Methodology of Profiling - European Commission

in partnership with

FSO

ESSNet Profiling of large and complex Multinational Enterprise Groups

FRAMEWORK PARTNERSHIP AGREEMENT N 30621.2009-2009.470

Specific Grant Agreement N° 30621.2009.001-2010.456

A project funded by the European Union

Drafted by : Partners in the ESSnet on profiling large and complex Enterprise Groups Version : 3.0 Version Date : 24-01-2014

Methodology of Profiling

Report of the Work package B of the

ESSnet on profiling large and Complex MNEs: Conceptual framework, methodology,

rules and standards.

ESSnet on profiling large and complex MNEs Version 3.0

Date 24 January 2014

WP B Methodology on Profiling report 2014 v3.0_final.docx

© Eurostat 2011 Page i

Version control

Version Date Description Author

1.1.p1 07/02/2012 Starting version ESSnet partners

2.0.p1 31/10/2012 Update with small corrections

Comments of Statfin

New drafts for chapters 11, 14 and 28 by ISTAT

with comments of Statfin and CBS

Additional annex related to the chapter 28 (Statfin)

First draft of chapter 8 by Insee (Pierre Teillet)

Jean Ritzen

2.0.p1 10/07/2013 Action 18 of the Action Table: update to SPEs and

Auxiliary activities

Pierre Teillet

2.0.p1 22/07/2013 Commented on chapter VI Simone Ambroselli

Roland Sturm

2.0.p2 19/11/2013 Revised version including revised chapter VI and

inserted para 15 (new, on quality), 20 and 21

Irene Salemink

3.0 24/01/2014 Final version including revised chapter 8, 11, 20

and 21.

Irene Salemink

Version Date Distribution

1.1.p1 07/11/2012 Circa site ESSnet profiling with a copy to ESSnet partners

For discussion in the Berlin workshop December 2012

2.0.p1 22/07/2013 Members ESSnet Profiling for review and ESSnet partners

2.0.p2 19/11/2013 Members ESSnet Profiling for review

3.0 24/01/2014 Pierre Teillet, Dominique Francoz and ESSnet Profiling final versions to

accompany Executive report




© Eurostat 2011 Page ii

Table of content Preface .................................................................................................................1

I Common operational methodology.....................................................................3

1 Exploring references to existing descriptions in the BR manual;

Making clear the differences and/or the deviations .....................................3

2 The units model described in more detail, with focus on the

international dimension ..............................................................................3

3 Statistical units in the model and other related units (observation,

reporting): importance and use ...................................................................6

4 Exploring the concepts of control and proposals for use in the context

of EGR and Profiling; the concepts to be used: UCI, GGH or other ...........8

5 The concept of autonomy in international context, what does it mean? ..... 11

6 Classifications (activity and institutional): which, why, where and

how, single and/or multiple? ..................................................................... 20

7 The core variables and the roles in the BR/EGR context ........................... 29

8 Classification of changes: which, why and how? Continuity rules. ............ 36

9 Analysis of usefulness of units of the new model for SBS, STS, FATS,

Prodcom and NA ....................................................................................... 44

10 The concept of autonomy related to main information and variables:

meaningfulness and availability of necessary information/data. How

relates global autonomy to geographical autonomy at GEGs? What

are the consequences? ............................................................................... 47

II Consistency and breaks .................................................................................. 47

11 Relationships with used statistical units (ENT/KAU/LKAU) in present

statistics (SBS, STS, FATS, Prodcom, NA) and related to Consistency

ESSnet ...................................................................................................... 47

12 Analysis of potential breaks in time series in changing the used units,

aspects of continuity and consistency; implications of changing ................ 50

III Consolidation aspects .................................................................................... 53

13 Description of basic organisational principles of large GEGs and the

appearances of these ................................................................................. 54

14 How relates consolidated information at the (global) group-level to

required geographical statistics? How to decompose and how to deal

with internal flows of goods and services within global groups,

including the aspect of transportation? ..................................................... 56

IV Modes in profiling ......................................................................................... 58

15 The standard and basic steps in profiling large and complex GEGs .......... 58




© Eurostat 2011 Page iii

16 Quality in profiling: what information should be available at the end

of the profiling process .............................................................................. 60

17 Description of the general principle approach ........................................... 65

18 The difference between top-down and bottom-up profiling and how to

combine these modes? ............................................................................... 65

19 The different intensities of profiling (Intensive, light, manual,

automatic) ................................................................................................. 68

20 The selection of groups to be distinguished (criteria and numbers) ........... 69

21 Priorities and follow up strategies: which group in which intensity

with which frequency? .............................................................................. 77

22 Relationship with updating strategy of the EGR ....................................... 78

V EU-parts of non-EU GEGs .............................................................................. 79

23 Description of the problem ........................................................................ 79

24 The impact of partly profiling on the statistical units model ..................... 80

VI SPEs, Holding Companies (HCs), Head Offices (HOs) and “other special

cases” ........................................................................................................ 81

25 Special Purpose Entities (SPEs) ................................................................ 81

26 SNA principles and requirements of Special Purpose Entities (SPEs) ....... 82

27 Treatment of SPEs in profiling; the global and national perspective ......... 89

28 Auxiliary activities and R&D according to SNA ....................................... 93

29 The treatment of R&D and auxiliary activities, with focus on crossing

border services .......................................................................................... 95

30 Branches and the question of VAT positions ............................................. 95

List of abbreviations ........................................................................................... 97

ANNEX I: BR recommendation manual 2010 chapter 21, the points

21.31to 21.46 ............................................................................................. 99

ANNEX II: Background information related to autonomy .......................... 104

ANNEX III: Variables for reconciliation with SBS statistics, NA use and

their links with accounting standards. ..................................................... 108

ANNEX IV: SPEs - classification tables ........................................................ 112

Decision tree for the identification of SPEs ....................................................... 114

ANNEX V: R&D problem statement examples ............................................ 115

ANNEX VI: Example of VAT position case .................................................. 120

ANNEX VII: Example of profiled GEG and the impact on business

statistics ................................................................................................. 122

ANNEX VIII: International profiling strategy paper for communication

with MNE’s. ............................................................................................ 130




© Eurostat 2011 Page 1

Preface

The ESSnet on profiling large and complex Multinational Enterprise groups

started at the end of 2009. One of the work packages (WPs) is on methodology,

the WPB.

The objectives of the Work Package B are:

To describe the theoretical background on statistical units (enterprise, en-

terprise group, reporting unit, observation unit, analytical unit), the rela-

tionships between units, the core variables (employees, turnover, value

added, economic activity) and their relevance to consistency as well as to

the concepts of control (ultimate controlling institution1 vs. group head),

country of ‘decision making centre’, continuity and other ‘coordinating’

characteristics.

To develop a common operational methodology for profiling that is

based on the theoretical foundation and takes into account practical is-

sues like availability of information in different countries.

To define different approaches to profiling like top-down and bottom-up,

the selection of relevant units (cut-off-criteria).

To delineate the non-financial sector (at this stage, profiling will focus on

the non-financial sector as far as possible).

To describe the treatment of specific cases like joint ventures, financial

vehicles, holdings, auxiliary activities and units, R&D, SPE, families,

funds, foundations, associations, co-operatives etc. and also the treatment

necessary to profile the EU truncated part of non EU MNEs (named now

and for the future GEGs (Global Enterprise Groups)).

The main 2010 result of this work package is the report on statistical units. The

proposals done in this report provides a fundament for the chosen approach in

the start of profiling in 2011. A further methodological foundation had the atten-

tion in 2011, 2012 and 2013. This is described in this final report.

Proposals are not restricted to the analysis of the statistical structure of the Glob-

al Enterprise Groups (GEGs). More precisely, also a description is given how

the proposed units can support an efficient data collection for the main business

statistics domains; this has led to the definition of core variables (including pri-

1 Presently, the naming UCI is under review: when the GGH differs from the main decision cen-

tre of the GEG, it is proposed to limit profiling to the Global Decision Center and its managed

affiliates (and not to treat in profiling the ownership line from the GDC upwards to the GGH).

Thus it is paradoxical to name it UCI -in which C=controlling - and not GDC even if the mean-

ing is the same.





ority variables such as number of employees, turnover, value added and econom-

ic activity) linked through accounting relations. The developed methodology is

being tested with a hundred of GEGs.

The results are a product of good cooperation between the working and review-

ing partners and with Eurostat within the Work Package. The content of the re-

port is shown in the table of contents. Some issues are put in annexes, especially

the references to other manuals and/or some background descriptions.

The approach of profiling and the consequences of it are shown in annex VII.





I Common operational methodology

Aim: To develop a common operational methodology for profiling that is based

on the theoretical foundation and takes into account practical issues like availa-

bility of information in different countries. The different levels of statistical units

should be considered (Global enterprises (GENs) defined as statistical divisions

of the group that can cross the borders, truncated enterprises (TENs) defined at

the country level) as well as the feasibility of the collection of information for

the enterprise, at least for Option D. An assessment will be done, in this ESSnet,

between this proposed type of "enterprise" and the present theoretical or used

enterprise unit.

1 Exploring references to existing descriptions in the BR manual; Making

clear the differences and/or the deviations

1.1. In the context of the ESSnet on profiling the chapters numbered 5, 19, 21

and 22 of the 2010 BR recommendations manual are very relevant. Parts of the

chapter 21 on Enterprise Group are further elaborated in a separate recommenda-

tions manual (September 2010) in which the definition of the UCI (Ultimate

Controlling Institute) is elaborated in more detail. In this last mentioned docu-

ment also other important terms are defined, like Global Group Head (GGH) and

Global Decision Centre (GDC). In the BR manual the glossary provides defini-

tions of frequently used terms. Of these, the terms are only defined again if the

definitions in this report deviate from the definitions in the BR manual.

1.2 The present BR regulation and BR recommendations do not take in account

the most recent developments as achieved from the ESSnet on profiling and the

EGR modelling of GEGs2. After formal adaptation of the proposed statistical

unit’s model the mentioned chapters must be revised and/or adapted. The con-

cept of the Global Enterprise (GEN)3 and of the Truncated Enterprise (TEN)

must be added, with the units’ definitions and their characteristics.

2 The units model described in more detail, with focus on the international

dimension

2.1 In the report on statistical units, prepared in the first year of the ESSnet on

profiling, a statistical units model is presented that can be used for compiling

statistics in which data of GEGs are included in a consistent way. For these units

the delineation of the Global Enterprise (GEN) is essential with its geographical

(national) components, the Truncated Enterprises (TEN).

Because the GENs are the result of the economic and statistical analysis of the

structure of the Enterprise Group, and consequently each Truncated Enterprise is

2 The terms MNE and GEG will be used as a kind of synonyms many times in this report, alt-

hough MNE is mostly used in the real world and GEG is a more proper statistical term. 3 Abbreviations GEN and TEN are in accordance with the used abbreviations in the EGR





viewed purely as the trace of the Global Enterprise in a country in which the

GEN is present, a Global Enterprise cannot have more than one truncated enter-

prise in one country, just like a Global Enterprise Group (GEG) cannot have

more than one truncated enterprise group in one and the same country (on this

topic, see also paragraph 3.5).

Diagram: The model

2.2 The proposed definition of the enterprise group (see report WPB 2010) is the

following:

The enterprise group is a set of legal units under common direct or indirect con-

trol. It mostly appears as a combination of legal units bound together by legal

and/or financial links.

An enterprise group is to be constituted regardless national borders. Here we

speak of a global group. If the group operates in more than one country, this

group is mentioned as a Global Enterprise Group (GEG). The territorial or geo-

graphical (mostly national) parts of the GEG are the Truncated Enterprise

Groups (TEGs). A global group cannot have more than one truncated group in

one defined geographical area, e.g. one country.

A distinction can be made in:

- Multinational Global Enterprise Groups (MNE or GEG) and

- All resident (or full domestic) Enterprise groups

With all resident enterprise groups the global group and the truncated group are

identical. Global profiling is then identical to national profiling.

According the 2008 BR Regulation enterprise groups can be identified through

the links of control between their legal units. In order to delineate enterprise

Economic/statistical

world (global)

Global Enterprise

group

Legal Unit

Legal/administrative

world (global)

Local (legal) unit

Global

Enterprise

Local unit

Economic/statistical

world (sub-global)

Truncated Enterprise

group

Truncated

Enterprise

Local unit

Legal/administrative

world (sub-global)

Legal or operational

unit (sub global)

Local unit

legal or operation-

al

SPE SPE





groups, the definition of control set out in point 2.26 of Annex A to Regulation

(EC) No 2223/96 shall be used4.

“Control over a corporation is defined as the ability to determine general corpo-

rate policy by choosing appropriate directors, if necessary.

A single institutional unit (another corporation, a household or a government

unit) secures control over a corporation by owning more than half the voting

shares or otherwise controlling more than half the shareholders' voting power.

In addition, government secures control over a corporation as a result of special

legislation decree or regulation which empowers the government to determine

corporate policy or to appoint the directors.

In order to control more than half the shareholders' voting power, an institu-

tional unit need not own any of the voting shares itself. A corporation C could be

a subsidiary of another corporation B in which a third corporation A owns a

majority of the voting shares.

Corporation C is said to be subsidiary of corporation B when: either corpora-

tion B controls more than half of the shareholders' voting power in corporation

C or corporation B is a shareholder in C with the right to appoint or remove a

majority of the directors of C.”

The concept of control is further elaborated in the chapter 5.

2.3 The proposed definition of the enterprise (see report WPB 2010) is:

The enterprise can be either:

- A single legal unit (including a natural person) if this LeU is “inde-

pendent” or sufficiently autonomous within the enterprise group, or

- The whole of an enterprise group as a set of legal units under com-

mon control if the group is managed globally and not more autono-

mous segments can be distinguished, or

- An “autonomous” part of an enterprise group, producing goods or

services.

It benefits from a certain degree of autonomy in decision-making, especially for

the allocation of its current resources5. The enterprise will mostly appear as an

organisational unit that can provide meaningful data for statistics.

The enterprise group is the starting point to derive or establish enterprises. The

enterprise group can be split into more enterprises if there are more autonomous

decision centres. In the case of not two or more legal units under common con-

trol, the enterprise is equal to the single legal unit (including a natural person).

The appearance as an organisational unit also indicates having its own manage-

ment.

4 Council Regulation (EC) No 2223/96 of 25 June 1996 on the European system of national and

regional accounts in the Community 5 From this definition it may be clear that an enterprise can be a single legal unit





From this definition, the distinction between the global enterprise and the trun-

cated enterprise is:

The global enterprise may be part of an all-resident enterprise group or be a

single legal unit, if it is not part of a set of legal units under common control.

The truncated enterprise is the national part of the global enterprise. This

belongs to the “truncated enterprise group” of the “global enterprise group”

(GEG).

Within an all-resident enterprise group, the global enterprise and the truncated

enterprise are one and the same unit.

It is very important to stress that the truncated enterprise is not the result of an

independent profiling action or analysis of the truncated enterprise group,

but it is the national part of a global enterprise, that then automatically is a

part of the truncated enterprise group.

In profiling this is the most important change in the derivation the statistical

structure of a GEG. If a Group is all resident or fully domestic, the global enter-

prise and the truncated enterprise are equal.

To get internationally consistent statistics also the belonging characteristics to be

assigned to the global enterprise and to the truncated enterprise are qualifying.

For this see chapters 6 and 7.

3 Statistical units in the model and other related units (observation,

reporting): importance and use

3.1 In the model of the “diagram 1” three types of statistical units are presented,

the Enterprise Group, the Enterprise and the Local Unit. These three units are

apparently the same than those to be registered in the statistical business regis-

ters according the 2008 BR Regulation.

But this new model is introducing the international dimension, what is of grow-

ing interest in the context of increasing globalisation.

Statistics that are internationally consistent need to be based on relevant

(changed from the presently used) concepts. Because many European statistical

concepts are prescribed from regulations, these regulations should be adapted

too. An example is the Structural Business Statistics Regulation. In this domain,

the enterprise statistical unit is the prescribed basic unit for national collection

and statistics compilation. It should be changed into the truncated enterprise.

The change has no conceptual consequences for the registering of the local unit6.

6 Nevertheless, for statisticians using legal units, one local unit refers to one LeU. In the BR

regulation, the local unit is linked to an enterprise => it mostly results then from the merging of

all the local units of the legal units which are included in the same “enterprise”.





3.2 In the definition of the enterprise no links with legal units are mentioned.

The enterprise structure should show the real economic situation to be described

in statistics. The global enterprise structure is the result of an analysis of the real

economic and operational structure of the Enterprise Group.

Most logic starting point in the analysis is the presentation of the group itself in

its components. We can find the basis of this analysis in the way the group has

organised itself in Group Operating Divisions7 (GODs). These are operational

segments displayed in its financial reports. For management reasons, it is ex-

pected that the operational segments will have internal supporting information

systems for all kinds of product and process information. These are to be used in

the analysis of the structure, if these are available for these purposes.

3.3 Next to the statistical units structure of a group we must know the units that

can report for the established statistical units. These units are called “reporting

units”. These units can be inside or outside the group, e.g. an accountant.

3.4 For some kind of information, the requested data cannot be directly collected

for the target statistical unit, but the data may be available from aggregation of

underlying (sub) units, e.g. legal or local units of enterprises. These subunits are

then called “observation units”. The data of the observation units must be aggre-

gated into data of the statistical unit thereafter. For some physical data the col-

lection must be done at the physical local places, nevertheless this is done by the

reporting unit itself or by the statistical institute according to agreements passed

with the group.

3.5 When studying the “feasibility” of profiling, we met what we called the

“classification dilemma”: a Global Enterprise which main activity is manufactur-

ing industry could at first glance have two activities in a non-UCI country: e.g.

one manufacturing and one trading (retail or wholesale); we can classify them

either according to the principal activity of the GEN they belong to or according

to their own.

If we would interpret the two activities as two different TENs, this might lead to

a contradiction to the principle included in § 2.1 according to which there is only

one TEN per GEN and country. We propose to solve this double dilemma (de-

lineation and classification of units) by sticking to the 2.1 choice and either to

refer to the detailed data found in surveys (e.g. on products) to get the required

information or to allow creating two KAUs (kind of activity units) in the con-

cerned country8. As in the 3.4 case, the statistical results can be obtained directly

7 The operating divisions can in practice be named “segments”, product lines, production fields

etc. by the GEGs 8 The list of statistical units that are going to appear in the future FRIBS regulation is still under

review; KAU is a discussed item of the list. Contrary to the abolition of KAUs that what was

foreseen in 2012 , the present “state of the art” tends to enlarge the use of KAUs to trade, con-

struction and services and thus to make it an universal unit. This new position makes it possible





from the TEN reporting unit, or re-built by the statistical institute from other

“reports”. This issue will be elaborated further in the paragraph 6.1

3.6 In profiling we should keep in mind a very important basic principle related

to units classification. First of all the statistical unit must be established or con-

stituted according to the criteria mentioned in the definition. After establishing

the statistical units, these are to be classified according to the appropriate classi-

fication systems like size-class and NACE.

3.7 The most important criterion in the definition of the GEN is that of the au-

tonomy in decision making, especially for the allocation of its current resources.

Activity homogeneity is not mentioned as a criterion as this is also not in the

definition of the Enterprise in the 1993 Statistical Units Regulation. Neverthe-

less, it can be mentioned that operational divisions within Enterprise Groups

may appear strongly correlated with activity homogeneity in many cases, but not

in all.

So: first the unit and after that the classification of the unit!

3.8 The relationships with the other statistical units defined in the 1993 Statisti-

cal Units Regulation will be dealt with in the beneath paragraph 11.

4 Exploring the concepts of control and proposals for use in the context of

EGR and Profiling; the concepts to be used: UCI, GGH or other

4.1 In the BR recommendation manual 2010 a separate chapter 21 deals with

enterprise groups. The content of this chapter is very useful and can stay un-

changed for the description of the concepts of control. All these are based on the

general definition of control as mentioned in the paragraph 2.2 before. A part of

the chapter 21 is attached in the ANNEX I of this report, the points 21.31 to

21.46, and most parts will not be repeated here.

4.2 In the section 21.45 of the BR manual chapter 21 is mentioned that “the

statistical concept of the enterprise group is different from the accounting

concept, as can be derived from the Seventh Council Directive (see the Annex).

In fact, as it is stated in explanatory note 3 of section III C of the Annex to the

SU Regulation “this definition (of accounting groups …) is not suitable for

statistical analysis because they do not constitute mutually exclusive, additive

groups of enterprises. A statistical unit known as ‘enterprise group’ based on the

‘accounting group’ concept must be defined by applying the following four

amendments:

to complete, if wished or requested, the national use of TENs by more detailed and homogeneous

information through KAUs





- Consider accounting group at the highest consolidation level (group

head or group decision centre);

- Include in enterprise group units whose accounts are entirely integrated

in those of the consolidating company9;

- Add majority-controlled units whose accounts are not included in the

overall consolidating by virtue of application of one of the criteria

allowed by the Seventh Directive, i.e. difference in the type of activity or

small relative size;

- Discount temporary links of less than a year.”

