publicized Price Earning Ratio (PER) and Dividend yields) could reduce compilation burden and remove the largest misreporting of portfolio income at low cost.
  - Macro-recalculation simplifying assumptions are common for historical data; portfolio income can be adjusted based on PER/dividend ratios; domestic direct investment links merely reallocate savings across sectors using equity shareholdings similarly to CII income (D.443).
- FITT support on share buybacks:
  - FITT expressed support to treat share buybacks as income distribution in the core accounts; preference to prepare a separate/subsequent Guidance Note to examine treatment in detail (Annex 1 illustrates a possible implementation). This view was shared by a majority of DITT members.

### Annex 1 — Share buybacks: rationale and proposed treatment
- Rationale for expensing share buybacks:
  - Share buybacks increasingly used as a substitute or addition to regular dividends and often act to release funds to shareholders; in some cases (notably hi-tech firms) companies carry out heavy buybacks instead of regular dividends.
  - Current statistical manuals treat buybacks as financial transactions (F.5) because sellers’ transactions are clearly financial; however, from the company’s perspective buybacks can be a substitute for dividends and recording them as D.42 would make sense.
  - Treating buybacks as income distribution would better capture income available to shareholders and avoid under-recording income and saving, which can affect GNI and saving rates.
  - Example: share buybacks have exceeded one trillion dollars a year—close to five percent of GDP.
- Practical issues with classifying buybacks:
  - Seller’s transaction is undeniably financial; directly reclassifying the cash receipt of a seller as D.42 could allow manipulative practices (e.g., governments generating revenue by reselling shares to companies).
  - Data may not reliably identify whether a share sale is to the issuing company (buyback) or to other market participants; intermediary-based buybacks further obscure buyer identity.
- Proposed accounting treatment:
  - Impute a dividend (D.42) for the amount and at the time of the buyback in both the company’s account (use/expenditure/debit) and that of all shareholders (resource/revenue/credit).
  - Counterpart of imputed D.42 is F.5, analogous to reinvested earnings (D.43); allocation across shareholders follows the reinvested earnings method.
  - In company accounts: outflow of cash currently coded (-)F.5L becomes D.42.
  - In shareholders’ aggregate: imputed D.42 is recorded across shareholders against (+)F.5A.
  - The seller records (-)F.5.A against cash received (+)F.5A, and also its apportioned D.42/(+)F.5A.
  - The buyback transaction remains classified as financial for the seller, but the amount/time of buyback is used to impute a dividend applying the reinvested earnings method—i.e., the proposal imputes a further D.42 in addition to observed dividends.
  - The new total D.42 should be subject to a superdividend test to distinguish buybacks that distribute current earnings from buybacks that liquidate a large part of the company (the latter should be treated as financial).
- Rejection of dependence on subsequent use:
  - Proposed treatment does not depend on subsequent use of the bought-back shares (e.g., cancellation vs. reissue) because classification should not be based on ulterior motives and such information is generally unavailable; subsequent use should be treated separately if and when information exists.