4.3 These four amendments are very important and are confirmed with all IN-

SEE 2011 tests with 3 remarks to be added:

- The highest displayed (displayable) consolidation level is not always the

Global Group head (GGH): this is the case for many “family groups” in

which the “family holding” does not reveal any data; this is also the case

for state-owned groups, the National State defining several Groups and

not consolidating them all; in this type of cases we take the highest dis-

played level of consolidation as the basis of the delineation of the GEG

we intend to profile.

- In the present uses of the Directive, “proportional integration” does exist,

according to which a Joint Venture is split 50%/50% between 2 GEGs; it

is then very difficult to understand which of the 2 GEGs, if any, has the

real control; and it is very difficult to obtain separate information for the

JV; but this exception should disappear in 2013, so that we will not try to

find a long-term solution for all the related cases.

- A concrete criterion for “small size” has still to be defined

4.4 In the paragraph 2.46 of the BR manual operational rules are described for

identifying control links:

“Control is a complex concept in economic terms. Statistical operational rules

need to rely on observable criteria: Proof of control. Therefore it is sufficient

that at least one of the following applies, in order to identify a link of direct or

indirect control between two legal units:

1) A legal unit directly owns more than 50 % of the voting rights of another

legal unit (direct control);

9 in accounting standards this concept:

- Refers to full consolidation = FC;

- But until 2013, the GEGs sometimes also include proportionate consolidation = PC in

their main accounts and it is very difficult for statisticians to exclude it.

Proportionate consolidation appears for including the GEG share of its joint-ventures

without explicit consideration of what is done by the partner of the remaining share. As

the concerned IFRS standard has been changed the PC should disappear from 2014, but

we are not yet completely sure of what the GEGs are going to do.

Up to us the “equity method” used for Legal units in which the GEG has an “interest” (the

reference is from 20% to 49% share of ownership) is not consolidation.





2) A legal unit indirectly owns more than 50 % of the voting rights of another

legal unit, through subsidiaries (indirect control);

3) Existence of special legislation decree or regulation, which empowers the

government to determine corporate policy or to appoint the directors of the

legal unit;

4) A legal unit fully consolidates the accounts of another legal unit, according

to the criteria of the Seventh Directive, and no other legal unit consolidates

the same legal unit (control by virtue of full consolidation);

5) Administrative sources, collecting declarations in application of specific

laws for market regulation, provide the information that a legal unit

controls one or a set of legal units, even though it owns less or 50 % of its

voting rights (effective minority control) and no other legal unit own more10

.

Note: It may be possible that two rules, e.g. both cases 1 and 4, could apply

simultaneously. As one unit cannot be controlled by two different units, the de

facto controlling unit should then be chosen. Case 4 can in general be

considered as weaker than 1, because there can be consolidation situations with

less than 50% ownership and situations with over 50% ownership without

consolidation.”

End of quotation out of the BR recommendations manual.

In global profiling, the concept of control is not restricted to national borders,

but is globally border crossing. This solves the problem of identifying

relationships of separate domestic sub holdings or subsidiaries which are linked

together by a common foreign control and so belong to one and the same global

and truncated enterprise group.

4.5 More and different appearances of GEGs can be distinguished. In the chapter

13 most frequent appearances are described. The way a GEG is organised,

appears and presents itself can influence the resulting way of approaching in

profiling. It can be concluded that in specific cases it can be advised that

consolidation and/or control is to be related to autonomous subgroups, e.g. for

only financially related groups.

10 Includes also the control resulting from a shareholders agreement (as well given by the majori-

ty to a minority owner, as joint control by several minority owners).





5 The concept of autonomy in international context, what does it mean?

5. A. Introduction

5.1 Autonomy is a crucial criterion in the delineation of the enterprise statistical

unit. This criterion must be elaborated further therefore. Autonomy can be ap-

plied at several levels, e.g. at the Enterprise Group level and at the Enterprise

level.

5.2 From a semantic point of view autonomy (from αυτο – auto, "self" + νόμος -

nomos, "law") means "one who gives oneself its own law11

“.

Autonomy is not a synonym of the word “independence”, its broadness is re-

stricted within the constraints defined by the owner and/or the controller. It more

relates to the use of a “broad mandate” regarding defined aspects. The best trans-

lation of the term autonomy is in the context it will be used here is: the power of

self-government.

Kant develops in his philosophical theories12

the concept of autonomy in terms

of relations of a person and his freedom: a person is free when bound only by

her own will and not by the will of another; her actions then express her own

will and not the will of someone or something else.

5.3 In a similar fashion, we may think of a person (physical or juridical), en-

gaged in economic activities, as autonomous when it may take decisions (eco-

nomic - productive – financial – organisational) in its own will and free from

external influences. A general definition of autonomy could be the following:

DEFINITION 1 - A person (physical or juridical) is defined as autonomous

when he (or it) has the control of the use (it may not be the owner from a legal

point of view) of the whole productive means, of the whole productive process,

of the whole productive outputs of the economic activities in which it is en-

gaged.

5.4 This concept of autonomy is too general to be applied to the complex reality

of the economic operators. It is necessary to face with a range of issues:

1. The boundary of the “autonomous person” especially in the global mar-

ket.

2. The area (domain) in which the autonomy is applied (financial area, eco-

nomic area, organisational area).

3. The interactions between the legal constrains and the economic deci-

sions.

4. The time period in which decisions are valid (short, medium, long).

11 Wikipedia

12 Stanford Encyclopaedia of Philosophy: Kant Moral Philosophy, 2004





5.5 More complex aspects have to be taken in consideration when we need to

apply the concept of autonomy to the statistical data collection:

1. Concepts of observational/non-observational unit (identification issue),

2. The coherence of data acquired in different contexts – e.g. short term,

structural and national account statistics (statistical coordination issue),

3. Temporal unit continuity and temporal data consistency (stability issues),

4. The data coherence between different territorial boundaries, e.g. regional

(international), national, EU 13

(geographical or spatial issue).

5.6 Last but not least, in the scope of the European Statistical System, the devel-

opment of practical and consistent criteria (and not only theoretical definition) to

identify the autonomy of a global economic actor has to face with the present

Statistical European Regulations, and especially those that were recently ap-

proved, like the new System of National Account and the NACE rev.2. and to

compare and confront them with the practical use of “operating segments”

(GODs) as basis for delineating the “enterprises” (see also the chapter 6).

5.7 This chapter, after considering some short elements on the present European

Statistical Regulation (see ANNEX II) and presenting some reflections on the

concept of autonomy in the global economy (paragraph 5.B), focuses the atten-

tion on the operational criteria to identify autonomy in case of complex multina-

tional (and national) units (paragraph 5.C). Further aspects dealing with the

global/national points of view (paragraph 5.D) and the set of minimum infor-

mation needed to guarantee “meaningfully statistical data” are proposed.

5. B. The concept of autonomy in the globalisation world

5.8 In the modern economic world the enterprises have increasingly chosen to

organize and conduct their business operations in the form of a cluster of vari-

ous separate corporations (legal units), rather than as a single corporate entity

(legal unit)14

. The largest enterprises typically evolve as a complex, large-scale

business network, where the different parts of the business are allocated to a

group of affiliated corporations (subsidiary corporations); global co-ordination is

obtained through the submission of such “legally independent” parts to a com-

mon economic strategy. The management of the whole is exercised by a central

decision centre (headquarters).

“The globalisation describes a process by which regional economies, societies

and cultures have become integrated through a global network of communica-

13 In the published Annual report or Reference Document MNEs refer also to “regions” as over-

national zones such as Latin America or EMEA (Europe Middle-East Africa). It is the same

when reports on globalisation are concerned. 14

On this topic see also chapter 13 on basic organisational principles and appearances of large

Multinational Enterprise Groups





tion, transportation and trade of goods and services” (ESSnet on International

profiling, WPA report 2010).

5.9 The main element characterising the global economy is the “speed”. Not

only in transfer and allocation of financial resources but also as regards the phys-

ical ones. The transfer of capital, labour and technology takes place with increas-

ing speed. Consider, for instance, as the transfer of entire production plants take

place relatively quickly (in less than a year) unthinkable only at the end of the

last 20th

century. Also the very rapid developments of the Information and

Communication Technology heavily contributed to this and created many neces-

sary conditions.

The decisional processes have necessarily to be accelerated. For this reason the

new organisational systems of the complex and global enterprise are the so

called “short chain organisation”, that permits to the top management to collect

all needed information in short time to take its decisions.

In this situation the control of Parent Corporation over the subsidiaries is not

limited on the “financial or strategic” aspects but focuses more on decisions of

resources allocations, markets where to produce and sell goods, price strategies,

communication and advertising strategies.

5.10 In the global economy the short/medium/long time and strategic/current

decision lose their meaning: by definition the speed reduces the time.

In this way there may be an increasing reduction of autonomy (and responsibil-

ity) of the subsidiary corporations in favour of the headquarters or of higher but

intermediate hierarchical levels of the group where the decisions (at

short/medium/long time) are being taken.

In case of multinational enterprise group (or national enterprise group) the head-

quarters of the EG are the only decision centre that may take all types of deci-

sions – strategic and current - in own will and free from external influences,

because it has the control of the whole productive means, of the whole produc-

tive process, of the whole productive outputs and of the whole financial process-

es of the economic activities in which it is engaged.

5.11 This cluster vision (instead of the atomistic one) of the economic actors it is

not only a “common sense” in a theoretical and economical point of view, but

above all, it is a reality that must be governed by laws and regulations.

In fact, several European countries in their legislation recognize the validity of

the so called “domain contract” or “hierarchical coordination contract”. With

these contracts the parent company buys the right to issue directives to the sub-

sidiary company also detrimental to the latter and, in some case (or in some na-

tional laws) without any need for a compensatory advantage.

“These typologies of contract create an alienation of the corporate government

characterized by the fact that:





a) A company acquires the right to give directives to the directors of anoth-

er (subsidiary) company even if detrimental (and in contrast with the so-

cial interest of the subsidiary), provided that the interests of the dominant

society or of another company of the group are honoured;

b) Members of the governing body of the company (subsidiary) are obliged

to execute these directives, going free from liability for damages that

may result from their implementation.”15

Here we also see the appearance of legal constructions to avoid or minimise

risks and to minimise other “disadvantages” like tax paying. These constructions

are mainly beyond pure real economic reasons.

5.12 Another important area of intervention in national legislation (and in the

European Union) is the correct pricing identification in the transfer of production

means (goods, services, labour and financial capital) between companies in the

same group. Through the “transfer price” mechanism the prices of intra-group

transactions are determined on the basis of evaluation parameters anchored to

the general needs of the multinational group from a management, organizational

and tax viewpoint, instead of under market conditions. Many governments have

adopted transfer pricing rules that apply in determining or adjusting income

taxes of multinational taxpayers. OECD has adopted guidelines followed, even if

in part, by many of its members. Rules are provided to permit the tax authorities

to adjust those prices where the prices charged are outside an arm’s length range.

The law recognizes and governs the fact that the global economic actors central-

ise their decisions and operate transfer of production means between their sub-

sidiary units without pure economic evaluation.

5.13 Considering the accounting point of view, the IFRS10 has the objective to

establish principles for the presentation and preparation of consolidated financial

statements when an entity controls one or more other entities. The definition of

consolidated financial statements is: the financial statements of a group in

which the assets, liabilities, equity, income, expenses and cash flows of the par-

ent and its subsidiaries are presented as those of a single economic entity

“The Standard:

Requires a parent entity (an entity that controls one or more other entities) to

present consolidated financial statements

Defines the principle of control, and establishes control as the basis for con-

solidation

Sets out how to apply the principle of control to identify whether an investor

controls an investee and therefore must consolidate the investee

15 U. Tombari - Autonomia privata e gruppi di imprese - http://www.notariato.it/it/primo-

piano/studi-materiali/

http://www.notariato.it/it/primo-piano/studi-materiali/

http://www.notariato.it/it/primo-piano/studi-materiali/





Sets out the accounting requirements for the preparation of consolidated fi-

nancial statements.” [IFRS10:1]

5.14 The main concept to realize the consolidated financial statements is the

Control of an investee: “an investor controls an investee when the investor is

exposed, or has rights, to variable returns from its involvement with the investee

and has the ability to affect those returns through its power over the investee”.

[IFRS10:5-6; IFRS10:8]

Where power means: the existing rights that give to the investor the current abil-

ity to direct the relevant activities of an investee. Power arises from rights. Such

rights can be straightforward (e.g. through voting rights) or be complex (e.g.

embedded in contractual arrangements).

“A parent must not only have power over an investee and exposure or rights to

variable returns from its involvement with the investee, a parent must also have

the ability to use its power over the investee to affect its returns from its in-

volvement with the investee.” [IFRS 10:17].

The definitions of “control” and “power” proposed by the International account-

ing principles show as the subsidiaries (identified as investees) are considered

just a way for the investor (the global group headquarter) to affect its returns

having the total control of the activities of the group.

5. C. Operational criteria and rules to identify autonomy

5.15 Issues in identification of the statistical “autonomous” units. The ESSnet on

profiling (WPB Report on statistical units, 2010) has proposed the following

definition of the Enterprise Group:

The enterprise group is a set of legal units under common direct or indirect con-

trol. It mostly appears as a combination of legal units bound together by legal

and/or financial links.

And the following definition of the enterprise:

“The enterprise is a single legal unit (including a natural person), an enterprise

group as a set of legal units under common control, or a part of an enterprise

group, producing goods or services. It benefits from a certain degree of autono-

my in decision-making, especially for the allocation of its current resources. The

enterprise will mostly appear as an organisational unit that can provide mean-

ingful data for statistics.”

Two levels of autonomy can be distinguished, one for the Group and one for the

Enterprise. The group has full autonomy at the highest level and exercises this

mainly and at least for strategic and long term decisions. The group head only

needs to give account and to report for its decisions to the owners or to the board

of shareholders of the group and in direct contact. A second and lower level of

autonomy is that related to the allocation of current resources in the production





processes. This is to be understood from a more operational view. If the Enter-

prise is a part of the Group the Enterprise management has to give account and

to report to Group management

In terms of statistics: for statistics related to large and strategic, mostly financial,

decisions, the Enterprise Group is the most eligible statistical unit and for statis-

tics related to current production the Enterprise is the most eligible one.

In some countries both kinds of statistics are part of the statistical programs and

statistical units are distinguished and applied in this way. The distinction does

not appear in the statistical program and regulations of the EU (Eurostat) till

now. The European system is based on the enterprise related statistics.

5.16 The main criteria to identify autonomy. On the levels in a (large and com-

plex) organisation where the important decisions are taken, the following kinds

of decisions are assumed to be relevant and could be considered to be criteria in

checking.

For the Enterprise Group:

- Mergers and de-concentrations, i.e. the authority to buy (stocks of) other

Legal Units (being or not autonomous enterprises) or sell parts of the

Group itself;

- Income assessment, i.e. decisions on keeping reserve funds, large unex-

pected depreciations, etc.;

- Income distribution, i.e. the allocation of the generated income, e.g. from

production, to shareholders, investments or reservations;

- Financing of new projects or termination of on-going ones.

For the Enterprise:

- Fixed capital investments within certain limits for the running produc-

tion;

- Recruitment or dismissal of personnel;

- Raises in salaries and other remunerations;

- Choice of the assortment of products;

- Size of the production;

- Provisions for doubtful debtors;

- Pricing of the output/products;

- Choice of the suppliers.

The Enterprise Group is market oriented by definition. For the Enterprise market

orientation is also a requirement (with some exceptions when quasi-enterprises

within a Group must be distinguished)

5.17 It is, of course, to be realised that none of the mentioned criteria are abso-

lute. A production manager may be allowed to decide to invest in new machin-

ery but he will not be permitted to build a whole new complex. Actual sales

prices will, taking into account the market, be set by the sales department of the





production unit, but the price policies may be made by the overall management

of the production unit as a “strategic” issue. The board of directors of the Group

probably has the authority to withhold large amounts of reserves but the share-

holders may not like it, if they are not paid any dividends at all. So everything

has to be seen in its perspective, which it is exactly what makes it so difficult to

establish straightforward rules. Autonomy and the level of it mostly seem from

management contract between the Enterprise management and the Group man-

agement. On the one hand we have mandated responsibilities, on the other duties

to give account and to report on results and performances.

5.18 In order to be able to operate as an autonomous unit it is necessary to have

available information systems to control and to report. From these systems

meaningful real economic figures can be provided, also for statistics. If infor-

mation systems, maybe only for internal use, are lacking, then the existence of

an autonomous unit is very doubtful. A first hold in the analysis of a large En-

terprise Group into Enterprises is the existence of Group Operating Divisions

(GODs). These can nearly almost be considered to be autonomous. But, depend-

ent of the statistical needs, it can be necessary to explore the capability of GODs

to be “Enterprises” or reversely Enterprises can be defined at a lower level with-

in the GODs, keeping the basic principles for criteria to be autonomous. A good

conclusion is only possible after consulting the Enterprise Groups and agreeing

with it, but with the requirements from statistics in mind.

5.19 The analysis of multinational enterprise groups should start regardless the

territorial boundaries. If territorial boundaries belong to the organisational crite-

ria of the Enterprise Group, they still have to be analysed to check if they fit with

requirements from statistics. It is often easier to judge that a potential unit is not

an enterprise because it does not fulfil some basic requirements (negative ap-

proach) than to follow a positive approach to confirm it as adequate.

5.20 The BR recommendation manual (chapter 19) suggests three different op-

erational criteria can be applied to identify an enterprise as autonomous actor in

the economic world:

1. An enterprise has accounts at its disposal

2. The operations of an enterprise are managed in an integrated manner

3. The enterprise is market-oriented.

In some way these criterions summarise the more detailed previous treatment

related to the aspect of autonomy. Also here the distinguished criteria must be

considered in their combination and not solely.

See further the BR recommendation manual 201016

.

16 Business Register recommendation manual, § 19.32.





5.21 Identification rules. The following operational rules meet mainly the need

to identify autonomous statistical units. The aim is to produce statistical

information consistent at EU level, and as close as possible to the economic

reality.

Identification rule 1 - A single legal unit not controlled by any other legal units

is an autonomous enterprise.

Identification rule 2 - An enterprise group (Multinational or National) is auton-

omous in itself; it will be equal to an Enterprise if there are no reasons to split it

into more autonomous parts.

Some groups have a complex structure: under a “financial holding” they can

present more sub-groups that operate in different and distinct economical

domains. These sub-groups often have sub-consolidated accounts and are listed

on a regulated market:

Identification rule 3 - In case of a conglomerate group17

each sub-group, if and

only if it produces sub-consolidated accounts, has at least to be treated as an

independent Enterprise and the intra-flow transactions between the sub-groups

are not taken in consideration

Some (Multinational or National) enterprise groups (or sub-groups) may decide

to organise their activities in different “Group Operating Segments” (“GODs”)

or “business lines”.

Identification rule 4 - If the GODs are observable (their existence are proved in

the reporting system of the Group), they are the starting point to identify and

delineate the “autonomous enterprises”.

Considering the market oriented criterion:

Identification rule 5 - If one GOD inside a Group (or sub-group) represents a

way on which the “group” itself performs a specific productive activity (it means

that it contains all legal entities and their parts serving to this scope), it will be

considered as a separate (autonomous) global enterprise. .

Identification rule 6 - If inside a GOD there are more (market oriented)

autonomous parts for which meaningful statistical data can be provided, these

have to be considered as autonomous units and should be proposed to be global

enterprises.

Identification rule 7 - If one GOD perform support activities (as ancillary unit:

administration, IT, wholesale, transport… or as artificial subsidiary corporation:

17 A conglomerate groups exists if the enterprise group is engaged in different activities that have

no links except of shareholding with each other: no product, no process, no sales force, no brands

etc. in common.





own land, building, equipment or being nominal employer) for other GODs and

the main part (more than 50%) of its transactions is with other GODs it has to be

considered as a serving GOD. In this case it is not considered an autonomous

enterprise. The outputs of the serving GOD have to be considered as

intermediate consumption for the other GODs and its accounting data have to be

consolidated with the data of the autonomous enterprise (global or truncated) it

serves, in principle. However, there can be exceptions, e.g. for R&D and for

holding activities which are provided at market prices. Here it can be considered

to define quasi enterprises, which are dealt with in statistics as enterprises, see

rule 8.

Taking in consideration the NACE18

manual, the following rule is valid:

Identification rule 8 - The R&D activities, if separated business line inside the

EG, have to be considered “autonomous” GEN and from there TEN.

Where possible the SNA19

and NACE20

manuals should be taken in

consideration in the decisions on the establishment of the enterprise statistical

unit

5. D. Autonomy at global and national level

5.22 The market orientation is an important criterion to identify the autonomous

global enterprises. The question is then: In which market and for which market

do we need to define these units?

It is possible to speak in terms of local, regional, national, European, global

market.

In particular, and for purposes of international enterprises delineation, autonomy

at global and national level could not be considered in the same manner. The

boundaries of the European country have to be taken into account and to be

related to the concept of “residence” in the National Accounts.

An example can help:

A, B and C are three legal units controlled by the same GEG. A and B are

manufacturing units; C is a wholesale unit. They are part of the same GOD. The

combination of A, B and C has to be considered as one Global Enterprise.