*Guidance Note, International Monetary Fund*

### SECTION I: THE ISSUE

### SECTION I: THE ISSUE

### Background
- Retained earnings correspond to the net distributable income that has not been distributed to shareholders in the form of dividends (System of National Accounts 2008 (2008 SNA), paragraph 7.139; BPM6, paragraph 11.34 and others).
- Retained earnings of foreign direct investment (FDI) enterprises are treated as remitted to the direct investors and reinvested by them; these are called reinvested earnings (RIE).
- BPM6 records RIE as being distributed to direct investors in proportion of their equity ownership; a direct investor is entitled to all the income generated by its subsidiaries, associates, and branches irrespective of whether the income is distributed or retained (BPM6, paragraphs 3.74, 3.17, 8.15–8.16, 11.33–11.47).
- The 2008 SNA treats retained earnings of foreign corporations included in FDI as though they had been distributed and then reinvested by the shareholder; the equal financial account entry is called reinvestment of earnings (2008 SNA, paragraphs 3.64 and 7.137–7.139; paragraph 26.88).
- As a result of the RIE treatment, the net saving of corporations which are 100 percent owned by foreign direct investors is zero (2008 SNA, paragraph 26.65).
- RIE are recorded only for equity in FDI and investment funds, but not for other types of equity; the RIE treatment is therefore not extended to all cross-border portfolio investment.
- The 2008 SNA does not classify resident-to-resident investment relationships as domestic direct investment; hence RIE treatment does not arise for domestic equity links.
- BPM6 and 2008 SNA justify RIE on the basis that a direct investor has significant influence or control over the enterprise and thus the decision to retain earnings is a deliberate investment decision of the direct investor (BPM6, paragraph 11.41; 2008 SNA, paragraph 7.138).
- Dividends payments reduce RIE (RIE can be negative); dividends do not affect overall income paid to FDI shareholders but only the split between dividends and RIE and corresponding financial-account entries (2008 SNA, paragraph 26.64; BPM6, paragraph 11.46).
- By contrast, dividends from non-FDI corporations affect overall income paid by the corporation and the decreases in corporate value are reflected as holding losses, not as transactions.
- A similar “all distributed” treatment is applied to collective investment funds (including some pension funds), where income earned by funds is deemed distributed to equity holders irrespective of actual distribution or retention (2008 SNA, paragraph 7.152; ESA 2010 sub-codification). As a result, the savings of these investment funds are emptied, analogous to the case of companies 100 percent owned by foreign direct investors.
- The timing and recording of dividends from non-FDI corporations can deviate from strict accrual principles (2008 SNA, paragraph 7.130), with income effectively recorded when the share price goes ex-dividend rather than when the investee’s income is earned; this raises issues at the income/revaluation boundary and becomes more salient with quarterly accounts and increased use of share buybacks.
- Share buybacks have grown substantially and in some markets exceed amounts of dividends; buybacks are perceived as substitutes for dividends, allow tax optimization, and can lead to underestimation of shareholder income (overestimation of holding gains) and distort distribution of savings across sectors.

### Inconsistency 1 — Direct Investment vs Portfolio Investment
- RIE transactions are recorded for FDI (equity ownership meeting directly or indirectly the 10 percent threshold) but not for foreign portfolio investment (nonresident owning less than 10 percent of equity).
- For FDI, increase in an enterprise’s value due to retained earnings is treated as a transaction (RIE); for portfolio investment, retained earnings are recorded as the enterprise’s saving and the investor’s increase in value is recorded as a revaluation.
- Conditioning treatment on investors’ degree of control shifts recording of financial returns between the income balance and revaluation purely based on distribution decisions; the treatment does not affect net foreign assets but affects the split of growth of net foreign assets accounted for by transactions versus revaluations.
- The asymmetry may hinder appropriate measurement of national income, particularly when net portfolio cross-border positions are large and share buybacks are prevalent.
- Counterargument: minority (portfolio) shareholders may lack influence over distribution decisions and thus treating retained earnings as corporate saving may reflect economic reality.

### Inconsistency 2 — Foreign vs Domestic Investment Relationship
- Except for FDI, 2008 SNA treats retained corporate earnings as saving of the corporation; domestic direct investment is not an SNA concept, so RIE transactions are never imputed for resident-to-resident investment relationships.
- The 2008 SNA has explored extending RIE to domestic equity relationships (notably public corporations) as part of its research agenda (2008 SNA, paragraph 7.140), but such extension was previously rejected in favor of rules on superdividends and capital injections.
- The 2008 SNA warns that extending RIE to domestic links “would have serious implications for interpretation of the accounts since it would be built on a different paradigm from the current treatment of dividends and corporate saving” (2008 SNA, paragraph A4.29).
- SNA’s paradigm treats corporations as independent institutional units that own assets and are responsible for liabilities; accruing income to owners at dividend declaration time is seen by many as consistent with this paradigm, yet this paradigm is not followed for FDI and investment funds.
- Table 1 (text summary): Allocation of retained earnings on equity other than investment fund shares in current standards
  - Domestic equity relationship: retained earnings allocated to saving of the corporation (both direct investment and portfolio investment).
  - International equity relationship: direct investment — retained earnings allocated to saving of the shareholder (FDI, RIE); portfolio investment — retained earnings allocated to saving of the corporation.