A is resident in country X, B and C are resident in country Y.

If there are intra-flow transactions between B and C, C can be considered as

ancillary unit and the Truncated Enterprise is the sum of B and C. The NACE

TEN code = NACE GEN code.

If there are transactions between A and C (and not with B) this transactions are

import/export activities and they are evaluated at arm’s length (for tax purposes).

18 Nace introduction guidelines, § 53

19 System of National Accounts – 2008, 5.21-5.28

20 Nace introduction guidelines, § 77





In this case we still have one GEN with one TEN in country X (legal unit A) and

one TEN in country Y (combination of legal units B and C).

5.23 Autonomy at the global level is determining in the delineation of the

Enterprise statistical unit GEN. The truncated national or geographical parts of

this are not necessarily autonomous because these are under the operational

leadership of the GEN management, even if these are under local legal

conditions.

5. E. Autonomy in relation to the provision of meaningful statistical data

5.24 The provision of meaningful economic figures is the purpose of business

economic statistics. The best way to comply with this purpose is to find a fit

with the information that is compiled for management purposes within the GEG

and for the operational management of it. Also information for shareholders

and/or the board of commissioners reflects real information on the operations of

the GEG. Managers of autonomous units will have meaningful and detailed in-

formation available from accounting systems and from other internal infor-

mation systems. The best way to get meaningful data is to connect the need for

statistical information to the available accounting and information systems and

to extract data from these in data collection. At the highest level and for the

Groups Operating Divisions accounting systems are being standardised accord-

ing the IFRS, but more detailed information systems related to more detailed

autonomous units may be available.

6 Classifications (activity and institutional): which, why, where and how,

single and/or multiple?

6.0 As is mentioned in the chapter 3, first of all the statistical units must be con-

stituted and established according to the criteria in the definitions. Once these

units have been established, the units must be classified according to the appro-

priate classifications. The main ones are the NACE and the size-class. In this

chapter the issue of the activity classification (NACE) will be dealt with in more

detail.

6.1 The issue of activity classification

6.1.1 Concerning the GEGs we face the question on how to classify the global

enterprises (GENs) and the national parts (TENs) of global enterprises. As pro-

posed in the feasibility study, we will in practice classify the national parts

(TENs) either according to the principal activity of the GEN they belong to

and/or according to their own activity. This § treats of the justifications to do so,

the procedures we propose and the constraints we need to respect.





6.1.2 To begin the analysis, we need, from a conceptual point of view, to create

the conditions for gathering significant European statistics, to find consistent

solutions for classification:

- In the framework of the presented SU model (see §2.1);

- With reference to the NACE prescription (NACE rev2. Chapter 3.1),

which states that every statistical unit is classified according to the fol-

lowing rule: “One NACE code is assigned to each unit recorded in sta-

tistical business registers, according to its principal economic activity.

The principal activity is the activity which contributes most to the value

added of the unit.”

- By using the method stated in the Business Registers Recommendations

manual 2010 (also called “top-down” in the sense that a descending way

of the NACE is used in the classification procedure from the sections

(capital letters) to the classes (4 digits)).21

6.1.3 In consequence, the activity classification of GENs and TENs needs that

we first interpret their definitions and delineation. Thus, the question of classifi-

cation is strongly related to the question of autonomy:

- As autonomy is compulsory for each GEN, its classification at its own

principal activity is straightforward when delineated, but leaves open the

relation with the criteria that are used to identify the autonomy (see the

previous chapter 5).The criterion of autonomy is the (only) determining

one, but the detail should be the result of analysis and tuning with the

GEG.

- As autonomy is often absent in the case of the TENs, we have to treat

separately the question of their own classification. But we also have to

treat the following question: “how shall we classify TENs of the same

GEN in different countries in order to add them up to European aggre-

gates consistent with the GENs they belong to”? The answer is in the du-

al coding approach, see 6.1.13 and 6.1.14.

6.1.4 According to the SU model that gives no place to homogeneity, GENs can

be homogenous or heterogeneous global units in terms of activity. GENs should

be considered to be real actors in the economy, not questioning the homogeneity,

but only that on the autonomy regarding the current resources, (see the chapter

5)22

.

21 This does not seem to create problems and is explained at the right end of this paragraph 6.1.

22 As many statisticians link the question of homogeneity to the kind of activity units (KAUs),

we can state that the SU model itself does not indicate the relationship of the GEN and the KAU.

Thus, from a theoretical point of view, GENs (and TENs) may consist of different KAUs.

In profiling MNEs, KAUs and LKAUs are until now considered to be used only at national lev-

els. Several KAUs can exist in the same TEN. The 2 issues are let open (not treated) in this re-

port.





6.1.5 The rules concerning the autonomy are, up to now, only related to the abil-

ity to decide at least in production and commercial fields for a specific manage-

ment that has a reporting system: they lead us to a solution with more heteroge-

neous GENs, than previous ways of classification, be they national or not23

. For

example, if we follow the market orientation criterion that the autonomy implies

usually, we cannot consider as a rule that head office activities, R&D activities

and all other ancillary or auxiliary activities are autonomous GENs. It is the

same for vertically integrated activities, even if they are operated in different

countries. Thus, at the same time, those activities need to be included in the

GEN or to be defined as separate quasi GENs.

6.1.6 As TENs are simply truncated parts (“local” units, if we state that a coun-

try is “one” address) of global enterprises, this implies that we can have only one

TEN per GEN and country. There is an analogy for what is currently done when

local units are designed from the (national) enterprises. There can be only one

local unit in the same address.

6.1.7 In practice, the availability of sufficient accounting-type or production-

type data for surveying or gathering administrative files is a leading and substan-

tial aspect of the enterprise definition in profiling GENs. Thus, it is to be sug-

gested utilising the IFRS when delineating GENs of GEGs, because IFRS im-

plies a relationship with the management structure and includes basic infor-

mation on operational divisions or segments. The operational divisions are seen

as a good starting point for delineating GENs, even if in some case we end with

GENs that are parts or sums of them.

6.1.8 In consequence, if we wanted the GENs to be as homogeneous as possible

(close to global KAU), we would have to accept less information per GEN for

considerably more numerous GENs per GEG than when accepting more hetero-

geneous GENs.

6.1.9 Another probable consequence is that, with heterogeneous GENs, the need

to split legal units is less likely than with homogenous global GENs. This con-

clusion is based e.g. on the assumption that many (but not all) GEGs organise

their legal structure as much as possible in coherence with their management

scheme.

6.1.10 As a summary about GENs, and to answer to the statisticians’ question

about homogeneity, our conclusion is that there is no direct way to include more

NACE homogeneity in the GEN definition that the homogeneity potentially exist-

ing in the “real world”.

23 It may occur that within GEG operational segments more detailed autonomous parts can be

distinguished. These should be taken under consideration then to be a GEN within the GOD. It

can automatically lead to a more homogeneous GEN then.





The solution related to the question on homogeneity should be found in the ap-

plication of other and nationally used statistical units which are in accordance

and consistent with the GENs and TENs. The existence of KAUs and LKAUs

among the statistical units creates the opportunity to gather data based on the

wished (more) homogeneous units.

6.1.11 Up to now, the SU model does not give clear lines to determine the prin-

cipal activity of the TENs included in one GEN:

- Of course it is possible that TENs are purely internal to a GEG (e.g.: the

production plant, which production is sold exclusively abroad via foreign

commercial affiliates; other e.g.: a production completely integrated in

the GEG by foreign affiliates etc.) => their own activity will compulsori-

ly be different of this of the GEN they belong to.

- It is also possible that ancillary or auxiliary productions serve mainly af-

filiates of the same GEG s in other countries; we have a turnover, which

is not an internal flow inside the country of its production, but which is at

the global level of the GEG => their own activity will be among auxiliary

or ancillary activities (not displayed at GEN level);

- It is frequent that a TEN involves itself in the (wholesale or retail) distri-

bution of products of other TENs of the same GEG => their activity is

absorbed by the manufacturing activity at GEN level.

6.1.12 So at the end, the key question remains about whether it possible to create

a good system of classification both from theoretical and practical points of view

ensuring sufficient consistency between GENs and TENs; this leads to the fol-

lowing proposal:

- If the GEN is present in only one country, the activity code of the TEN is

equal to that of the GEN by definition.

- In other cases, there is a necessary rule: that the activity code of the GEN

is consistent with that of all the TENs together (general bottom up ap-

proach in activity classifying).

For this purpose we need to define a decision tree; it could be the following:

- Apply the NACE rule directly to the GEN, with predominance in the

analysis given to the marketed activities; 24

- Define all the activities present in the GEN, including the non-marketed

ones (either because they are ancillary or auxiliary, either because their

sales are internal to the group, or because they are vertically integrated

even in the same local unit);

- Apply the NACE rule to each TEN.

24 In the case of GENs (and only in this case) if ancillary/auxiliary activities or integrated activi-

ties have appeared in the process, we suggest that their specific data (on VA for example) will be

reclassified with the activity they are used by or in which they are incorporated.





6.1.13 It is still to be decided which is the best proxy for the VA (Value Added),

as well for GENs activities as for TENs: employment, an additive variable,

would be better than the turn-over which arithmetic is very complex and not well

documented.

- This procedure ensures that the own principal activity of each TEN is, in

economic meaning, consistent with the GEN principal activity25

;

- To ensure the European consistency of the statistics based on the

GEN/TEN principal activity, each NSI should collect both classification:

this of the TEN and this of the GEN it belongs to; and make a double set

of statistics (a national one based on TENs own principal activities; a

European based on GENs). This can be indicated as a dual or double

coding approach. This approach can be extended into multiple coding if

we need statistical calculations for more than 2 geographical areas, e.g.

national, European, global.

6.1.14 Aggregation of national figures according the TENs own principal activi-

ties would not fit with EU figures. The dual coding intends to allow:

- A purely national calculation, in which the main activity is fixed accord-

ing to the national viewpoint (and consequently may be different from

the TEN of a country to the TEN of another in the same GEN: e.g. manu-

facturing in one, wholesale in another, the GEN being classified as man-

ufacturing);

- A calculation according to the global coding of the GEN, in which all

TENs are classified with this only NACE => the EU figure is exactly the

sum of the TENs figures belonging to the same GEN, but only for the

variables which can be summed up. In the case of variables which must

be consolidated like turnover, the meaning of consistency is different.

Consolidation has to be applied according to the geographical area for

which statistics are being compiled.

6.1.15 The "Top down" (related to the different levels of the classification)

method as stated in the Business Registers Recommendations manual 2010: we

suggest to use this approach to classify as well GENs as TENs, at their own

main activity, in addition to the previous procedure determining their “basic”

NACE activities:

"The top-down method follows a hierarchical principle: the classification of a

unit at the lowest level of the classification must be consistent with the classifica-

tion of the unit at the higher levels".

25 If we found that this top-down procedure is too heavy, in particular for the country of the UCI,

we could let each country classify its own TENs; but in this case we would have to build con-

sistent activity tables, relating for example the frequent presence of NACE 2910 Motorcar indus-

try with NACE 4510 Motorcar distribution or selling whether NACE 2410 Iron and steel is con-

sistent with NACE 2550 Stamping





6.1.16 Below are the steps that the hierarchical principle follows:

1. Identify the section which has the relatively highest share of the value

added.

2. Within this section identify the division which has the relatively highest

share of the value added within this section.

3. Within this division identify the group which has the relatively highest

share of the value added within this division.

4. Within this group identify the class which has the relatively highest share

of value added within this group.

The next example illustrates this approach.





Example: a unit carries out the following activities (shares in terms of value added):

Section Division Group Class Description of the class Share

C 25 25.9 25.91 Manufacture of steel drums and similar con-

tainers

10%

28 28.1 28.11 Manufacture of engines and turbines, except

aircraft, vehicle and cycle engines

6%

28.2 28.24 Manufacture of power-driven hand tools 5%

28.9 28.93 Manufacture of machinery for food, beverage

and tobacco processing

23%

28.95 Manufacture of machinery for paper and pa-

perboard production

8%

G 46 46.1 46.14 Agents involved in the sale of machinery, in-

dustrial equipment, ships and aircraft

7%

46.6 46.61 Wholesale of agricultural machinery, equip-

ment and supplies

28%

M 71 71.1 71.12 Engineering activities and related technical

consultancy

13%

Identify the main Section among

Section C - Manufacturing (52%),

Section G - Wholesale and retail trade; repair of motor vehicles

and motorcycles (35%)

Section M - Professional, scientific and technical activities (13%).

Identify the main Division within main Section C:

Division 25 Manufacture of fabricated metal products,

except machinery and equipment 10%

Division 28 Manufacture of machinery and equipment n.e.c. 42%

Identify the main Group within the main Division 28:

Group 28.1 Manufacture of general-purpose machinery 6%

Group 28.2 Manufacture of other general-purpose machinery 5%

Group 28.9 Manufacture of other special-purpose machinery 31%

Identify the main Class within the main Group 28.9:

Class 28.93 Manufacture of machinery for food, beverage and

tobacco processing 23%

Class 28.95 Manufacture of machinery for paper and

paperboard production 8%

Therefore the correct class is 28.93 Manufacture of machinery for food, bever-

age and tobacco processing, although the class with the biggest share of value

added is class: 46.61 Wholesale of agricultural machinery, equipment and sup-

plies".





6.2 The issue of institutional classification

The classification according to the SNA and ESA institutional sectors is mainly

applied for the Enterprise Group unit.

6.2.1 The present context:

The profiling process described previously might be applied to all types of

GEGs, including these which participate to the financial system (“financial in-

termediation” e.g. banks, insurance or financial auxiliaries). But the financial

system is highly regulated, its main activities are submitted to the consent of

regulatory authorities prior to their beginning; they are also permanently super-

vised by authorities able to set management and structure conditions. In conse-

quence the perimeter of the regulated activities is largely in the hands of specific

governmental bodies, be they known as “independent agencies”. This perimeter

does not evidently fit with the Enterprise Group structure: there is the need of a

deep insight in how to define the perimeter of the cluster of control and to delin-

eate the Global Enterprise Group. This insight is not yet sufficiently available.

According to the SNA and to the ESA, the activity classification of the financial

intermediation is combined with their institutional sector classification, different

from the institutional sector of other private businesses. Once more, the way the

institutional sector classification and the GEG analysis fit to each other is to be

elaborated further in the future.

For all these reasons, in the initial stage of profiling, it was decided to concen-

trate on the private non-financial enterprises sector. But this decision leaves

open issues or questions such as what to do with financial parts of non-financial

GEGs (or how to deal with significant non-financial parts of financial GEGs,

where they are important).

In a number of countries (e.g. The Netherlands) the compilation of statistics re-

lated to financial institutions is the task of the Central Banks. The NSIs include

these statistics as these are in their own statistical system, e.g. the National Ac-

counts. On the contrary, over the past few years some NSIs have successfully

profiled on a national basis (UK/ONS26

), or have taken insight (INSEE27

) in, a

number of banks, real estate companies, investment companies and other busi-

nesses classified in the financial sector. More close cooperation between NSIs

and the Central Banks started for the building of the EGR.

26 Including Royal Bank of Scotland, Lloyds TSB, Barclays Bank and Santander-Abbey Nation-

al. 27

Including BNP-Paribas, Société Générale





This chapter will concentrate on concrete questions coming from this context,

with the main aim to gather remarks or experience from NSIs.

6.2.2 Facts from experience:

- Large GEGs of the financial sector have some of the most complex struc-

tures. This results for example for the UK in the necessity to find several

high level correspondents spread over the whole of the country to organize

each profile; and in a specific group structure in France , in which the GGH

is not a holding as usual, but the largest Legal Unit, simultaneously involved

in all its operational activities being thus split in different parts belonging to

the various “enterprises” of the Group (the only exceptions of this general

implication coming from regulatory forbidding).

- The information coming from private providers is not accurate, as they may

treat financial loans as ownership links.

- The respective fields of structural surveys and of administrative (and super-

visory) information do not easily fit to each-other; and if so the skills of the

“industrial” and of the “financial” staff in the NSIs are so different that dia-

logue proves to be difficult

- Nevertheless:

- There are significant “banking” or “insurance” activities in non-financial

groups: for financing purchases or for financial management of the inde-

pendent dealers in motorcar industry, distribution, for short term or revolving

loans in retail networks, for long term financial loans in equipment industries

etc.

- There are also very significant non-financial “enterprises” in GEGs that, as a

whole, are clearly financial: operational leasing of motorcar, trucks and

equipment (computers, machines) often including management, maintenance

and staff and not only financing the purchase, real estate management and

renting as well as development of building projects and building and con-

struction28

- There could be very specific cases such as the “Caisse des Dépôts” in

France, which is legally not financial but submits voluntarily to financial and

banking regulations and which has also the largest French companies in ven-

ture capital (not classified financial by the supervisory regulations), in real

estate (rental of offices and housing), “private public local and long distance

transportation”.

28 In FR the largest operator in these fields is owned and controlled by a banking group.





6.2.3 Proposals:

- The list of GEGs to be profiled at European level in the initial stage will

not include financial groups (eventual exceptions to be decided).

- Financial parts of non-financial GEGs will be treated at minimum. This

includes:

a. The delineation, in agreement with the concerned groups, of the

“financial enterprises” (GENs) and, if possible, their links with the

Legal Units;

b. The discussion with the concerned services of the NSI and of the Na-

tional Bank on the financial cluster;

c. Proposals on how to ensure consistency with NA on the Statistical

units and on how to treat eventual secondary non-financial activities

in financial enterprises.

7 The core variables and the roles in the BR/EGR context

7. A. Introduction

7.1 We must know ourselves as statisticians: what do we want to collect and

what statistical information do we want to compile and publish? We need well

defined statistical methodology in terms of units, definitions and so on, but we

must also speak the language of the business. We must have knowledge of their

accounts, which many times is their source for reporting data for statistics. Core

variables in the accounts do not coincide with the needed core variables in statis-

tics, like the SBS.

So we must be aware of possibilities of translation selected core variables from

business accounts variables into statistical variables.

Necessity and availability of needed core-variables is the subject of this chapter.

A problem that may rise is the splitting of the global data available in the ac-

counts of GEGs into national outcomes. Instead of working bottom up from

national data into global, it could be preferred to do the other way around, from

global into national, and this all in relation to the data collection methods to be

used (bottom up or top down).

7.2 In this section the issue is restricted to the core variables related to the Enter-

prise Group and Enterprise statistical units. The main focus will be on the Enter-

prise statistical unit (Global Enterprise and Truncated Enterprise), but here also

attention will be given to their relationship with the Enterprise Groups unit and

to the belonging core variables. No distinction is made in the present situation of

the EU statistics, because in the present ESS the Enterprise Group is not used in

regulations for statistics, although the Enterprise Group is to be included as a

(statistical) unit listed in the Business Register.





7.3 A distinction should be made between statistics describing the production

processes (GDP related to income generation) and statistics describing the finan-

cial processes (incl. income distribution or distribution of the income generated

in the production processes). The distinction mainly relates to the aspects of au-

tonomy which can differ for the different mentioned processes.

- Statistics on financial processes should be based on statistical units that are

autonomous to the decisions related to the financial processes. These are the

Global Enterprise Groups, with a differentiation to the Truncated Enterprise

Groups.

- The statistics on the production processes should be based on the statistical

units that are autonomous to the decisions related to production processes.

These are the Global Enterprise, with a differentiation to the Truncat-

ed Enterprises.

In this approach, the P&L-accounts (Profit & Loss-accounts) are the main

basis for the statistics on the production processes (mainly SBS), so the vari-

ables for the Global Enterprise must be collected or calculated statistically

from these accounts, with a differentiation to the Truncated Enterprises.

7.4 The Financial Statement (new name for the Balance-Sheet) that traces the

Assets&Liabilities-accounts are the basis for the statistics on the financial pro-

cesses; so the variables for the Global Enterprise Group must be collected or

calculated statistically from these accounts, with a differentiation to the Truncat-

ed Enterprise Groups.

Variables related to “physical” investment, GFCF, or tangible assets are specific:

as mentioned previously they are mostly part of the autonomous decisions of the

“enterprises”; but they belong to the balance-sheet accounts. So that we need at

least to locate them in these accounts and to translate them from the accounting

language to the statistical one.

7.5 If no distinction is made between the different processes, as is not done in

SBS a compromise must be found, but it is still useful to have the difference as a

starting point.

7.6 For each statistical unit we should establish (see 7.14):

- Variables for identification;

- Statistical frame variables for underpinning data collection (e.g. for stratifi-

cation purposes)

- Variables, also important for statistics compilation (e.g. NACE-code, institu-

tional sector code);

- Variables for units’ continuity analysis

- Information on mutual relationships of statistical units within the Enterprise

group.

These types of variables must be stored in the frame (EGR and/or national BRs).

It is to be repeated here that there is a distinction between the core variables





which are essential in profiling and the centralised data collection for statistics

(which is not profilers’ responsibility).

7.7 In addition we have to check the availability, at the GEGs or at the GENs

and/or TENs levels, of the necessary data for statistics compilation (for the spec-

ified stakeholders) related to the adequate statistical unit. Availability can be in

direct data collection or by statistical estimation from available records.

The next steps of investigation could be:

- To check these of the variables that we can find at the GEN or the TEN level

and also these which are not ready-made but could be calculated on request

by the enterprises.

- To discuss which is the better way(s?) to gather them for SBS and NA pur-

poses.

7. B. Contexts: the BR/EGR and the statistical domains:

7.8 As suggested in the title of this §, core variables are implied in the profiling

activities in which they play important roles.

Two kinds of roles have to be considered:

In the 1st role, some of the variables are usually present in registers; either as

o Identification or checking data, permitting

To validate the content of the register and/or

To assess the continuity of its units and/or

To manage the links between the different kind of units (e.g. en-

terprise with legal units or with the enterprise group) or as

o Statistical frame variables, underpinning data collection (e.g. permitting

to split the populations in significant sub-populations - stratification pur-

poses including NACE-codes and institutional sector codes - or as crite-

ria for sampling purposes)

The 2nd

role is specific to the “enterprise” Statistical Unit; this SU is purely sta-

tistical, as it will be created to allow a better economic description of the “busi-

ness world”, which is no more well described when relying on the Legal Units.

7.9 In this context, it is no longer possible to act as usual on a national basis: ask

the reporting units only about the value of such and such variable on the SU they

answer for; in this case, it is necessary to split the approach:

- First to check if, or not, the variables are available;

- And, second, if or not, their value is significant from an economic point of

view.

7.10 Even more difficult, for the 1st time, on an “industrial” basis, the “enter-

prise” SU is being tested for its capabilities from an European (and no longer a

national) point of view: are we able to describe consistently, through the data we

ask them for, GEGs in different countries and their global enterprises; are we





also able to split these GENs in their national parts all over Europe, the TENs,

and to gather consistent data on the TENs ?

The consistency is, of course very difficult to assess, and it is the topic of anoth-

er ESSnet, whose results will have to be made available and later incorporated

into this report29

. See §11 for a short description of the relationship between

used statistical units in present statistics and related to the ESSnet Consistency.

Here, the scope is restricted to the domains of highest priorities, as detected and

proposed in the “feasibility study”.

7. C. The main statistical stakeholders30

of “profiling”

7.11 The prioritized list for the survey statisticians is quite simple:

- The BR as a whole (including the EGR), as it includes an “enterprise regis-

ter”

- The EGR, as profiling is directly in charge of the “enterprise” register for the

“large and complex GEGs”, task including the checking of GEGs clusters,

operating and economic structure, and the determination of their principal ac-

tivities,

- OFATS (Outward Foreign Affiliate Statistics):

o as they are in accordance with their own regulation providing information

of affiliate “enterprises” outside Europe of European-centred GEGs; even if

we know perfectly that the definitions might be more similar than identical, it

would be paradoxical that the FATS statistics remain independent from the

BR and EGR;

o as they are the best candidates to provide basic significant information on

the structure of the medium (and small?) Enterprise Groups for profiling pur-

poses.

- SBS the Structural Business Statistics are, according to their own regulation,

mainly based on “enterprises”; they constitute the domain which will get im-

mediate improvement from the profiling, for use in

o its own production of significant data and also as

o a predominant provider of information for the National Accounts.

- Other domains are also interested in the profiling results, such as FDI (For-

eign Direct Investment) and Balance of Payment statistics; their use is treated

indirectly through their relations with the EGR system.

Even if one does not agree with the previous priorities and rank them differently,

the results on core variables would not change much. If one thinks of omitted

priorities, then the results could change more.

29 Final conclusions of the ESSnet Consistency work package 2 were presented in Vienna 3 and

4 December 2013. As the results of the ESSnet on consistency are available at the same date as

this report, this is a task for the years 2014 and on. 30

Stakeholders can be defined in terms of Institutions or in terms of statistics. It is chosen for

statistics here. National statistical offices (NSIs) and international statistical bodies like Eurostat,

UNECE are of course stakeholders too.





7.12 The place of National Accounts (NA) is predominant, but nevertheless dif-

ficult to assess.

- In reality, all links between NA and statistical units (SU) are indirect:

o NA offer statistics of a 3rd

type (the 1st is statistical, the 2

nd is use of

ADMIN data, the 3rd

is a kind of synthetic statistics).

o We propose SU for the 1st and 2

nd type.

- In the world of concepts, the NA need a set of consistent concepts to make it

possible to build their synthetic evaluations; of course, they tend to define

themselves this set to avoid their coordination burden to be too important.

- Also in profiling large and complex GEGs the greatest consideration should

be given to the manuals of NA; but proposals for changes should be allowed

if and when the present (use of the) NA concepts leads to significant incon-

sistencies.

- The relationship between National Accounts and Statistical Units, in particu-

lar the Enterprise unit, should be assessed more clearly.

7. D. Variables linked to each stakeholder:

7.13 The variables for the most important statistical use are dealt with under this

heading, but not in an exhaustive way. Further elaboration should be done else-

where and is beyond the scope here.

7.14 BR as an “enterprise” register, also including the Enterprise Group:

- Usual identification characteristics, including a name (there is no legal name

for an EG, so this usage name should correspond to the name under which the

EG is known and can be publicly identified and/or can be the result of an

agreement between the EG and the NSI).

- Relations with other SUs

- The link and the composition of (legal) units to be made visible between the

global enterprise and its units on “lower” levels

- Including a dual notion of Enterprises (GENs & TENs)

7.15 EGR according to the role it gives to profiling:

- The same variables apply on the three SUs (GEG, GEN and TEN), previously

listed for BR, as it provides the “enterprise” register for large GEGs;

- For checking GEGs cluster, structure & principal activities:

o Delineation of the EG as combination of legal units under common control

o Enterprise and its links with Legal Units (if possible as these links make it

possible to monitor the change of usual statistics and surveys based on

LeU into the new system based on “enterprises” for those countries which

used the legal unit as the basis for the SBS )

o information on size of the SU (to be précised: turnover, employment)

- Control variables necessary for IT.





7.16 FATS

- The closeness between O-Fats and profiling is stressed by GEGs during the

contacts with them; this implies that =>

o OFATS could be replaced by quantified Profiles, in relevant kind of statis-

tical collection strategies;

o OFATS could provide the structure of profiles for semi-manual light profil-

ing procedures if extended as well to EU and domestic parts as to foreign

parts of the same group (so that OFATS would become a result of profil-

ing for the largest GEGs and a source for EGR update for medium size

GEGs).

- The list of OFATS permanent variables will be soon completed, even if re-

mains under exam in the appropriate committee of Eurostat.

7.17 SBS with 2 strategies:

- Profiling as a provider of a list of SUs for surveying, for using data of

administrative files (ADMIN if possible), or matching both kinds of data;

with what kind of quality control?

- Profiling in charge of mixed role (register and part of collection): with

what kind of cost control?

- Need to check the SBS list (the “regular” and the “specific” by industry)

Among the other stakeholders, the case of National Accounts needs a complete

study, which is made in the paragraph 7.F. Thinking about consistency between

truncated and global level, the attention should be paid to the global perspective!

7. E. The position and needs of the GEG

7.18 The relations with the GEG, in the delineation of enterprises it comprises,

have to be direct and confident.

Nearly every time the organisation is complex, the GEG representatives ask

about what kind of variables we would like to gather on the “enterprise”: their

answer on the possibilities to do so might change, according to the type of varia-

bles we need.

So, it is to find a common European answer to this question, because this would

lead to the least burden at GEGs from common European needs.

7.19 What could be the approach to this topic?

- If we suppose that in the present situation, many countries rely on “tax office”

data, related to some kind of accounting data or system;

- If the providing of (or enabling the SBS to provide ...) basic information to

build the National Accounts (which are balanced in the accounting way) is

supposed to be the first priority;

- If we suppose that the SBS statistics (on turn-over, employment, etc.) should

rely to the same SUs as the SUs surveyed for NA purposes,





- Priority is given to “accounting type” core variables and rely them first with

the SBS core variables.

7.20 The Variables for reconciliation with SBS statistics, NA use and their links

with accounting standards presented here are limited to the components of the

Value Added They are elaborated more completely and in more details in the

ANNEX III.

The needs of NA are usually presented along of 3 different lines:

- The components of value added as a source for sectorial accounts (as well by

Institutional Sectors as by industry);

- The basic data for evaluation of fixed capital (elements coming from the bal-

ance-sheets or the so-called “financial statement”)

- Bases for wealth estimates (coming from the rest of the balance-sheets); these

data could also be useful for checking the fixed capital elements as part of the

balanced items of a global account.

Here only the first line is developed.

7.21 The IFRS accounting standard (International Financial Reporting Standard)

provides a template of Profit & Losses (P&L) accounts, also for operational

segments of a GEG. This is a tentative version of a very simplified data set that

try to include enough variables to produce the main aggregates of sectoral ac-

counts for NA flows; it includes nearly all variables that appear in SBS require-

ments (missing at this moment change in merchandise inventories) plus as few

variables as necessary to have complete accounts.

These accounts and the data of these seem very difficult to obtain when the En-

terprise statistical unit has insufficient autonomy regarding its production pro-

cesses from a financial (production process related) point of view, but, in this

case, the existence of a specific “enterprise” including holdings, managing activ-

ities (and other residual ( mainly auxiliary)activities of the GEG) is very proba-

ble; this residual “enterprise” would also include most of the “production’ ori-

ented financial-type variables.

7.22 Very important: it works from a by-activity version of the P&L ( in which

purchases, wages and salaries, depreciation of fixed capital, etc. are displayed

explicitly) and not from the frequently displayed version, which is by- function

(in which the main variables are “cost of sales, distribution costs, administrative

costs, etc.”). So that the existence (and GEG the agreement to display) of this

by-nature version of the accounts is crucial.

The beneath table with variables reflect the Enterprise and Truncated Enterprise

statistical units, resulting in the operational (truncated) results (remark: in some

cases the information of this table is less detailed that requested by the present

SBS questionnaire e.g. on splitting between sales of own production, sales of

merchandise etc.; the same for inventories):





P & L by nature

(not by function)

(consolidated for the GEN or the

TE)

Content of the boxes

1st evaluation of VA

( by the production

side )

=

“Production” = Proxy of the “Revenue” variable?

+ pure T-O

+ other activity products

+- produced inventories

T-O (sales to 3rd parties) net of granted

discounts & rebates (IAS18) if possible split between sales of merchandise and

other sales.

Newly produced inventories and fixed assets (incl. grants on fixed assets)

+- Other products and expenses Patent, franchise & brand royalties etc.;

more useful if split between products and

charges.

- Used purchases

- Other external expenses

Purchases of goods (raw material, equip-ment’s and parts etc.), services and mer-

chandises, net of in inventories of

received discounts and rebates +ancillary costs on purchases (CIF etc.)

2nd

evaluation of VA

( by the compo-

nents) =

+ Employees wages and salaries Including bonuses and share of results

+ Taxes on products and indirect taxes

+Depreciations Physical and value change

= Current operating re-

sult (optional)

Close to net operating result of the NA

+- Other current products and charge Other current non-recurring products &

charges (e.g. sellings of assets, depreciations

of goodwill)

Operational result

What is very important here, is that the translation process has begun: the

variables in the centre column give proxies to the wished NA-required variables,

the left column giving the clue for the calculation of the VA as well by the

production side (something close to production less intermediate consumption)

as by its components (wages and salaries including social contributions paid on

salaries plus “indirect taxes” plus current operating surplus)

8 Classification of changes: which, why and how? Continuity rules.

8. A. Background and context

8.1 The BR recommendation Manual lists all the types of “changes” that can

affect the statistical units it comprises. We do not propose to list all types, but

only to concentrate here on the changes that affect “Enterprises” and “Global

Enterprises Groups”.





8. B. Classification of changes

8.2 The basic general cases of change in GEGs and GENs are described in the

following §’s.

The first case arrives when previously independent legal units come to fall under

a common control creating a GEG, with only one management and thus a sole

enterprise (§ 8.3). We have then to look not only to the enterprise but also the

newly created enterprise group.

The second case (§ 8.4) is similar except that 2 or more GENs are created.

The third type concerns the cases when a sole GEG is being restructured (§ 8.5).

The fourth type concerns the cases when two (or more) GEGs are being restruc-

tured (§8.6).

We assume without being sure at this stage of having analysed all cases that a

combination of simple and/or elementary cases is sufficient to describe the

whole real cases that might happen. The full description of these cases will be

done from 2014 on in the successor ESSnet of the VIP programme.

Having observed what were the GENs/TENs before and after the restructuring is

not sufficient, in particular for measuring the business demography: the com-

plementary question we have not treated is whether the previous units have all to

be ceased and if the following units are all new born? Looking at this question

from the other side , the question would be raised as whether some units are “the

same” as previously, or in other terms whether the change to one unit has been

sufficiently small that it allows to consider it (in relevant cases) as non-

significant; in these cases there is a “continuous unit”.

The § 8.8 to §8.11 explain the proposed principles and show on selected theoret-

ical examples what we mean by continuity.

It must be specified that as all business demographer or classificators, we as-

sume that the best variable for measuring the size of any change would be the

VA. As all others, we have to assume that is it not possible to measure it easily

in the elapse time we have to decide on continuity. As all others we will thus use

a proxy variable. But because we are concerned by restructuring and because in

this context turnover is not additive or easily measurable in case of splitting, the

proxy we will use is employment.

In the time we had it has not been possible to make our proposal sufficiently

consistent with the methods of business demography; thus this is a topic for fur-

ther attention.





8.3 Pure birth of a GEG:

A GEG is created from “single” legal units31

that were previously independent

and thus individually treated as enterprises; this implies simultaneously:

- The "death" of each of the previous GEN/TEN enterprises consisting in

one single legal unit;

- The creation at this date of a new GEG, which perimeter includes all the

previous legal units;

- The creation of a GEN which perimeter is the same as the GEG perime-

ter;

- The eventual creation of TENs in each country where the legal units op-

erate.

There is no suppression of GEGs, because we do not stipulate that a single inde-

pendent legal unit is a GEG (contrary to what we do about GENs / TENs)

8.4 Birth of a GEG with autonomous GENs:

The basis is similar to the case 8.3. But the new GEG includes several GENs /

TENs.

If it happens that a GEN is composed of a single previous Legal Unit, then this

GEN (which is also a TEN) is in continuity with the previous “enterprise” and

equal to the concerned legal unit.

The other GENs/TENs are each to be treated as in case 8.3; this implies:

- The creation of a new GEG, which perimeter includes all the previous

legal units;

- The creation of GENs which global perimeter is the same as the GEG pe-

rimeter;

- Some of the GENs are new (perimeter to be listed); their TENs are to be

created in the countries where they operate;

- Some GENs/TENs are in continuity (this implies that each of these last

GENs are made of a single legal unit);

- The "death" of each of the previous non continuous GEN/TEN enterpris-

es consisting in one single legal unit.

8.5 Restructuring of one existing GEG, that leads to re-profiling:

- A new GEN can be added (0:1); of the previous GEN: is it the same and

in continuity or is it a new one?

- A GEN can be deleted (1:0); in the simplest case it is taken over by an-

other GEN; is the resulting GEN “the same” as the previous one?

- A GEN can be split (de-concentration) (1:n); same question about the

eventual continuity of one of the resulting parts?

- Several GENs can be combined (concentrated) (n:1); idem ?

- Several GENs can be restructured (m:n).

31 If there was no GEG previously, the creation results compulsorily from the merging of legal

units in a GEG.





For more details about the concerned operation we can refer to the classification

and rules of the BR manual.

Anyhow, in all cases, we have to check whether they imply the creation of a new

(or of several) new GEN(s), the “death” of one (or several of them) at the date

of the operation, but we have also to treat the situation of the resulting: is there

one (or several) which is (are) the heir(s) of (a) previous GEN(s) and that has

(have) to be treated as continuous?

8.6 Changes occurring in situations where several GEGs are involved:

- The most simple case occurs when a GENs benefits from a spin off to

become a new independent GEG; then there is continuity for the GEN

and “birth” of a new GEG. The continuity of the initial GEG after spin

off has to be treated.

- The next case occurs when a GEN is transferred without any change

from one GEG to another: then there is continuity for the GEN and the

question has to be raised for the two concerned GEGs: are they each con-

tinuous or is one or the other or are both of them changed by the transfer?

8.7 more complex cases take place when two GEGs exchange GENs or part of

GENs to recombined themselves and them on an (m:n) basis as well for GEGs

as for GENs.

Let us assume that all the cases can be dealt with by a “combinatorial procedure”

using the simple cases of the points 8.5 and 8.6.

8. C. Continuity rules

8.8 We now are presenting proposals for continuity or discontinuity of statistical

units, with as economic meaning as possible:

- We propose the same rules for GEGs and GENs except that they are ap-

plied to the relevant level;

- For more easy understanding, the presentation will apparently rely on

“legal units”(named here ULn); but the cases would not be different if

we replaced the LeUs by other units (internal reporting units of GEGs; or

directly the GENs): these units can conceptually come from legal units

by first splitting legal units in (virtual) parts then recombining the (virtu-

al) parts in the new type of units;

- The reasoning is based on the idea that the initial units are “givers” and

the resulting are “heirs”. If the giver gives the majority of its content to

the heir and if the heir receives the majority of its content from one giver,

then there is continuity. In all other cases the initial units die and the re-

sulting are new.





8.9 The basic general case will describe the transfer of a unit from one GEG

(resp. GEN) to another GEG (resp. GEN):

The GEGs (resp. the GENs) E1 and E2 do exist before and after the restructur-

ing; E1 “sells” its unit UL2 to E2; the question we have to answer is: “are the

GEGs (resp. the GENs) E1 and E2 the same after the restructuring, or not?”

This case is relatively general, if we notice that the previous scheme might cover

a lot of different situations:

- Partial transfer of one unit from E1 to E2 => the analysis will imagine a vir-

tual break-down of the original unit in two pieces: first piece to be trans-

ferred / second piece remaining in E1;

- Creation of E’2: virtual breakdown of E1 (with no content in the 1st period;

real existence in the 2nd

period);

- Etc.

8.10 The approach of the main “giver” and “heir” GENs (or GEGs) needs further

explanation.

8.10.1 The diagram 2 shows a very simple case: in the period N an enterprise

(resp. a GEG) E’1 that results from the merger of three enterprises (resp. GEGs)

of the period N-1. The small squares are relative to the size of each constitutive

unit.

N - 1 N

E 1

E 2

N - 1 N

E 1

U L 1

U L 2

U L 3

E ’1 U L 1

U L 3

E 2

U L 4

U L 5

U L 6

E ’2

U L 2

U L 4

U L 5

U L 6

N - 1 N

E 1

E 2

N - 1 N

E 1

U L 1

U L 2

U L 3

E ’1 U L 1

U L 3

E 2

U L 4

U L 5

U L 6

E ’2

U L 2

U L 4

U L 5

U L 6





Diagram 2.

Clearly E1 is the largest contributor to E’1. It is the “main giver”. E’1 receives

more from E1 than from any other giver; it is the heir of E1.

But E1 does not constitute the majority of E’1.

There is no continuity between E1 and E’1; they are different units and thus they

must have a different ID.

8.10.2 The third diagram is nearly the same as the second; with a main exception

Diagram 3

E1 remains the “main giver” to E’1. But now its gift is a majority gift: E’1 is the

“majority heir” of E1. E1 is thus the “majority giver” to E’1.

There is full continuity between E1 and E’1; they must be considered identical;

their ID is the same.

8.11 From givers and heirs to continuity32

:

The proposed definitions are the following:

- The “main giver” is the GEN of the previous period (N-1) that has the

maximum economic value of all givers in common with the concerned

GEN of the current period. The main giver is always defined. We have to

decide what economic value has to be used; the best would be VA but it

32 Note: The actors are difficult to name for which “English” is not the mother language:

- Are “giver”, “main giver”, “majority giver” adequate; in French they are called “af-

fluent” name that does exist in English but can also be replaced by “stream”, “tribu-

tary”, “feeder” etc.

- Difference between “main” and “majority”? What about “principal”?

Needs to be decided commonly, …

U L 1

U L 2 U L 1

U L 2

U L 3 U L 3

U L 4 U L 4

U L 5

E 3 U L 5

N

E '1

E 1

E 2

N -1

= = = = = = = = = = = >

U L 1

U L 2 U L 1

U L 2

U L 3 U L 3

U L 4 U L 4

U L 5

E 3 U L 5

E 1

E 2

N -1

= = = = = = = = = = = >

N

E '1





is probably too difficult to monitor it in BR procedures. The second best

is them the employment (on an “fte” fulltime equivalent basis);

- The GEN of the current period is the “heir” of the GEN of the previous

period that gives it the most;

- The “majority giver” does exist when a GEN of the previous period

gives to its “heir” a majority of the heir’s chosen economic variable of

period; there is backward continuity;

- If the gift of its “main giver” represents more than half of its economic

value (chosen variable) of the previous period, then the GEN of the

current year is a “majority heir”; there is forward continuity

- A GEN of the current period might be new, being the majority heir of no

GEN of the previous period.

- When a majority giver gives to a majority heir, then there is a continu-

ous GEN (same ID etc);

- The definitions and consequences are the same for GEGs;

- They are looked at independently from the GENs they comprise.