### Issues for Discussion (Conceptual and Practical Considerations)
- Whether enterprises should have saving:
  - Arguments for enterprise saving:
    - Consistent with corporations as distinct institutional units making independent management decisions (e.g., saving versus paying dividends analogous to investment decisions).
    - Legal independence and limited liability support enterprises holding their own saving.
    - Enterprise saving indicates intent to fund investment from internal resources; some analysts exclude RIE from FDI when measuring foreign capital inflows because RIE is not new foreign capital to the economy.
  - Arguments against enterprise saving:
    - Transaction imputation (imputing distribution and reinvestment) reflects that owners benefit from earnings as they are earned; retained earnings increase market value of corporations and could be recorded as transactions rather than revaluations.
    - Owners can, in principle, realize economic equivalent (e.g., selling shares) to mimic distribution.
    - Dividend-in-kind (extra shares) is economically similar to retaining earnings and is recorded as income (2008 SNA, paragraph 7.129).
- Communication and terminology:
  - Users often interpret “saving” in household terms; describing corporate “saving” as “retained earnings” can be clearer (2008 SNA, paragraph 9.11).
  - Extending RIE to all equity links would set net saving (B.8n) of corporations to zero, but retained earnings would remain observable via net RIE, preserving information for users.
  - For households, increases in share prices from retained earnings contribute to consumption incentives; current non-RIE treatment may understate household income and depress measured saving ratios.
  - An alternative balance could address communication problems if RIE were extended.
- Practical asymmetries and economic effects:
  - Mixed approach means recorded saving of an enterprise depends on investor mix (FDI, portfolio, resident).
  - Net saving of an enterprise 100 percent owned by foreign direct investors equals zero (2008 SNA, paragraph 26.65); by contrast, an enterprise 100 percent owned by portfolio or resident investors records all retained earnings as corporate saving and records investor wealth growth as revaluation.
  - Corporate inversions illustrate impacts: they can shift net primary income receipts and related national accounts indicators (e.g., GNI) from the economy of the inverter to the economy of the new foreign parent (see GN “D.4 Corporate Inversions”).

*Guidance Note, International Monetary Fund*

### 24.      The 2008 SNA research agenda identifies the asymmetry as particularly relevant for public

### Asymmetric Treatment of Retained Earnings

### Problem statement and conceptual issues
- The 2008 SNA research agenda identifies the asymmetry as particularly relevant for public corporations (2008 SNA, paragraphs A4.29 and 7.140).
- Current asymmetry: retained earnings imputed (RIE) treatment applies to foreign direct investment (FDI) but not uniformly to public corporations, cross-border portfolio investment, or domestic controlling shareholders.
- Practical distortions that arise:
  - Governments can use ownership of controlled corporations to optimize deficit figures by distributing large dividends to meet specific deficit targets and later recapitalizing the companies through capital injections described as subscriptions of equity.
  - Superdividend and capital injection rules (2008 SNA, paragraphs 7.131 and 22.138) contain ad-hoc deviations from general principles and are subject to contestation.
- Expected effect of extending RIE to public corporations:
  - Government deficit would be reduced when investees’ earnings are earned (rather than when distributed) and increased when investees’ losses occur (rather than when actually covered), ensuring a better measurement of government net lending/net borrowing at any particular point in time.
- Logical-consistency argument:
  - The treatment of FDI presumes control or influence by the foreign investor and direct access to net income; public corporations also have a controlling shareholder, so routing retained earnings of public corporations to the government would improve internal consistency.
- Potential benefits of imputing retained earnings to all shareholders:
  - Makes role of saving in growth of shareholders’ assets more visible.
  - Institutional sector saving, national saving, and the current account balance would better reflect resources available to residents (e.g., economies with a large net negative position in foreign portfolio investment).