8.12 Examples for explanation:

The following scheme (diagram 4) shows a rather simple case:

Diagram 4

E’1 is the “majority heir” of E1 which is its “majority giver”: they are one and

the same GEN;

E’2 is the “majority heir” of E2 which is its “majority giver”: they are one and

the same GEN.

It leads to a slightly more complex case:

N -1 N

E 1

E 2

N-1 N

E1 UL1 UL2 UL3

E’1 UL1 UL3

E2 UL4 UL5 UL6

E’2

UL2 UL4 UL5 UL6





Diagram 5

E’1 remains the “majority heir” of E1 which remains its “majority giver”: they

are one and the same GEN;

E’2 remains the “majority heir” of E2 which is no more its “majority giver”:

they are two different GENs.

Then to the next case:

Diagram 6

E’1 remains the “majority heir” of E1 which remains its “majority giver”: they

are one and the same GEN;

E’2 is at the same time the “heir” of E1 and of E2 (no majority heir);

E2 is the “giver” to E2, and the majority giver to E’3;

E’3 is not the majority heir of E2;

N-1 N

E’1 UL2 UL3

E1 UL1 UL2 UL3

E’2

UL1 UL4

E2 UL4 UL5 UL6

E’3 UL5 UL6

N -1 N

E 1

E 2

E ’2

N-1 N

E1 UL1 UL2 UL3

E’1 UL1 UL3

E2 UL4 UL5 UL6

E’2

UL2 UL4 UL5 UL6





This analysis leads to the following list of Units.

And finally to an “extreme case”, in which there is no more continuity:

Diagram 7

9 Analysis of usefulness of units of the new model for SBS, STS, FATS,

Prodcom and NA

9.1 The question of the usefulness of the new unit model and of its ability for pro-

cessing statistical data was initially supposed to be one of the most decisive ques-

tions for assessing the validity of studies on profiling.

In practice, facts happen to be somewhat different:

- At the end of 2013, the European Business Statistics are being re-

regulated through the writing of FRIBS as a framework supplemented

and made explicit by Commission regulations;

- FRIBS uses the combined results of the ESSnets on Profiling on Con-

sistency and on the EGR;

- It appears mainly through the analysis of the ESSnet of Consistency that

the present definition of “enterprises” is very similar from its economic

interpretation to the proposed one, has been compulsory for 20 years, is

poorly applied by the Member States, but is not contested.

In consequence, the application of the unit “enterprise” for publication of the

main economic statistics in the EU is no more an issue.

N -1 N

E 1

E 2

E ’2

E ’3

N-1 N

E’1 UL2 UL3

E1

UL1 UL2 UL3

E2 UL4 UL5 UL6

E’2 UL1 UL4 UL7

E3 UL7

E’3 UL5 UL6





9.2 The main positive or difficult facts happening at the end of 2013 are the fol-

lowing:

Outward FATS appear to be very close to the necessary inputs for profiling: the

UCI is nearly always the respondent; it is required to answer in terms of activi-

ties relative to NACE, but often replies according to its “global operating seg-

ments”, splitting them by countries of operation; we do not always know how

the number of affiliates per activity and country is evaluated since the economic

figures concern the segments.

Mostly O-FATS may be on one way the result of intensive profiling and on the

other way may provide the supplementary information needed for light profiling;

considering also the fact that the domestic sources for Inward FATS are sup-

posed to refer to enterprises, the use of enterprises for the whole of the FATS

seems efficient, allowing to compare the results in a matricidal form. Some

changes in the surveying methods are planned that would ease the process moni-

toring.

The other assessments are being processed through a double type of analysis:

1. A Task Force on Statistical Units gathering country and Eurostat ex-

perts with the coordinators of the ESSnets is preparing the future

Statistical Units to be included in the FRIBS regulation; this TF is

validating the Profiling ESSnet proposals, expanding it without sig-

nificant difficulties to the whole productive domain, and finalizing

the wording of the definition and of “operational rules” that facilitate

their implementation: the list includes the enterprise group, the en-

terprise (global and truncated); the kind of activity unit (KAU) and

its local part (LKAU) will be part of the SUs, proposed to be used

for STS and as inputs for National Accounts, even if probably not

compulsory registered in the BRs; this report will need to be updated

in 2014 to be worded in accordance with the results of the TF fore-

seen mid of the year;

2. “FRIBS packages” are being drafted for each statistical domains,

that include a lot of technical specifications including the SUs to be

used in each of them; the preliminary drafts of these packages do not

show dramatic conceptual issues but lead to the emergence of im-

plementation problems of the same kind as the country consultations

comments.

Eurostat has also launched a series of country consultations on the future of Busi-

ness Statistics, domain by domain and at the BSDG level. As awaited, the imple-

mentation comments and issues are numerous.

Apart from costs and financing, which is a prominent question but not relevant to

the “methodology” as such, and from the breaks in series to happen when and if

the SUs or their use are changed in any BS domain, the remarks seem to concen-

trate on the difference between Statistical Units / observation units and reporting





units: until now it was easily possible to do as if the three types of units are the

same:

1. The use of Legal Units in most countries gave the appearance of units

having accounting reports (considered as statistical basis), official repre-

sentatives allowed to “sign” answers (reporting) on apparently adequate

figures (observations).

2. The for more economically significant but less legally defined (except in

accounting topics) units in a context of administrative liberalism makes it

necessary to treat explicitly the difference between who reports, on

which observed but eventually not desired units (e.g. Legal Units figures

can be used as intermediate stuff to estimate “enterprise data” on the base

of “core variables” computed by the UCI at request of UCI NSIs as well

for GENs as for TENs).

The proposed concepts need a re-examination of the process not only for apply-

ing the “top-down” approach in delineating the units but also for the collection

of data in all and every statistical domain.

Last but not least, the case of Prodcom for which even presently the coherence

with SBS and STS is specific will need very specific analysis.

9.3 A permanent and very strategic question has to be answered about the links

and coherence with the National Accounts. NA are supposed to use mostly the

LKAU in the production estimates, historically because LKAUs were (supposed

to be) the place where outputs were produced from their inputs according to pro-

cesses described in quite stable NA “technical coefficients”. This analysis should

be questioned when globalisation reigns in physical production, destroying this

technical approach at least in any individual country; the ESSnet on Profiling is

in no case legitimate to do so but can report such questioning when it comes

from the main NA authorities, which is the case.

The same ESSnet is fully legitimate in its role when it stresses the synchrony of

statistics: we are now preparing the BS backbones for the years 2020, used in

NAs probably not sooner than 2025; the questioning is then about what will be

the units the ESA will want to use in 1 decade and 1/2. The answer cannot be

straightforward; it cannot be either: nothing will change. Then what is the most

important: try to stick to technical coefficient (which is anyway impossible in

the present ESA/SNA because reference is made on the owner of the products

and no more on the physical flows)? Try to describe better local and global pro-

duction (what the links between global and truncated enterprises allow)?

At the end of 2013, contact is being made between the conceptual assemblies of

National Accountants and the Profilers supporting bodies. No solution yet; but

promising discussions.





10 The concept of autonomy related to main information and variables:

meaningfulness and availability of necessary information/data. How relates

global autonomy to geographical autonomy at GEGs? What are the conse-

quences?

10.1. Autonomy at the global level is determining in the delineation of the

Enterprise statistical unit GEN. The truncated national or geographical parts of

this are not necessarily autonomous because these are under the operational

leadership of the GEN management, even if this is under local legal conditions.

10.2. The provision of meaningful economic figures is the purpose of business

economic statistics. The best way to comply with this purpose is to find a fit

with the information that is compiled for management purposes within the GEG

and for the operational management of it. Also information for shareholders

and/or the board of commissioners reflects real information on the operations of

the GEG. Managers of autonomous units will have meaningful and detailed

information available from accounting systems and from other internal

information systems. The best way to get meaningful data is to connect the need

for statistical information to the available accounting and information systems

and to extract data from these in data collection. At the highest level and for the

Groups Operating Divisions accounting systems are being standardised

according to the IFRS, but more detailed information systems related to more

detailed autonomous units may be available.

10.3 The consequence of the fact that TENs are not autonomous necessarily is

that the treatment of the TEN is different for national and supranational

statistics. This becomes evident in the use of multiple coding and the use of

different classification codes depending on the kind of statistics, national or

supranational.

II Consistency and breaks

Aim: To enlarge this assessment of the present theoretical or used statistical

units (e.g. present enterprise, KAU and eventually LKAU) through a contribu-

tion to the ESSnet on Consistency, in accordance with the domains it will choose

(SBS, STS etc.)

11 Relationships with used statistical units (ENT/KAU/LKAU) in present

statistics (SBS, STS, FATS, Prodcom, NA) and related to Consistency ESS-

net

11.1 The “External study on detail evaluation of the legal acts in the areas of

statistics which were identified by member states as areas to revision” (main

authors: Dr. Josef Richter, Christian Engelage, Peter Thomas) provided a useful

synoptic overview (para 2.2.2.1.) in which were described all the statistical units





used in the various statistical domains. Briefly, the situation can be summarized

as follows:

SBS: mainly enterprise and KAU for some specific module;

STS: KAU (for Industry and Construction) and enterprise (Retail Trade

and other services);

FATS: enterprise (the resident enterprises for Inward; non-resident en-

terprises for Outward);

Prodcom: enterprise;

NA: Institutional Unit (the enterprise is considered as an institutional

unit) and the Establishment (it corresponds to Local KAUs).

11.2 “ESSnet on consistency of concepts and methods of business-related statis-

tics - 2010 project on statistical units” launched an inquiry at the end of October

2011 through a web-based questionnaire to identify and analyse different typol-

ogies of inconsistencies. The sections of the questionnaire were related to the

statistical domains under investigation and each section of the questionnaire was

composed of modules, one for each investigated unit, Legal Unit (LeU), Enter-

prise, Local Unit (LU), Kind-of-Activity Unit (KAU), Local Kind-of-Activity

Unit (LKAU). The compilation of the questionnaire was open to the 27 Member

States of the European Union and to the EFTA Countries.

11.3 The main results of the survey were disseminated with the document “ESS-

net Consistency Deliverable 3.2 - Identification and evaluation of Member States

inconsistency – Part 1 – (July version / Version 1.4)”. Part of these results may

also be used to better understand the actual situation in the use of the statistical

units and their relationships in the present statistics. In particular, it is important

to underline as:

The identification of LeUs and Enterprises is generally seen as a BR task. In

fact, “out of the total respondent countries, 71% of the SBS experts take the

list of the enterprises directly from the BR without any further manipulation

and the other five countries use the BR as the main frame and they just com-

bine it with the information coming from other sources”. For STS statistics

the use of the statistical unit “Enterprise”, even when not mandatory derives

from lists identified by the BR without any further manipulation.

“13% of the countries consider each identified legal unit as a productive unit

without further analysis while more than 80% of countries say they perform

further analyses to understand how the unit is actually productive, above all

by using sources that could give this information (45%) or by using thresh-

olds of certain variables (42%) or profiling methods (35%). About 52% of the

countries perform some activities to combine legal units in enterprises when

they consider them “not autonomous”, nevertheless actually only 30% of the

countries carry out a complete analysis and apply in practice the procedure of

profiling in a “strict” sense. They represent 20% of the total enterprises and

18% of total European employment”





KAU is implemented in the Business Register of 11 countries even it is

not required by Regulation; “17 countries use KAU to produce SBS statistics

(required by regulation), 13 countries use KAU to produce STS Industry sta-

tistics (required by regulation) and 2 countries use KAU to produce other STS

statistics (not required by regulation).” “15 countries do not have KAU or Lo-

cal KAU on their Business Register”

“The information on Local units is mainly issued from BR experts (27 coun-

tries)”.

“The first part of the National Accounts questionnaire contains the statistical

unit used for compiling national production accounts. 71% (17 countries) an-

swered that they mainly use enterprises or legal units. The remaining 29% (7

countries) mentioned that they compile their National Accounts on the basis

of KAUs or Local KAUs”

11.4 It clearly emerges that the BR plays a central role. The enterprise delinea-

tion (seen as a task of the BR) carried out by the profiling activity may deter-

mine an impact in all the main statistical domains. However, compared to profil-

ing approaches in practice today – considering the main aspect of the model (see

chapters 2 and 3) – the profiling approach proposed by this report introduces an

international dimension. While leaving the same links among the Enterprise

Group, the Enterprise and the Local Unit, the proposal makes no references for

the statistical units KAU, LKAU, UHP).

11.5 For further details on the possible approaches to afford the data collection

problem especially for SBS and FATS domains see the paragraphs 7C, 7D and

7E. See also chapter 9 for the analysis of the usefulness of units of the new mod-

el for the main statistical domains.

11.6 The proposals of the ESSnet on Consistency regarding statistical units’ def-

initions have been passed on to a Task Force on Statistical Units which has been

launched by Eurostat. The Task Force gathers experts of statistical domains at

Eurostat and experts of statistical units and business registers from some mem-

ber states – among which also participants of the two ESSnets on Consistency

resp. on Profiling. This Task Force shall provide the wording of the definitions

which shall be included in the coming European Framework regulation for Inte-

grated Business Statistics (FRIBS) and the operational rules for the application

of the renewed definitions. The work of the Task Force will go in year 2014

since it proved ambitious to work out new definitions and operational rules

which take good care for all the interdependencies which exist between the sta-

tistical units.





12 Analysis of potential breaks in time series in changing the used units,

aspects of continuity and consistency; implications of changing

12.1 Profiling activity, national or multinational, meets the need to treat the

complex situations in which the statistical unit “enterprise” is built as a combina-

tion of several (more than one, numerous) legal units. The result is the creation

of a unit closer to the economic/organizational world rather than to the adminis-

trative one. For GEGs acting in a global perspective with hundreds (or thou-

sands) of Legal Units (LeUs) often created for fiscal/administrative reasons, pro-

filing is the proper tool to make a better description of the activities carried out.

12.2 The top-down approach followed for the GEGs profiling activity introduced

a double view of the statistical unit “enterprise”: the “global enterprise” (GEN)

derived from the operational segments disclosed by the group itself and the

“truncated (national) enterprises” (TEN) which are the truncated national parts

of a global enterprise. Operationally, the first step is the delineation of the GEN

and the second is the identification of the TENs as the national parts of the

GENs both options recommended in the Feasibility Study (Options D and E

WPA – SGA 2010)33

.

12.3 Following the global profiling approach adopted in the ESSnet it is neces-

sary to take into account three elements that can produce substantial effects:

1) The global view;

2) The possibility to split legal units into several enterprises;

3) The accounting data consolidation to prevent double-counting.

- The first effect is due to the fact that starting from the group perspective,

even if it is a combination of single legal units, the global view is conceptu-

ally irrespective of national boundaries.

- Furthermore the single legal units may contribute to more than one enter-

prise (second effect: one to many relationships). In that case the links are not

referred to financial or controls ties but they are only related to the actual

economic structure of the enterprises within the group.

- The application of a top-down method leads to a data consolidation of the

intra-group flows (or better intra-GEN flows). If IFRS standards are fol-

lowed they represent a very helpful standard. Considering the business op-

33 Option D - Profile at the global group level and derive and classify GENs at the global, and

TENs at the national, level centrally by the NSI of the UCI. Pass the TENs and the list of legal

units for each country to the relevant NSI for use as supplied in the national business register and

for data collection.

Option E - Create GENs and collect data centrally and apportion to the national level, where a

GE includes activity for more than one country. There would be no link to the legal units other

than at the global group cluster level.





erating divisions introduced in IFRS8 principle34

the perspective changes in

favour of the group view in comparison with the legal or administrative cri-

teria, until now mainly adopted for the enterprise delineation. Anyway pro-

filing activity is independent of the application of accounting standards

(IFRS, GAAP) and it could be possible to obtain the same results also with

the “traditional” financial statements or adopting another (e.g. bottom-up)

approach in close cooperation with the GEG.

12.4 The application of the global profiling produces results differing from those

obtained with the classic and frequent present situation in which each legal unit

is entirely comprised in a single enterprise. Such approach determines conse-

quences in terms of the treatment of legal units (especially for units performing

“ancillary” activities):

- The delineation of statistical units (impact on the structure of the BR);

- Stratification characteristics (for example NACE codes, size class);

- Values of variables (for example, number of persons employed, turnover).

12.5 Profilers from UCI Countries produce the first “global” view. Considering

the situation in which the financial statements are useful, the NSI responsible

collects the data for the Global Enterprises (GENs) starting from the consolidat-

ed balance sheets (that means eliminating the intra-group flows) not considering

the national boundaries. The result is that the pure sum of the national results

(for example for the EU Countries) for some variables can never be equal to the

values obtained considering the GENs. So if the minimum requirement for GEN

was a principal activity code, an estimate of the employment and the turnover,

the differences with the aggregation of the National data would be the following:

“Global” NACE code could be different from the national (change of view);

there could be two extreme situations: a group operating in the same way in

all Countries (=> global=local NACE code for all the Countries and for thee

GEN); a group with the principal activity only in one Country (global=local

only for one Country35

). In practice, GEGs are within the extremes and it is

advised to adopt a dual-coding system especially necessary in the application

of Option D to permit calculation of European aggregates (see paragraph 6.1).

But, apportioning data for all the Countries in the option E should also be

supported by a careful evaluation of the GEGs organisations.

The employment values are the same if we consider the entire group: sum-

ming national data or GENs values must produce the same result. But if we

consider the variable “employment for each activity” the results could be dif-

ferent because GENs are created in a different manner.

34 The core of the principle is “disclosing information to enable users of the financial statements

to evaluate the nature and financial effects of the business activities in which the groups are

engaged and the economic environments in which they operates” 35

In very extreme, but exceptional cases the GEN NACE code could be different of the NACE

codes of all the TENs it comprises





“Global” turnover is necessarily different from the pure sum of national data

both for the entire group and the enterprises: in contrast to what happens for

the employment the accounting consolidation produces lower values than the

summary; considering the single GEN the effect could be different because

the reduction due to the consolidation could be balanced from the legal units’

aggregation.

12.6 The second task of the profiling team of the UCI Country is deriving the

TENs both for Option D and E. Ideally the TENs would be the unit for statistical

surveys but they need to be able to provide the full set of accounts. This is possi-

ble if the TENs comprise whole Legal Units that have the ability to provide ac-

counting data for statistical purposes36

.

12.7. Going down one step more towards the national level, the effects are both

in the UCI Country of the GEG and in the other Countries. In the majority of the

cases (when TEN = sum of LeUs) the profiling activity brings to the aggregation

of different legal units. Only in some cases, also a split of single legal units will

be needed.

Taking into account the national dimension, the values of the economic variables

are produced after consolidating the intra-group flows within each different

Country. The potential breaks in changing the used units should then be the fol-

lowing:

A reduction of the total number of “enterprises” in the BR.

Changes in the structure of the BR in terms of size classes (increase of the

share of large enterprises)

A simplification in terms of NACE codes scattering: if the statistical units are

considered as complex units performing a principal and some secondary ac-

tivities:

1) The TENs are generally37

larger than the “traditional” units (in relation to

their principal NACE code);

2) “Support” units or ancillary units, often of small size, disappear.

A break for the turnover time-series due to two main effects:

1) An increase due to the aggregation of legal units previously coded in a dif-

ferent way (or aggregated in a different way from national profiling activity);

2) A reduction due to the intra-group flows detection.

For turnover, the final result is globally lower than the turnover coming from

bottom up procedures; but it may be higher or lower on each NACE code de-

pending on the impact of detailed intra-group flows.

36 Until now, with the exception of a few “European companies”, LeU are nationally defined

37 Generally for the TEN’s employment the final result is an increase but the effect is uncertain

when we compare the previous situation (LeU=Ent or national profiling with LeUs’ combina-

tion) with the global profiling results in which the LeUs are split into more enterprises.





12.8 For the other Countries global profiling needs also a preliminary evaluation

of the TENs. Broadly, the steps for non-UCI partners after receiving their own

truncated parts are:

Evaluating the delineation structure; could be the TENs the unit for statistical

surveys? Is it possible to collect data in that way?

Comparing national and global NACE code; is a dual-coding system neces-

sary (or sufficient) to guarantee coherence at the national level?

Comparing the structure and the values (12.7 para): different number of en-

terprises (and LeUs); NACE changes; different values.

12.9 It deserves a speech in part the evaluation of the value added (VA) as result

of the profiling activity. In the 6th

chapter of this report (The core variables and

the roles in the BR/EGR context) and in the more comprehensive annex III the

core variables implied and their roles in the profiling activities are described.

Data consolidation (global or national) means deleting the intra-group flows for

some variables and summing for others. In theory VA does not change. In fact, if

we consider the simple case in which only two LeUs constitute an enterprise the

situation may be described as follows:

LeU A (NACE Section C, manufacturing) sells all its output to LeU B

(NACE division 46, wholesale);

Purchases of goods (costs) for A:100;

Production of A= Purchases of goods (costs) of B: 120;

Production of B: 160;

Evaluation of VA by the production side (simple hypothesis Production-

Costs) for the aggregation of A and B: (120-100) + (160-120) = 20+40 = 60.

The GEN obtained from the global profiling is classified in section C and delet-

ing the intra-group flows VA=160-100=60: the value added does not change.

But which is the situation in terms of NACE codes? In the “traditional” view 20

is for Section C and 40 for Division 46; after global profiling 60 is for Section C.

So if the total (for a Country) value added is built for aggregation weighting in a

different way the values in terms of NACE codes, global profiling also deter-

mines a change for the variable “value added”.

III Consolidation aspects

Aim: The consistency of information collected at the different levels of the

groups should be considered and the potential sources of inconsistencies be-

tween the data produced at the different levels should be explored (this case in-

cludes a possible insight into External Trade in goods and services).





13 Description of basic organisational principles of large GEGs and the

appearances of these

13.1 The questions concerning basic organisational principles of large and com-

plex GEGs refer more to the economic or the management science than to the

statistical studies. But, as previously stressed, our aim is to describe the “real

economic” world, and not exclusively the legal organisation. Knowledge on or-

ganisational principles and the reasons for creation of a legal structure within a

group give first holds for the statistical approaches.

In this context, we could easily conclude that, according to the large variability

of managerial structure, each GEG case is specific.

So, prior to the pure statistical work, let us go for a very short while into an in-

sight of the “reasons” for an EG to become “large and complex”. There are

many books on organisational issues of companies, also in relationship with ac-

counting, but for the purposes of profiling it would be interesting to have means

and criterions for groupings according different motivations.

13.2 The enterprise group can be motivated by the following looked for effects:

1. Industrial leveraging effect of scale

These effects tend to promote a world-type organisation, in which each country

plays a role very specific according to its economic advantages; the management

is usually either centred on “business lines”, the production of each country be-

ing integrated in a global process or of the “functional type”, with stress put on

the “markets” and on the supply chain, which leads to great difficulties to de-

scribe the production and to apportion it country by country.

They can operate on:

- Procurement and/or logistics

- Manufacturing

- Back-office and ancillary services

- Use of R&D results (patents, process, models)

2. « brand » effect of scale

These effects lead to a “distribution” model, reproducible in each country, not

compulsorily related to a unique or united production model; it can be also used

in a franchise type of development, in which the “autonomy of the franchisees

can be interrogated.


- Advertising (world brands)

- Relations with other GEGs (global contracts)

- Human Resources (attraction effect)

3. Financial effect of scale

Their priority is not the costs or the efficiency of the GEG (industrial) or its dis-

tribution (“brand”) but the financing of its activity.


- Lending and borrowing (leveraging?)

- Using fiscal benefits and/or (in combination with) relocation.





13.3 Reversely, the enterprise group can meet conditions that lead to a “regional

and/or local type of organisation”:

1. The nature of goods and services traded

- Small unitary price of goods (forbidding long distance transport and leading

to local production; but the production processes can be world-wide)

- Maintenance and repairs (similar to previous point)

- Services to persons (as well personal as relative to persons) (having also to

be produced locally and commonly also related to local habits or culture for-

bidding integration of process management)

2. Necessary local distribution (can supplement the alinea 1, or be specific)

- Of perishables (as varied as fruits, cement …)

- With advice or fitting (clothes)

- Etc.

3. Specificity or constraints of (local) regulations

- Regulated activities (e.g. fix or mobile phone, broadcasting etc.)

- Services of most professionals

- Etc.

13.4 The previous effects can combine; after combination, they produce typical

appearances of GEGs that we will try and describe more precisely through our

testing experiences. The result of testing will be included in the “manual” of

profiling as guidelines to profile in concrete situations.

At this stage, we can list examples of what we think to be in force in some in-

dustries:

1. Pure industrial effect:

Motorcar construction industry / High value industrial edibles (chocolate, solu-

ble coffee, etc.) / Iron and steel producers

2. Industrial effect combined with nature of products:

High unit value construction materials producers (even in this case they remain

“heavy” products / Escalator constructors (to be locally installed according to

local regulations)

3. Industrial leveraging effect combined with « local» regulations (networks,

defence)

Defence industry / Pharmaceutical distribution / Fix and mobile phone (seem to

be all organised on regional basis even if all the techniques are global).

4. Pure financial:

This effect results in conglomerates (highly diversified GEGs), that have no de-

scripted cut-offs with investment funds. Tests will try to reveal significant limits

(if no combined system of reporting, no synergies between the different activi-

ties, no common general staff, no share of treasury => the different segments

will be considered as independent “EGs”.





14 How relates consolidated information at the (global) group-level to required

geographical statistics? How to decompose and how to deal with internal

flows of goods and services within global groups, including the aspect of

transportation?

14.1 As emerged in different parts of this document, shifting from the global to

the national level produces additional problems of data consolidation. In fact,

accountants’ concepts are irrespective of the national boundaries while the statis-

tics are mainly produced for the national level. There can be several situations in

which the various ways to consolidate the data may determine very different

results (see also Annex 6 for a comprehensive example).

14.2 At the global level there can be two situations:

a) The GENs correspond to the operating divisions disclosed in the con-

solidated accounts;

b) The GENs are different in comparison with the divisions and they are

the result of the agreement with the group.

In the case a) the global values are consolidated and available in the annual re-

ports. In the case b) data supplied by the group should be consolidated and avail-

able via direct contacts. In both cases it is not required for the NSIs an additional

effort to treat the intra-group flows. At least it could be necessary to start from

the “core variables” to estimate some others.

14.3 According to the geographical area under examination, data consolidation

affects the national level (TEN) but also other kind of aggregations (EU for ex-

ample). Data can be obtained directly from the groups (if mandatory) or estimat-

ed by the NSIs treating the intra-group flows. In both cases it should be clarified

what it is meant with “intra”. In fact, TEN values may be obtained by a data

consolidation:

a) Within the truncated group (treating all the flows among the units of the

truncated group);

b) Within the single enterprises (TENs) of the group (treating the flows

towards other enterprises of the same group as a third parties flow).

14.4 Testing activities showed as the treatment of the intra-group flows is one of

most difficult aspects of the approach and also in other experiences outside the

EU the measurement of the intercompany transactions is considered from many

years as a very complex task. In practice, for the TEN level, groups were asked

for a supplementary job: producing consolidated values or supplying to the NSIs

with all the flows. With the second option the NSIs accept to produce in house

the “core variables” for their respective TEN. Avoiding any kind of evaluation

of this option, before deciding the in house treatment NSIs should also consider

the problem of the sources potentially useful to collect the intra-group flows

without involving the group.





14.5 The accounting principle “IAS 24 Related Party Disclosures” has the ob-

jective to “ensure that an entity’s financial statements contain the disclosures

necessary to draw attention to the possibility that its financial position and profit

or loss may have been affected by the existence of related parties and by transac-

tions and outstanding balances, including commitments, with such parties.”

(http://ec.europa.eu/internal_market/accounting/docs/consolidated/ias24_en.pdf)

A related party is “a person or entity that is related to the entity that is preparing

its financial statements (in this Standard referred to as the ‘reporting entity’).

(a) A person or a close member of that person’s family is related to a reporting

entity if that person:

(i) Has control or joint control over the reporting entity;

(ii) Has significant influence over the reporting entity; or

(iii)Is a member of the key management personnel of the reporting entity or

of a parent of the reporting entity.

(b) An entity is related to a reporting entity if any of the following conditions

applies:

(i) The entity and the reporting entity are members of the same group

(which means that each parent, subsidiary and fellow subsidiary is relat-

ed to the others).

(ii) One entity is an associate or joint venture of the other entity (or an asso-

ciate or joint venture of a member of a group of which the other entity is

a member).

(iii)Both entities are joint ventures of the same third party.

(iv) One entity is a joint venture of a third entity and the other entity is an as-

sociate of the third entity.

(v) The entity is a post-employment benefit plan for the benefit of employees

of either the reporting entity or an entity related to the reporting entity. If

the reporting entity is itself such a plan, the sponsoring employers are al-

so related to the reporting entity.

(vi) The entity is controlled or jointly controlled by a person identified in (a).

(vii) A person identified in (a)(i) has significant influence over the en-

tity or is a member of the key management personnel of the entity (or of

a parent of the entity).

A related party transaction is a transfer of resources, services or obligations be-

tween a reporting entity and a related party, regardless of whether a price is

charged.”

14.6 The principle requires that “Relationships between a parent and its subsidi-

aries shall be disclosed irrespective of whether there have been transactions be-

tween them. An entity shall disclose the name of its parent and, if different, the

ultimate controlling party. If neither the entity’s parent nor the ultimate control-

ling party produces consolidated financial statements available for public use,

the name of the next most senior parent that does so shall also be disclosed”. The

disclosure required by the principle “shall be made separately for each of the

following categories:

http://ec.europa.eu/internal_market/accounting/docs/consolidated/ias24_en.pdf





(a) The parent;

(b) Entities with joint control or significant influence over the entity;

(c) Subsidiaries;

(d) Associates;

(e) Joint ventures in which the entity is a venturer;

(f) Key management personnel of the entity or its parent; and

(g) Other related parties”.

Examples of transactions to be disclosed if they are with a related party are:

(a) Purchases or sales of goods (finished or unfinished);

(b) Purchases or sales of property and other assets;

(c) Rendering or receiving of services;

(d) Leases;

(e) Transfers of research and development;

(f) Transfers under licence agreements;

(g) Transfers under finance arrangements (including loans and equity contribu-

tions in cash or in kind);

(h) Provision of guarantees or collateral;

(i) Commitments to do something if a particular event occurs or does not occur

in the future, including executory contracts (recognised and unrecognised);

and

(j) Settlement of liabilities on behalf of the entity or by the entity on behalf of

that related party”.

14.7 Thus, for the units that adopt the IAS principles is possible in theory to col-

lect all the necessary information to treat the intra-group flows. It is possible to

achieve the result with the direct use of clerical staff engaged in the annual re-

port analyses or acquiring external data base. In that latter case it is important to

consider that generally accounting data recorded by private companies relate to

P&L and Asset Liabilities schemes while this information are disclosed in the

Notes of the Reports.

IV Modes in profiling

Aim: To elaborate further the different approaches to profiling (mainly through

description of the use of top-down and/or of bottom-up procedures)

15 The standard and basic steps in profiling large and complex GEGs

15.1 Methodologically the basic steps in profiling large and complex enterprise

groups (GEGs) are:

- Selection of the GEGs to be profiled

- Defining the UCI, that determines the responsibility for the profiling of the

GEG

- Desk preparation:

- Collection of information on the legal structure, using EGR data





- Determination of the countries in which the GEG operates, and so deter-

mination of the NSIs involved

- Collection of information on the operational structure of the GEG, using

the annual reports and information at MNE websites

- Collection of the GEG information that is already available at the NSIs

(e.g. from surveys)

- Analysis of the relationships between the legal structure and the opera-

tional structure. If these are not clear, priority should be given to the op-

erational structure of the GEG

- Analysis of the role and place of the GEG in statistical outputs (uses)

- Informing the GEG management at the highest level as possible by the NSI

at highest level as possible on the plan for profiling the GEG and explaining

the goals and procedures of it.

- Drafting a first proposal for the profile in terms of statistical units (global

Enterprises)

- Informing for comments the NSIs of EU-countries in which the GEG oper-

ates on the draft profile

- Discussing the proposed profile with the GEG

- Proposal is in accordance with reality

- Autonomy of the proposed units regarding production processes (allocat-

ing current resources)

- The availability of the core variable data items (see chapter 4)

- Possibilities of the GEG to split global enterprise data according the

truncated enterprises, what means according the countries in which the

global enterprises are operating

- Discussing the reporting and observation structure

- Discussing the way of maintaining the profile

- Discussing the management of relationship between the GEG and the

NSI

- Discussion and final agreement with the relevant NSIs as to the structure of

the global and truncated enterprises for profiling

- Formal agreement between NSI and GEG on the statistical units’ structure,

the reporting structure and the structure for observation. This agreement

should be formalised and approved by a contract or a formal letter, to be

drafted and sent by the NSI

- Information on the profile and contract to the users in the NSIs (all NSIs of

countries in which the GEG operates)

- Evaluation and regularly check of the profile, both with the GEG and the

users

- Update of the profile if necessary. Update also includes confirmation of ex-

isting profile.

The presented steps are according the Deming quality circle: plan, do, check,

and act.

Procedures and guidelines for this will be prepared in the work package C.





16 Quality in profiling: what information should be available at the end of the

profiling process

Profiling is intended to delineate enterprises, global and truncated, and to gather

information for these enterprises or at least to ensure that the defined enterprises

are suitable for collection purposes. Profiling is a cooperative activity in which

each partner has a responsibility in the quality of the final product of profiling.

In this process, however, the country of the UCI has a special role and the final

responsibility of the quality of units defined. This quality will rely not only on

the direct usability of released information but also on its capacity to help part-

nering countries in building business statistics based on these units. On that re-

gard, SBS and FATS statistics should be served in priority.

16.1. Quality in statistics is an important concern of the European Statistical

System. The quality criteria are included as principles in the European statistics

Code of Practice that is the result of a common agreement between the National

Statistical Institutes and Eurostat. They are detailed in the ESS handbook for

quality report (Eurostat publication – 2009)38

. These criteria generally apply to

the output of the statistical process. However, it is possible to interpret them in

the context of profiling. Some of the aspects are more relevant in this context:

16.2 Relevance is defined, in the ESS handbook, as "the degree to which statisti-

cal outputs meet current and potential user needs”. This criteria fits with the pro-

filing context since profiling intends to define units that are useful for the users

both national and European. The Truncated Enterprises should be recognized by

the business statisticians as statistical units to be used in building business statis-

tics in the case of multinational enterprise groups.

16.3 Accuracy and reliability: "The accuracy of statistical outputs in the general

statistical sense is the degree of closeness of estimates to the true values." This

criterion can be translated in profiling by the condition that the statistical units

defined through profiling should represent on a proper way the national and Eu-

ropean production systems and be usable for production of statistics. They

should be complete and the result of profiling should cover all the productive

activity of the GEG.

16.4. The "timeliness of statistical outputs is the length of time between the

event or phenomenon they describe and their availability. Punctuality is the time

lag between the release date of data and the target date on which they were

scheduled for release as announced in an official release calendar, laid down by

Regulations or previously agreed among partners."

The timeliness requires the enterprises defined through profiling to be updated

regularly. The punctuality means that deadlines for profiling need to be estab-

38 The definitions given in the document are extracted from the ESS Handbook for quality report





lished in order to provide the business statisticians with the information in time

for their needs.

16.5 "Accessibility and clarity refer to the simplicity and ease with which users

can access statistics, with the appropriate supporting information and assis-

tance." This criterion is more related to the availability of profiling information

rather than to the profiling process. However, clarity implies that the profilers in

the different countries follow the same rules and the same conventions in order

to be understood by the others.

An important quality characteristic for profiling is that the process and its results

in terms of “enterprises” are easily understandable by the respondents them-

selves; thus the business officials are able to monitor the updating of the whole

process and to be committed to do so.

16.6 "The coherence of two or more statistical outputs refers to the degree to

which the statistical processes by which they were generated used the same con-

cepts - classifications, definitions, and target populations – and harmonised

methods. Coherent statistical outputs have the potential to be validly combined

and used jointly. Examples of joint use are where the statistical outputs refer to

the same population, reference period and region but comprise different sets of

data items (say, employment data and production data) or where they comprise

the same data items (say, employment data) but for different reference periods,

regions, or other domains. Comparability is a special case of coherence and re-

fers to the latter example above where the statistical outputs refer to the same

data items and the aim of combining them is to make comparisons over time, or

across regions, or across other domains."

The result of profiling should introduce more coherence and comparability in

business statistics based on the new defined enterprises: the priority has been

given to coherence between countries - for describing the same GEGs - and in

each country between domains - which implies that the enterprise units are

prominent part of the business registers.

In consequence, in order to reach these goals, profilers should be coherent be-

tween each other in their profiling practices in order to keep the global coher-

ence that comes from the central treatment of a GEG.

16.7 The quality of the UCI profiling has mainly to deal with accuracy and relia-

bility, accessibility, clarity and coherence. The result of the UCI profiling should

cover the whole productive activity of the GEG to answer the criteria of accura-

cy and reliability.

All the GEN should be delineated in terms of legal units (including the

legal units outside the EU);

None of the GEN should be empty in terms of legal units;

All the GENs should be qualified with the following information:

o NACE

o Employment





o Turnover

All variables should have a time stamp in order to prevent potential dis-

crepancies between UCI and partnering information.

In case some legal units have not been included in a specific GEN, or a

GEN “others” is created or these units are “let outside the scope of profil-

ing”39

. In any case, these units should not represent more than 10% of the

total GEG employment.

In order to fulfil the objective of accessibility and clarity, the partnering exercise

should be made easy and useful for both the partnering and the UCI countries.

For that purpose the UCI profiling should include the following information:

The legal units which are let outside the scope of profiling should be

qualified (or they are inactive, or they are assessed not being in the frame

of the GEG, or they are out of the profiling scope).

In case of inclusion of a new legal unit that was not in the initial EGR

frame, this legal unit should be mandatorily identified by its name and its

country of residence and whenever possible by the town of residence.

When the new legal units are in the country of the UCI, in addition, the

legal units should be identified with an EGR ID.

As to the largest GEGs, a minimum understanding of their organisation

and what their business consists of has to be shared between them and all

implied NSIs; to reach this objective a descriptive (documentary) note is

attached to the quantitative tables: this note first drafted at the UCI level

might be completed updated or corrected by partners and of course also

by the GEG. Among the necessary information, the usual naming of the

GENs and TENs which might be different from one country to the other.

In order to fulfil the criteria of coherence, as much as possible, the following

information on TEN should be available as well with associated time stamps:

o NACE

o Employment

o Turnover

16.8 The activity of the partnering countries fits more specifically into the quali-

ty criteria of relevance and accuracy, coherence and timeliness.

To fulfil the criteria of relevance and accuracy, the partnering countries have the

responsibility of checking if the TEN defined by the country of the UCI suits

with the needs of national business statisticians. Moreover, they also should

check that the TEN defined cover the GEG national productive activity and that

no substantial unit has been forgotten.

The status of the GEG legal units should be confirmed:

o The legal units added by the country of the UCI should be identi-

fied with an EGR ID

39 Which conceptually is not different for each of these legal units to be considered as a quasi-

GEN !





o The status of the other legal units should be confirmed or a pro-

posal of change should be made

The content of the TEN should be confirmed or a change should be pro-

posed, in consistence with national business statisticians. The proposal of

the partnering country should reflect the usability of the TEN in national

business statistics.

At the end of the partnering exercise, the following information should

be available for all the TEN with associated time stamps:

o NACE

o Employment

o Turnover

This information should originate either from the UCI profiling (and be

confirmed by the partnering country) or from the partnering country.

In order to fulfil the timeliness criteria, a deadline of 10 days should be respected

by the partnering countries to answer the country of the UCI or at least to inform

on the reasons for answering later.

16.9 The profiling of a group could be considered as of a good quality if the var-

iables that are required from the UCI and from the partnering countries are filled

up.

However, it is not guaranteed that all the partnering countries will answer to the

country of the UCI. In the meanwhile, some of the countries will have a small

involvement in the profiled GEG. Under certain conditions, some of the TEN

will be automatically granted.

At the end of the process, a profiling will be considered of a sufficient quality if

90% of the employment has been approved, manually or automatically, by the

partnering countries.

16.10 Another dimension of the quality that needs to be taken care of is the time-

liness and punctuality. The Profiling process can provide quite updated infor-

mation. However, this advantage should be kept by organising the whole process

(UCI and partnering) in a limited period of time. On that regard, both UCI and

partnering countries should be made aware to the necessity the profiling process

to be as short as possible.

Another aspect of timeliness is that profiling should refer to updated infor-

mation. To fulfil that criterion, the profiles should be updated regularly. On that

regard, an annual periodicity for the largest and a biennial periodicity for the

medium GEG could be established.

According to criteria that still have to be established, an extra profiling has to be

set up when large restructuring happens to a GEG.

16.11 Profiling builds a bridge between the perception the GEG has of its activi-

ty and the statistical needs of data. Statistical needs are both European and na-

tional. Taking into account all these dimensions leads to solve potential incon-

sistencies. In particular, it amounts to solve the issue of double counting of some

financial flows within the GEG (turnover in particular).





Some conventions could be taken to solve some aspects: it is agreed that the

NACE code of the TEN may not be the same than the NACE code of the GEN.

In that case, in order to produce EU aggregates, it can be proposed to use the

NACE code of the GEN. There will be a difference between the sum of the na-

tional figures and the EU aggregates, but as it is acknowledged, it makes it pos-

sible to be documented: thus it is not an inconsistency.