### Practical and data challenges
- Estimation of retained earnings requires uncertain assumptions, including:
  - service lives used to model consumption of fixed capital;
  - definition and location of software and other intellectual property assets;
  - assignment of prices to inventory additions and withdrawals.
- These assumptions are routinely made for RIE on FDI and allocation of retained earnings on collective investment schemes.
- Implementation challenges:
  - Distinguishing enterprises with a local controlling shareholder requires adapted databases and knowledge of ownership chains.
  - Many statistical institutes/central banks lack complete resident ownership breakdowns by sector except with security-by-security databases.
  - Extension to domestic links could be done via macro-adjustments using equity cross-sector whom-to-whom positions.
- Risks of resolving a single asymmetry in isolation:
  - Applying RIE to foreign portfolio investment only would increase the difference between cross-border and domestic investment treatment.
  - Extending FDI treatment to domestic controlling shareholders would expand differences between direct and portfolio relationships.

### Options considered (five)
- Option 1: Keep the status quo (i.e., the current treatment in both BPM6 and 2008 SNA).
- Option 2: Leave core balance of payments accounts and national accounts unchanged, but add supplementary information on portfolio investment RIE to the balance of payments (and possibly memorandum items) and national accounts and supplementary information on public corporations RIE and overall investment in resident enterprises RIE to the national accounts.
- Option 3: Extend the concept of RIE that is currently applied to foreign direct investors to public controlled corporations and/or to cross-border portfolio investors.
- Option 4: Extend the concept of RIE that is currently applied to foreign direct investors to all equity holdings in the national accounts and balance of payments accounts.
- Option 5: Eliminate asymmetries by discontinuing the current treatment of RIE for FDI (with the possibility to keep the treatment in supplemental tables or memorandum items).

- Table 2 summary (textual):
  - Option 5: no RIE in core accounts; Option 5 may have RIE in supplemental tables/memorandum items.
  - Option 1 to 4: RIE applied to FDI enterprises in core accounts.
  - Option 3 and 4: RIE applied to public corporations in core accounts.
  - Option 4: RIE applied to foreign portfolio investment and private domestic equity stakes in core accounts.

### FITT and DITT views; recommended pragmatic approach
- Majority FITT conceptual/practical view: need for enhancing coherence and internal consistency; reject Option 1.
- Conceptual consistency approach: apply RIE treatment uniformly to controlling/influencing shareholders, both foreign and domestic (owner control/influence rationale).
- Practical preference and feasibility:
  - Extending RIE only to public corporations (Option 3) is more practical than extending to all domestic controlling shareholders and would improve coherence slightly for some economies; for others, it could be significant given prominence of general government deficit and could allow dropping superdividend and capital injection rules.
  - Extending RIE to all cross-border equity links (Option 3 alternative) would better measure national income (GNI etc.) and may pose compilation challenges that are not necessarily more severe than for FDI.
  - Removing current RIE in FDI (Option 5) would enhance methodological consistency but hamper analytical and policy usefulness of GNI in globalization context, as RIE in FDI partially corrects distortions in geographical allocation of operating surplus and corporate income.
  - Extending RIE to all enterprises regardless of owners’ residency and control (Option 4) would be conceptually coherent and attribute saving to ultimate beneficiaries, but presents significant practical challenges and could produce significant effects on aggregates such as current account balance, national saving, and household saving; potential for delays, reduced reliability, and breaks in time series unless simplifying assumptions are used.
- Option 2 merits:
  - Items published as supplemental information can be based on alternative definitions without affecting internal consistency, international comparability, and time series continuity of core accounts.
  - Pragmatic outcome: conceptually accept that RIE should apply to all equity investments, but recommend universal application only in supplementary information; for balance of payments statistics, RIE on cross-border portfolio investment could be added as memorandum items.
  - Under Option 2 in supplementary tables:
    - RIE treatment continues to be applied to FDI in core accounts.
    - Supplementary information presents alternative balance of payments with RIE applied to portfolio investment and alternative measures of income, saving, and investment at national and institutional sector levels.
    - An alternative measure of government deficit could be compiled and labeled as such.
- FITT consultation results:
  - Majority favored Option 4 or 3 from a conceptual viewpoint, but expressed preference for Option 2 as a pragmatic solution.
  - Out of 13 FITT views, eight supported Option 2 either as a first choice or as a preferred option for feasibility reasons (and another member indicated support for Option 2 as a second-best alternative). Among those that did not expressly support Option 2 as a recommended solution, three supported Option 4 (another one as a second choice), one Option 3, and another one Option 5.
- DITT subsequent consultation:
  - Split views between Option 1 (keep status quo) and Option 5 (remove RIE in FDI); Option 2 received some substantial support given feasibility difficulties of Options 3 and 4.