The inconsistencies in turnover are more difficult to solve and more problemat-

ic because there are several sources of inconsistencies. The GEN turnover is

given by the GEG and is usually consolidated40

. The TEN turnover may have

several sources that will create inconsistencies:

The TEN turnover may be transmitted by the GEG itself, in that case it

will also be consolidated and the sum of the TENs turnovers will corre-

spond to the GEN turnover. In that case, there is no inconsistency; but

the TEN figures will not fulfil national statistics requirements and it may

generate inconsistencies between the national turnover and the other SBS

data;

The TEN turnover may be the result of a national investigation and in

that case it might include intra-GEG flows between countries. In that

case it will be difficult to ensure full consistency between the GEN turn-

over and the sum of the TEN turnovers, but TEN figures are coherent

with other variables in national statistics

A mixed situation may occur when the GEG provides TEN turnover, but

the partnering countries proposed a revised turnover that will be coherent

with the other SBS variables at the national level. This situation is the

worth in the sense that it will create inconsistency not only between the

sum of the partnering countries turnover and the EU aggregate, but also

among the turnover of the different partnering countries, some of them

keeping the consolidated turnover given by the GEG and some using na-

tional figures. In order to solve this situation, the central collection of da-

ta at the level of the GEG should be generalised to all the GEG under

profiling and should cover not only NACE, turnover and employees, but

all the SBS variables.

The employment should theoretically not be touched by consolidation issues

and should be coherent. However, some differences may arise due to the follow

up of different employment variables. The following kind of data may be found

in GEG annual reports: headcounts vs. full time equivalents (FTE), employment

at a given date (31/12 in general) vs. annual average. As it is not possible to re-

quire the use of one specific variable at the global and national levels and in all

the countries, it is proposed to ensure a consistency within a margin. For that

purpose, whatever source of information is used at the TEN level (GEG or na-

tional source), the following rule should apply:

40 Two situations appear in practice: either the GENs turnover are fully consolidated and add

exactly to the GEG turnover, or there remain flows between GENs that are deduced when adding

up to the GEG.





- The sum of the TEN employees should correspond to the GEN employ-

ees within a margin of 5%.

- The TEN employees proposed by the partnering countries should be

equal to the TEN employees provided by the GEN within a margin of

5%.

17 Description of the general principle approach

17.1 The basic principle should be that used statistical units represent the real

statistical economic reality. The units (global) EG and (global) ENT (GEN) must

be considered units that autonomously generate economic processes or are in-

volved in these processes. This means that the units are not represented by pure

legal, fiscal or administrative constructions.

17.2 As to small enterprises, the operational structure and the group structure

will not differ very much. Enterprises can, as in many other cases, be defined in

terms of (combination of) legal units within the Enterprise group. But enterprise

groups and enterprises mostly will be equal, which means that all legal units

constituting the group will be combined in only one enterprise.

17.3 The operational structure of domestic large and complex enterprise groups

(all resident enterprise groups) will in most cases differ from the legal structure.

Then it mostly will not be possible to have a good delineation of enterprises

along the lines of the legal units. A tailor-made analysis using the requested cri-

terions must result in the enterprises to be used in statistics.

17.4 At multinational groups the international dimensions must be taken into

consideration additionally. The only level of a real economic analysis is the

global level. From the results of the global analysis the national truncated parts

of the globally established enterprises are derived as truncated enterprises.

17.5 There is a huge gap between the small units and the large and complex

ones. In between a big amount of medium sized groups exists, of which a num-

ber can be complex too. How to deal with these “in- between” units needs fur-

ther attention. The solution for these must be found in a combination or com-

promise of the approaches used for the smallest and the largest units.

17.6 Different intensities of profiling will be described in the chapter 19.

18 The difference between top-down and bottom-up profiling and how to

combine these modes?

18.1 In top down profiling firstly the full group as a set of all legal units under

common control is to be established. After this the group must be analysed into

its group operating divisions (GODs) and from there in the global enterprises for

statistical uses. Having done this, the profiler may in some cases be able to link





the legal units to the enterprises. In other cases, the units must be identified

through discussion with the business. Enterprises are to be established according

the main criterion of autonomy regarding production processes. Market-

orientation and data availability are components in the autonomy check.

Diagram representing top-down profiling (see report WPA 2010).

An advantage of this way of profiling may be that daily or frequent changes in

the legal organisation do not immediately affect the structure of the statistical

units, although these changes could indicate the need for an update or a partial

update of the profile. Another advantage is that profiling in this way leads to an

exhaustive profile that means that all legal units are included in the profile, are

incorporated in one or more enterprises or are separate individual quasi-

enterprises (including SPEs and inactive or dormant legal units).

18.2 For very large and complex groups, it would be very exceptional if the

profile analysis would result in an enterprise structure as presented in the

diagram related to the paragraph 21.75 of the BR recommendations manual, see

below. Here the underlying principles are: “ Once the enterprise group is

reconstructed from the legal units, the enterprises must be delineated within the

set of legal units that are the basis of the enterprise group: The enterprise

consists either of a single legal unit (‘simple enterprise’) or of a combination of

two or more legal units (‘complex enterprise’). It follows that an enterprise

group must consist only of complete enterprises, not parts of them.” (21.75

quoted)

Global

Group

Global

Group

TEN1 TEN2 TEN3 TEN4

GOD1 GOD2

GEN1 GEN3 GEN2 Statistical envi-

ronment at global

(GEN) and nation-

al (TEN) levels

Legal or opera-

tional

(non statistical)

environment





Diagram: Legal units as a common basis of the enterprise group and its

constituent enterprises

18.3 In the bottom-up approach, a legal unit is identified together with its

relationship with its immediate parent, which is the direct controlling legal unit.

This creates tree structures as the basis for creating enterprises. It deals

effectively with time-lags and other deficiencies in administrative data. While it

results in an accurate reflection of the structures and activity of a group, it is a

costly way to deal with groups with hundreds of affiliates. The legal units’

diagram, including the resulting enterprises structure, could be the result of a top

down analysis or the result of a bottom up analysis. The bottom up procedure

starts with the individual legal units and it is checked each time if the legal units

fulfil the requirements to be an enterprise. If not, it is checked if it fulfils if it is

combined with its direct controlling legal unit or with the units it is direct

controlling and so on.

18.4 From the above presented descriptions and diagrams it may become clear

that the use of a mixture of the approaches can be very useful. In practice we

will have an iterative process in which the requirements are checked for the

found possibilities of combinations. If no combinations are possible at all we

cannot longer rely on the legal units structure and must use the approach as

presented in the above top down profiling diagram. The mixed approach mostly

Enterprise group Enterprise 1

Enterprise 4

Enterprise 2

Enterprise 3

Enterprise 5

Head of group A

Legal unit E

Legal unit D

Legal unit C

Legal unit B

Legal unit F

Legal unit G

Legal unit I

Legal unit H

Legal unit J

Legal unit K





will apply for the medium sized groups (e.g. more than … persons employed)

and for the very large units that are not selected for global profiling.

19 The different intensities of profiling (Intensive, light, manual, automatic)

19.1 From the definition of profiling all kind of organisational units can be sub-

ject of it for the establishment of the enterprise structure, except for single units

carrying out economic activities in their own and for their own account. It is an

exception if a large economic activity would be carried out in a single legal unit

not belonging to a group. It still occurs in governmental institutions, but these

are out of scope here.

19.2 Available means and resources should optimally be assigned. Most atten-

tion is needed where most effective results can be reached in terms of costs and

quality. Response burden is included in these criterions.

19.3 Automatic procedures for the constitution of enterprises based on legal

units are suitable and sufficient for small units. It could be agreed to automati-

cally combine all legal units under common control if the size of the combina-

tion does not exceed a certain level.

19.4 Automatic generated proposals for the constitution of the statistical units

structure for groups exceeding the criterions mentioned before, must maybe

manually checked according quality signals from the automatic procedures. Here

we come to the procedure of passive profiling. Manual action is done if the au-

tomatic business registers procedures generate signals, or if there is a need to do

so based on feedback information of users of the register. This kind of manual

interaction can be seen as a kind of very light profiling.

19.5 Intensive profiling is to be done for the very large and complex groups

which have very high impact on the statistical outcomes. So the top xxxx enter-

prise groups should be statistically structured as actual as possible. It is recom-

mendable to assign a profiler (sometimes called an account manager as in pri-

vate business or a coordinator) to these groups. This manager, well known with

the group, can judge the statistical impact of changes within the group. As com-

pared with usual domestic profiling activities of the (truncated) groups the meth-

odology and procedures to start global profiling will have consequences for the

selection of the groups to be profiled according the approach of intensive profil-

ing.

19.6 There are a large number of groups between the groups selected for inten-

sive profiling and units which are constituted according automatic procedures.

Depending on available means and resources and statistical input (such as en-

larged OFATS surveys in some countries) the number of units under active pro-

filing can be defined. Active profiling can additionally be done for quality





checking for a defined group of units, although these units do not belong to the

population for the intensive profiling, or signal based.

20 The selection of groups to be distinguished (criteria and numbers)

20.1 Selection of European global enterprise groups (GEG) with their UCI in the

EU+EFTA. At the EU level, the population of interest is approximately the top

600 groups for European intensive profiling and the 1000 following for light

profiling.

The European global enterprise groups (GEG) in the target of profiling should

be selected in the EGR population. This population can be segmented into 3 cat-

egories of groups for profiling purposes:

Large GEGs for intensive profiling

Medium GEGs for light profiling

Small GEGs that should be automatically profiled.

20.2 Three main criteria can be taken into account to delineate these 3 catego-

ries: the size of the group, its complexity in terms of number of performed ac-

tivities and the geographical scope of the group. Two of these criteria (the size

and the scope) are subjective and depend of the size of the country where the

group has its UCI. Indeed, a GEG of 3000 employees will be considered as a

large GEG in a small country where it will have a big impact on national statis-

tics and as a small GEG in a large country where its impact on statistics will be

insignificant.

1) The size of the group measured by:

o The global employment

o The number of affiliates

o The size of the group in the EU

2) The geographical influence

The geographical influence reflects how far the group has activities in a number

of countries. For profiling purposes, it is limited to the European activity of the

group and measured by taking into account the number of European countries

(EU+EFTA) where the GEG has activities and the number and the percentage of

employees who are working outside the UCI country.

3) GEG Classifications for size and geographic influence according to the

country where the GEG has its UCI The size and number of the enterprises and groups differ from one country to

another in the EU+EFTA. The classification of the groups for profiling purposes

needs to take into account these differences in order to balance the breakdown of

GEG to be profiled per country. Three groups of countries could be delineated

for which the criteria to select groups would differ in terms of size, activity and

geographical influence.

Two classifications of countries need to be performed in order to adjust the size

criteria applied to the GEG. The first classification is performed taking into ac-





count the size of the groups in the different EU countries. The second classifica-

tion is made on the geographical influence criteria.

Classification 1: The countries are classified into the 3 groups according to 3

size criteria: the median number of employees, the 3rd

quartile of number of em-

ployees and the last decile of number of employees of the groups with UCI in

the country.

Classification 1 Group1 Group2 Group3

Countries included Bulgaria, Estonia,

Iceland, Latvia,

Lichtenstein, Malta,

Slovakia, Slovenia

Austria, Finland,

Cyprus, Czech Re-

public, Hungary,

Italy, Lithuania,

Luxembourg, the

Netherlands, Nor-

way, Portugal, Ro-

mania, Sweden

Belgium, Denmark,

France, Germany,

Greece, Ireland,

Poland, Spain,

Switzerland, UK

Size class definition for GEGs

Small <1500 employees <2500 employees <5000 employees

Medium 1500-3999 employ-

ees

2500-8499 employ-

ees

5000-16999 em-

ployees

Large ≥4000 employees ≥8500 employees ≥17000 employees

Classification 2: The countries are classified into the 3 groups according to 3

geographical scope criteria: the median number countries where the GEG is act-

ing, the third quartile and the last decile of number of employees of the groups

with UCI in the country.

Classification 2 Group1 Group2 Group3

Countries included Bulgaria, Estonia,

Hungary, Ireland,

Latvia, Lithuania,

Romania, Slovenia,

Czech Republic

Cyprus, Greece,

Italy, Malta, the

Netherlands, Nor-

way, Poland, Por-

tugal, Slovakia,

Spain, Sweden, UK

Austria, Belgium,

Denmark, Finland,

France, Germany,

Iceland, Lichten-

stein, Luxembourg,

Switzerland





The indicator of influence is calculated according for the three populations of

countries according to the following rule:

For large countries (group3)

Geographical influence

Number of countries where the group is act-

ing outside the country of the GDC

Number of employees

outside the country of

GDC

Part of employment


GDC

<3 3-10 >10

<4000 <20% Small Small Medium

20%-50% Small Medium Medium

50%-70% Small Medium High

≥ 70% Medium High High

4000-5000 <20% Small Medium Medium




5000-6000 <20% Medium Medium Medium

20%-50% Medium Medium Medium

50%-70% Medium Medium High

≥ 70% high High High

≥6000 <20% High High High

20%-50% High High High

50%-70% High High High

≥ 70% High High High

For medium countries (group2)




Number of employees


GDC

Part of employment


GDC

<2 2-8 >8

<3000 <20% Small Small Small



≥ 70% Small High High

3000-4000 <20% Small Medium Medium





20%-50% Medium Medium high



≥5000 <20% Medium Medium Medium






For small countries (group3)




Number of employees


GDC

Part of employment


GDC

<2 2-6 >6

<2000 <20% Small Small Small





20%-50% Medium Medium high



≥3000 <20% Medium Medium high

20%-50% Medium High high

50%-70% Medium High High


4). The complexity of the group in terms of number of activities

An indicator is calculated with information available in the EGR that reflects the

number of activities performed by the group in the EU+EFTA41

(related to the

NACE code). It is calculated taking into account the NACE of the enterprises in

the EU and weighted by the number of employees of these enterprises.

The support activities are removed from the calculation. These support activities

are detected when they are found in at least 80% of the groups and representing,

in each group, less than 10% of the total EU GEG employment. 28 activities are

removed : computer programming and consultancy ('6201', '6202' ,'6209' ,'6311),

financial holding ('6420' ,'6499' ,'6492'), engineering and R&D ('7112', '7219'),

wholesale ('4669', '4649', '4690', '4618', '4614'), financial services ('6619',

'6612'), head offices ('7010', '7022'), retail trade ('4778'), business support activi-

ties ('8299'), accounting ('6920'), advertising ('7311'), real estate

('6832','6820','6810'), renting and leasing of machinery ('7739').

41 The only activity taken into account is the one performed in the EU because it is the only one

for which information is reliable.





The following variable is then computed for each group:

Multi-activity indicator

part of the first

activity

(a)

part of the second

activity

(b)

part of the

3rd activity

(c)

(a)+(b)+

(c)

mono-active GEG ≥ 90% - -

quasi-mono active GEG [80%-90%[ <10% -

bi-active GEG [80%-90%[ ≥ 10% -

quasi-mono active GEG <80% <10% <10%

bi-active GEG <80% ≥ 10% <10%

tri-active GEG <80% ≥ 10% ≥ 10% ≥ 80%

multi-active GEG <80% ≥ 10% ≥ 10% <80%

20.3 Evaluation of the number of groups to be profiled after application of the

criteria. The following table gives a segmentation of the GEG into 3 categories

made on the EGR population of 2011:

Intensive pro-

filing

Light pro-

filing

Automatic pro-

cedures

Austria 31 55 326

Belgium 30 19 168

Bulgaria 0 6 4

Switzerland 58 56 298

Cyprus 6 10 65

Czech Republic 3 11 58

Germany 98 218 1082

Denmark 22 22 124

Estonia 2 6 16

Spain 17 47 231

Finland 31 33 137

France 83 86 479

UK 100 105 770

Greece 4 4 28

Croatia 1 5

Hungary 2 1 17

Ireland 11 6 87

Iceland 3 5 13

Italy 28 63 442

Lichtenstein 3 0 8

Lithuania 3 17

Luxemburg 3 4 11

Latvia 2 9

Malta 1 2 5

Netherlands 67 64 787

Norway 12 35 215

Poland 1 10 32





Portugal 3 14 71

Romania 1 0 8

Sweden 52 62 549

Slovenia 1 14 19

Slovakia 2 4 9

Grand Total 675 965 6083

This classification relies on the quality of the information in the EGR. In particu-

lar the economic information at the global level of the GEG and at the enterprise

level is essential to properly shape the GEG population.

Given that the largest GEGs are included in the EGR 2010, the number of GEG

to be profiled (intensively or lightly) should not change over time.

However, this classification is indicative and the population of GEG to be pro-

filed may be the result of an agreement between Eurostat and the NSIs. Especial-

ly in the population of the GEG that need to be profiled, the choice between light

profiling and intensive profiling cannot rely only on size criteria.

20.4 Selection of global enterprise groups (GEGs) with their UCI outside the

EU+EFTA. A part of the activity in the EU is performed in enterprises under the

control of GEGs that have their UCI outside the EU. In some cases, this part is

not negligible and the activity performed in the EU deserves to be profiled. In

that case, only the EU part (plus the affiliates underneath in the tree) will be

dealt with. The structure of the EU sub groups of non EU GEG is not homoge-

nous and may lead to the proposal of various treatments. This paragraph aims to

give selection criteria for the non EU GEGs that should be profiled and proposes

some treatments according to their European structure.

20.5 Criteria to be taken into account in the segmentation. The same criteria that

have been presented could apply for non EU GEGs, but in a simplified way. It is

proposed to take into account the criteria of size and geographical influence and

not to differentiate the countries where the GEG have activities.

1) The size of the group is measured by:

o The EU employment

o The number of affiliates

2) The geographical influence

The geographical influence is measured by the number of countries where the

GEG is acting.

The combination of these two criteria allows classifying the non-EU GEG ac-

cording to the following grid: Number of EU countries where the GEG is acting

Number of EU employ-

ees

3 countries or

less

3-5 countries 6 countries or more

< 3500 employees small small small

3500-5000 employees small medium medium

5000-7500 employees small medium top

> 7500 employees medium medium top





It could be agreed that top non-EU groups should be intensively profiled and

medium groups should be lightly profiled. However, some other aspects need to

be taken into account in order to clearly make the distinction between the two

populations. One is the availability of EU information which is essential for light

profiling and the other one is the structure of the EU part of the non EU GEG.

20.6 Evaluation of the number of groups to be profiled after application of the

criteria. The following table gives the number of the non-EU groups in the EGR

2010 according to the country of the UCI.

Top Medium Small

Canada 3 3 146

Japan 18 10 280

USA 93 66 1695

Other non EU countries 15 16 1109

Total 129 95 3230

What is interesting for EU countries is to know how they will be impacted by the

profiling of these groups as main or partnering profiler.

The following table gives, per country, a first estimation of the number of non-

EU GEG to be profiled as UCI profiler or as partnering profiler (detailing the

total number of non EU GEG in which the countries are involved and the num-

ber of non-EU GEG for which they have more than one legal units in the part-

nering country).

The potential main profilers have been selected as they have the highest em-

ployment of the non-EU GEG in their country. A current analysis shows that this

is not necessarily the most appropriate country to perform the “UCI” profiling. A

further manual investigation will assess if the non-EU GEG has a European or-

ganisation (and a European headquarter) or if its European subsidiaries directly

depend of the global headquarter and don’t have economic relationships. In the

first case, a European profiling will be relevant and the country of the headquar-

ters is a good candidate to be the main profiler. In the second case, there is no

obvious European organisation of the GEG and each country will perform its

own profiling. In such case, it could be relevant to share practices in order to

treat the different parts of the GEG on the same way (if it is relevant).





Potential main pro-

filer

Partnering profiler Partnering profil-

er with more than

1 legal unit

Top medium top medium top medium

Austria 2 1 92 62 65 30

Belgium 3 2 106 78 88 58

Bulgaria 29 15 7 3

Switzerland 4 1 92 63 86 44

Cyprus 11 6 6 3

Czech Republic 2 2 94 65 57 31

Germany 25 20 99 64 94 62

Denmark 84 52 57 24

Estonia 30 12 9 3

Spain 10 4 105 78 88 52

Finland 1 88 48 50 24

France 18 23 100 65 89 59

UK 22 21 105 73 101 73

Greece 41 15 19 2

Croatia 24 5 5

Hungary 2 1 100 67 67 28

Ireland 7 4 91 58 83 52

Iceland 2 4 1

Italy 4 1 105 78 78 54

Lichtenstein 1 2

Lithuania 28 11 9 1

Luxemburg 1 69 31 66 24

Latvia 30 7 11 1

Malta 4 3 2 1

Netherlands 2 5 113 81 106 72

Norway 1 87 49 64 25

Poland 21 8 91 74 78 58

Portugal 1 91 45 53 18

Romania 2 1 95 29 43 10

Sweden 2 101 64 82 43

Slovenia 32 11 10 3

Slovakia 1 71 30 30 6

Total 129 95 2191 1345 1600 864





21 Priorities and follow up strategies: which group in which intensity with

which frequency?

21.1 Light or intensive profiling. The boundary between GEGs that deserve an

intensive profiling and GEGs that can be treated according to a light method is

narrow. The GEGs to be profiled according to a light profiling process are sup-

posed to be medium sized GEGs that are not too complex and that do not man-

datorily require a contact with the GEGs. For these GEGs, only available

sources are used (annual reports of the GEG, statistical information available in

the NSI from surveys or administrative sources, including FATS data) to deline-

ate the GENs and TENs.

However, in order to be able to collect the minimum set of information accepta-

ble for a profiling of a good quality (see in §16.7 and 16.8 the list of infor-

mation), the UCI profiler needs to have available enough information. For each

GEN, the UCI profiler mandatorily needs to provide the economic information

which qualifies the GEN (NACE code, number of employees, turnover), but also

the content of the GEN in terms of legal units. In addition, it would be appreciat-

ed for partnering countries to have economic data that qualify their TEN (mainly

number of employees and turnover).