### Implementation considerations and next steps
- Testing recommended:
  - Given practical difficulties in implementing Option 2, its feasibility should be tested, especially if options affecting core accounts (Options 3 or 4) are adopted due to larger resource implications and impacts on headline macro indicators.
- Compilation aids and simplifications:
  - Proxies (e.g., publicized Price Earning Ratio (PER) and Dividend yields) could reduce compilation burden and remove the largest misreporting of portfolio income at low cost.
  - Macro-recalculation simplifying assumptions are common for historical data; portfolio income can be adjusted based on PER/dividend ratios; domestic direct investment links merely reallocate savings across sectors using equity shareholdings similarly to CII income (D.443).
- FITT support on share buybacks:
  - FITT expressed support to treat share buybacks as income distribution in the core accounts; preference to prepare a separate/subsequent Guidance Note to examine treatment in detail (Annex 1 illustrates a possible implementation). This view was shared by a majority of DITT members.

### Annex 1 — Share buybacks: rationale and proposed treatment
- Rationale for expensing share buybacks:
  - Share buybacks increasingly used as a substitute or addition to regular dividends and often act to release funds to shareholders; in some cases (notably hi-tech firms) companies carry out heavy buybacks instead of regular dividends.
  - Current statistical manuals treat buybacks as financial transactions (F.5) because sellers’ transactions are clearly financial; however, from the company’s perspective buybacks can be a substitute for dividends and recording them as D.42 would make sense.
  - Treating buybacks as income distribution would better capture income available to shareholders and avoid under-recording income and saving, which can affect GNI and saving rates.
  - Example: share buybacks have exceeded one trillion dollars a year—close to five percent of GDP.
- Practical issues with classifying buybacks:
  - Seller’s transaction is undeniably financial; directly reclassifying the cash receipt of a seller as D.42 could allow manipulative practices (e.g., governments generating revenue by reselling shares to companies).
  - Data may not reliably identify whether a share sale is to the issuing company (buyback) or to other market participants; intermediary-based buybacks further obscure buyer identity.
- Proposed accounting treatment:
  - Impute a dividend (D.42) for the amount and at the time of the buyback in both the company’s account (use/expenditure/debit) and that of all shareholders (resource/revenue/credit).
  - Counterpart of imputed D.42 is F.5, analogous to reinvested earnings (D.43); allocation across shareholders follows the reinvested earnings method.
  - In company accounts: outflow of cash currently coded (-)F.5L becomes D.42.
  - In shareholders’ aggregate: imputed D.42 is recorded across shareholders against (+)F.5A.
  - The seller records (-)F.5.A against cash received (+)F.5A, and also its apportioned D.42/(+)F.5A.
  - The buyback transaction remains classified as financial for the seller, but the amount/time of buyback is used to impute a dividend applying the reinvested earnings method—i.e., the proposal imputes a further D.42 in addition to observed dividends.
  - The new total D.42 should be subject to a superdividend test to distinguish buybacks that distribute current earnings from buybacks that liquidate a large part of the company (the latter should be treated as financial).
- Rejection of dependence on subsequent use:
  - Proposed treatment does not depend on subsequent use of the bought-back shares (e.g., cancellation vs. reissue) because classification should not be based on ulterior motives and such information is generally unavailable; subsequent use should be treated separately if and when information exists.

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_Source: https://www.imf.org/-/media/files/data/statistics/bpm6/fitt/f2-asymmetric-treatment-of-retained-earnings.pdf_