Before starting to lightly profile a GEG, the UCI profiler should check the avail-

ability of this information of the following documents:

Consolidated annual accounts

With segment information by activity

With the delineation of

segments in terms of legal units

Answer to the O-FATS survey

That allows to delineate the GEN and TEN

That allows to derive economic information on GEN (and TEN)

These two sources are complementary.

If the mandatory information cannot be completed, the UCI profiler may take the

decision to contact the GEG to complete the profiling. In that case, it will be-

come an intensively profiled GEG.

At the opposite, if a profiling has been started as intensive but the GEG does not

accept to collaborate, it cannot automatically become a light profile. In order to

transform it into a light profiled GEG, the mandatory information needs to be

available.

21.2 Automatic procedures. The majority of groups are out of the scope of pro-

filing. The category of GEG to be treated according to automatic procedures is

heterogeneous however. It includes both groups that are small by their size, or

simple to profile because they perform only one activity or GEG that perform

their activities in a restricted geographical area. For some of them the boundary

with GEG in the scope of light profiling is tiny. It will depend of the resources





available in the NSI for profiling and the availability of the information to build

and qualify the GENs and TENs.

The following table gives an idea of the characteristics of the GEG to be treated

automatically in the EGR201142

:

Number of GEG

Mono-active GEG 1856

Quasi-mono active GEG 694

GEG acting in 1 country outside the

UCI country

1131

Bi-active GEG 1680

GEG acting in 2 countries outside the

UCI country

199

GEG with less than 250 employees 256

Other GEG 267

The automatic procedures should be based on the following principles:

Only one or two GENs are defined in the GEG. In case of one

GEN, it contains all the active legal units belonging to the GEG.

In case of two GENs, the allocation of the legal units to the GEN

is made according to an algorithm that takes into account the

NACE of this legal unit.

The GEN economic data correspond to the GEG global data

(NACE, employment and turnover)

The TEN economic data are initially computed at the central level

(Eurostat). An automatic algorithm attributes to the TEN a NACE

code that takes into account all the activities that are performed in

the TEN and makes a comparison with the GEN NACE code. The

employment corresponds to the sum of the legal units employees.

The NSIs have the responsibility to check and amend these data.

They can also compute automatically national figures for SBS or

STS purposes.

22 Relationship with updating strategy of the EGR

First proposal to be drafted in relationship with the WPC and EGR which, if

possible, identifies links between legal units and enterprises for identification of

the enterprises. See also chapter 7.

42 The table excludes the cases where the GEG is active only in the UCI country. It corresponds

to the cases where the GEG has subsidiaries in more than 1 country, but the subsidiaries outside

the country of UCI don’t have activity (on the criteria of employment). These cases may point

out lack of quality in the EGR and need to be removed from the target population.





V EU-parts of non-EU GEGs

Aim: To define profiling for the European part of non-European groups: desk

profiling of a few groups could be undertaken to define potential different mod-

els (of profiling as well as of statistical units etc) and to propose a way of treat-

ing them.

23 Description of the problem

23.1 Profile the EU-parts of a non-EU GEG necessitates knowing, guessing or

estimating:

- The GGH of the GEG (we will often precisely know it from the commercial

providers, with more difficulties when individuals are concerned)

- Its UCI (we will most of the time know it easily for the GEGs whose UCI is

located in the most developed countries; it can be more difficult to locate it

with certitude when either the owner(s), the capital or the management comes

from developing countries; not because it is theoretically impossible but be-

cause the present commercial data providers, centred on developed countries,

have less information of satisfactory quality. We probably will have more

problems when the scheme changes rapidly than in more traditional struc-

tures. A question to treat is the eventual link between the rate of growth of an

economy and the rapidity of change of its productive structures: if this link

does exist then we will have more problems with GEGs whose UCI is in fast

developing countries.

- The hierarchical scheme of the overall control (because of lack of infor-

mation, the case is more difficult when developing countries are involved; but

it is frequently missing whatever the country of origin is. What we know

quite well is that there is a control, direct or indirect, without being able to

draw the tree).

As a consequence it is difficult to be sure of the global size of the GEG, the EU-

part being often insufficient to be taken as a significant characteristic, as well on

turn-over as on employment.

We probably, in numerous cases, will not be able to find correspondents in

charge of the GEG in Europe; correspondents that we usually look for in order to

discuss the profiling proposals.

It is also difficult to know the operational segments that do exist in the GEG and

to be sure of their impact on the “truncated enterprises” - truncated meaning in

this case as well restricted to EU as restricted to an individual MS.

What might often happen is the existence of apparently independent sets of affil-

iates of the group, each set operating in a bundle of MS, with great difficulties to





build relationships between what is on in the sets of affiliates and the bundle of

countries.

Nevertheless, only testing can show us if our fright is justified. The 2 first exam-

ples (one in France with a very large global and diversified non-EU group, one

in UK with a non-EU group specialised in all electronic and computerised ap-

parels) do not justify the difficulties described previously, but this “small” test-

ing is not yet able to permit significant conclusions.

24 The impact of partly profiling on the statistical units model

24.1 What is our real aim when profiling a non-EU GEG?

Our answers can be of two types:

- We would like to do exactly the same process as for EU-GEGs:

o Determination of the exhaustive global cluster of affiliates and/or con-

trolled legal units;

o Delineation of the global enterprises through the analysis of the operating

segments (but with difficulties to meet global GEG officers if required),

then the delineation of the TENs;

o Checking the ability of the TENs to provide the required statistical data.

- We would want to profile only the group defined by the EU affiliates and

their daughters, granddaughters etc. (exactly as if the upside part of the GEG

was limited to one unique GGH with direct links to the EU parts, rubbing the

intermediate structures). A possible problem can be the delineation of the

right group cluster (perimeter) because of the possibility that control relation-

ships only can be detected outside the EU.

The advantages and disadvantages of the 2 solutions have been slightly ex-

plored:

- We are not sure to be able to get the upside information from non EU GEGs;

on the contrary all the downside data are legally available in Europe;

- If we are sure that we want to describe Nokia as belonging globally to the

manufacturing industry, we see no real advantage to describe Samsung in the

same way (for the EU, Samsung is a pure distributive group)

- We feel comfortable when the group has created a European holding struc-

ture; we found it uncertain when each affiliate report to non EU owners. In

the last case it could be impossible to do more than a legal unit investigation

or to survey a large bunch of very small subgroups, having no direct relations

with each other even if all related to the same but practically unknown global

enterprises.

We have nevertheless made a provisional choice and decided to test the profiling

restricted to the EU and downstream.





VI SPEs, Holding Companies (HCs), Head Offices (HOs) and “other

special cases”

Aims: To describe the implications of changing from current enterprise to

GEN/TEN, including the treatment of some specific cases among: financial ve-

hicles, holdings( and to split them up from the head offices, headquarters and in

the profiling terminology from the GDC global decision centre), auxiliary activi-

ties and units, R&D, SPEs;

To check and assess at/in which conditions it would be possible to do it consist-

ently with other statistical domains or users.

25 Special Purpose Entities (SPEs)

25.1 The term Special Purpose Entity, SPE, is used for legal units that are creat-

ed to fulfil narrow, specific or temporary objectives and/or to gain fiscal ad-

vantages43

.

- Other special business structures frequently encountered in GEGs such as

legal units consisting purely of centralized R&D, headquarter or auxilia-

ry activities are labelled as other special cases.

- During the tests, another rather unexpected type of cases has appeared:

wholesale intermediate affiliates belonging to the producing group, with

a small activity size: they buy the (manufactured) products from operat-

ing countries at a rather low producer’s price and sell them back to other

affiliates or to independent buyers at arm’s length often through a net-

work of commercial representatives employed by a branch in the con-

suming country; thus the “competitive prices” appear between a non-

producing country and the consuming country, the producing country re-

ceiving in an “optimized” version only a fee for processing. Profiling al-

lows analysing these relations and links inside the same GEG in different

countries.

25.2 SPEs and other special cases have an increasing importance in the global

organisation of the GEGs and in their extension to new geographic areas.

25.3 SPEs and other special cases affect business statistics and national account

statistics through altering structures of enterprise population, GDP in relation to

GNI and international trade in services. For example, SPEs often locate in coun-

tries offering tax advantages, and one of their main purposes is to generate cross

transactions between subsidiaries located in different countries. Therefore, SPEs

directly affect FDI creating initially artificial cross-border financial flows. As

showed previously they might also affect the value of production and of property

income flows.

43 The guide “Impact of Globalisation on National Accounts”, p. 39 Item 4.5.





25.4 The recent international statistical regulations and manuals (including the

SNA 2008 and the ESA 2010, the BPM6 manual etc.) recognize the impact of

SPEs and other special cases. However, the detailed guidelines on how to handle

these entities in various statistics only appear now; countries are in many cases

still left to choose their own treatment. National experience, task forces and

working groups show that existing definitions and recommendations for treat-

ment are still specific to the very statistical domain in question – reflecting its

perceived objectives and characteristics. But as the description of the underlying

phenomena and the tentative statistical measurement of them increase, a large

consent is appearing that the “domain statisticians” all use the same basic infor-

mation in a converging way: they need to discuss and agree with the GEGs on

what is on, and on which way to treat it; they need to use efficiently private ac-

counting data and it is necessary to share analysis and data between involved

countries. Moreover, decision trees and other technical solutions, which are

presently typically described for legal units within national boundaries, are to be

translated to GEGs and enterprises at global level.

25.5 The profiling of large and complex GEGs may take a crucial role in assur-

ing coherent statistical treatment of SPEs and other special cases in the business

statistics and as providers of data to national accounts. As profiling will be real-

ised in close co-operation with the EGR and as SPEs are specific phenomena of

the GEGs, the leading profiling NSI-this of the UCI of the GEG - may provide

the EGR with updated information on SPEs and other special cases. The EGR

could then flag SPEs and other special cases accordingly, and the information

would be centrally available for production of various statistics. As a conse-

quence, individual statistics need no longer to identify SPEs and other special

cases but may take their status as given, and apply the appropriate statistics-

specific treatment to these entities.

25.6 In this Section VI Chapter 26 summarizes the identification criteria of SPEs

as described in recent international regulations and manuals. Chapter 27 propos-

es treatment of SPEs in GEG profiling. Chapter 28 summarizes ancillary activi-

ties and R&D activity as described in recent international regulations and manu-

als. Chapter 29 proposes treatment of R&D and auxiliary activities in GEG pro-

filing. Chapter 30 introduces the issue of branches and “VAT positions”.

26 SNA principles and requirements of Special Purpose Entities (SPEs)

26.1 GEGs often have legal units that are insignificant from economic44

point of

view of the production and of related topics. In different statistical manuals, the-

se types of units are referred as ancillary or auxiliary units or artificial subsidiar-

44 more precisely, the point of view of production and distribution of goods and non-

financial services





ies. Moreover, terms SPE and SPV45

are used for certain types of units. To a

large extent, the complexity of a GEG arises from the amount or variety of these

special types of units.

26.2 Concerning the SPEs, the new international manuals (the 2008 SNA, BD4

and BPM6) include general criteria which may help statisticians to identify

them. In addition, many different task forces/working groups in Eurostat have

attempted to facilitate the identification of SPEs. This is the recent case of a

Task force on HOs, HCs, and SPEs common to national accountants of Eurostat

the ECB and OECD46

26.3 The SNA 2008 Chapter 4 “Institutional units and sectors” defines institu-

tional units and their use. The chapter deals with different types of corporations

including not only legally constituted corporations but also cooperatives, limited

liability partnerships, national resident units and quasi-corporations. Moreover,

special focus is given to special cases such as groups of corporations, head of-

fices and holding companies and special purpose entities.47

The main principle in the SNA 2008, referred to by the latest TF to date is that

standard criteria for determining whether they constitute an institutional unit

should be applied to each individual corporation, whether or not it forms part of

a group. The SNA 2008 mentions some special cases (mainly related to large

groups of corporations) and includes some paragraphs on SPEs:

“Such units often have no employees and no non-financial assets. They may

have little physical presence beyond a “brass plate” confirming their place of

registration. They are always related to another corporation, often as a subsidi-

ary, and SPEs in particular are often resident in a territory other than the terri-

tory of residence of the related corporations. In the absence of any physical di-

mension to an enterprise, its residence is determined according to the economic

territory under whose laws the enterprise is incorporated or registered. For

more detail on problematical cases see BPM6.

Entities of this type are commonly managed by employees of another corpora-

tion which may or may not be a related one. The unit pays fees for services ren-

dered to it and in turn charges its parent or other related corporation a fee to

cover these costs. This is the only production the unit is involved in though it will

often incur liabilities on behalf of its owner and will usually receive investment

income and holding gains on the assets it holds.”48

45 special purpose vehicle

46 common report dated 14 June 2013

47 Part B of the chapter 4 (SNA2008).

48 Paragraphs 4.56 and 4.57 of the SNA2008.





26.4 According to the SNA 2008 only following categories of SPEs need to be

treated different from other resident entities49

:

– Captive financial institutions

– Artificial subsidiaries of corporations

A prominent example of a captive financial institution is a holding company that

simply owns the assets of subsidiaries. The holding companies are distinct from

what the SNA names the Head Office (in BR they are referred to as GDC or

UCI, that are, also, active in managing the GEG or part of it)

Artificial subsidiaries of corporations are created to provide services to the par-

ent corporation or other corporations in the same group. For example, the parent

may create a subsidiary which owns buildings or equipment and whose sole

function is to lease them to the parent corporation or to its affiliates50

.

26.5 Other work on identification of SPEs. In addition to SNA2008 the 4th edi-

tion of the OECD Benchmark Definition of Foreign Direct Investment (BD4)

provides guidelines on how to identify SPEs. The OECD51

criteria are:

”i)The enterprise is a legal entity,

a) formally registered with a national authority; and

b) subject to fiscal and other legal obligations of the economy in which it is

resident.

ii) The enterprise is ultimately controlled by a non-resident parent, directly or

indirectly.

iii) The enterprise has no or few employees, little or no production in the host

economy52

and little or no physical presence.

iv) Almost all the assets and liabilities of the enterprise represent investments in

or from other countries.

v) The core business of the enterprise consist of group financing or holding ac-

tivities, that is – viewed from the perspective of the compiler in a given country –

the channelling of funds from non-residents to other non-residents. However, in

its daily activities, managing and directing plays only a minor role.”

49 “Special purpose units” of general government should also be treated explicitly, but

they are excluded here, because the focus is on the corporate sector 50

the artificial characteristic is even greater if it is lease back and not direct lease. Simi-

lar examples would be on HR, management of patents, etc. 51

The OECD Benchmark Definition of Foreign Direct Investment, 4th edition, p. 102,

Box 6.2. 52

An issue comes from the treatment of R&D as GFCF: it results from this treatment

that patents and models become non-financial produced assets; their fees remain prod-

ucts of ordinary services - as anticipated from the ESA95 - creating Value Added and

thus impacting GDP =>

1- The SPE might produce such services;

2- The business statistics need to cover properly these flows.





In 2010, the Eurostat Balance of Payments Working Group and the ECB Work-

ing Group on External Statistics53

agreed on definition of SPE for the compila-

tion of FDI statistics in the EU. The definition is in line with the BD4 guidelines.

The Eurostat Task Force on FDI has recommended using the definition agreed

by the BoP WG and the WG-External Statistics as a basis to identify SPEs in the

EGR. The Task Force also recommends that SPEs have to be flagged in the EGR

for FDI and FATS purposes and it lists criteria that could be used to produce a

list of potential candidates for national SPEs using the available information in

the EGR. This work is closely related to that of profiling of GEGs. On the one

hand, profilers can provide input on the SPEs and other special cases to be

flagged in the EGR. On the other hand, profilers could also use the list of poten-

tial candidates for SPEs and other special cases generated by the EGR.

Also another Eurostat Task Force has dealt with the identification and the treat-

ment of SPEs. The Task Force on recording of certain activities of multination-

als in national accounts recommends that the treatment of SPEs in EU member

states should conform to the classification table reproduced in Annex IV of this

report. The Task Force provides also a decision tree for the identification of

SPEs (see also the Annex IV).

All the guidance on SPEs in current manuals and other research on the subject is

taken into account in a recent guide called “Impact of Globalisation on Na-

tional Accounts”54

. Chapter 4 of the guide focuses on SPEs. However, the man-

ual still states that a clear definition of SPEs is not available and the work on

common conceptual framework on SPEs is one of the priority items on research

agenda.

26.6 Proposals selected from the report of the TF on HOs, HCs and SPEs. Tak-

ing into account the previous developments, the TF finds it more useful to work

on practical classification, rather than try to find criteria that could cover com-

prehensively the whole of this issue (the objective is to treat about 90% of the

accumulated concerned assets in an economy).

A stress is put on the necessity to come to consistency with business statistics in

the future: “In order to make the recommendations of the Task Force useable in

Business Registers, the concept of “institutional unit” according to the SNA

should be brought in line with the concepts used in Business Register, and vice

versa” (see also the footnote 1 page 7 of the final report). [Note: an ad hoc Task

Force on Statistical Units has been installed mid 2013which amongst others has

53 External Statistics refer to all statistics that focus on cross border transactions (such as FDI,

foreign trade statistics) 54

See

http://live.unece.org/fileadmin/DAM/stats/groups/wggna/Guide_on_Impact_of_globalization_on

_national_accounts_FINAL.pdf

http://live.unece.org/fileadmin/DAM/stats/groups/wggna/Guide_on_Impact_of_globalization_on_national_accounts_FINAL.pdf






the task to draft a definition and operational rules for the enterprise group (2a,

2b) and the reference to institutional unit (3). At the moment of finalizing this

document it is not yet clear what this means for the current proposed GEN/Ten

approach]

As it is not an objective of Profiling to discuss in-depth the links and differences

between “enterprises”, “enterprise groups” and “institutional units” (see also

Note above) our main will be to be practical on the way to the required con-

sistency.

Thus we have to pay a maximal attention to the classification of some types of

SPEs as given in the § 5.2 of the TF report (numbers are ours). The distinction

among different SPE-type of entities and the brief description were taken from

the TF report; as ESSnet profiling we added an evaluation of the proposed solu-

tions according to our methodology

TF1: Holding company

Function: Holding the assets (owning controlling level of equity) of subsidiary

corporations on behalf of its parent without undertaking any management activi-

ties

Criteria: An SPE (or similar type of entity) exercising some aspects of manage-

rial control over its subsidiaries should be classified as head office; see also sec-

tion 3 and 4 of the report.

Industry ISIC Section K 6420

Sector S127 - Captive financial institutions and money lenders.

TF1 - Profiling assessment: when these entities are situated in the control tree

upwards from the UCI, we agree with this classification:

1. The result of it will be to consider that the profiled GEGs are based on

the UCI controlled affiliates; this is mostly consistent with the way we

use the consolidation perimeter and thus manageable in a profiling per-

spective.

2. The “upward holdings” belong to the financial sector, will be eventually

profiled in the future, noting that their own tree finishes just above the

UCI (the non-financial GEGs not being part of their perimeter and being

treated as non-controlled - even if majority - ownership). How the UCI

should be identified has not been established yet and should be part of fu-

ture testing.

3. This treatment if validated allows investment funds to be involved in

several “independent” GEGs.

4. Of course in our use, the term “captive financial institution” might not be

the best.

When the holdings are located inside control sub-trees, we prefer to keep them

in the profiled GEG as part of the relevant “enterprise”.





TF2: Shell company

Function: Passing through funds from non-residents to non-residents without

conducting any operations in the economy

Criteria: A shell company only deals with group enterprises and is thus classi-

fied under S127. If the relevant SPE (or similar type of entity) mainly holds

shares of subsidiaries, it should be regarded as a holding company.

Industry ISIC Section K6430 or K 6499

Sector S127 - Captive financial institutions and money lenders

TF2 - Profiling assessment: it is, mutatis mutandis, the same as the previous

one; for profiling all the units, also shell companies, located inside the control

sub-trees, will be kept in the profiled GEG as part of the relevant “enterprise” to

be found

TF3: Unit for holding and managing wealth of individuals and families

Function: Holding financial and non-financial assets for individuals and families

Criteria: According to the 2008 SNA, family trusts are to be treated as captive

financial institutions (S127). However, if the trust deals with individuals and

families on the open markets, it should be distinguished from other family trusts

and it should be classified under the corresponding financial subsector, for ex-

ample, as Non-MMF investment funds (S124).


Sector S124 – Non-MMF investment funds or S127 - Captive financial institu-

tions and money lenders

TF3 - Profiling assessment: it is, mutatis mutandis, the same as concerning the

two previous cases.

TF4: Securitisation company

Function: Securitising assets for fund raising

Criteria: Purchasing assets while issuing securities such as Asset Backed Securi-

ties (ABS) and Asset Backed Commercial Paper (ABCP) or acquiring loans

originated by other units. Although SNA 2008, para. 4.110 states that financial

corporations engaged in securitisation are to be classified under S125, SNA

2008, para. 4.59 also considers at least some securitisation vehicles as captive

financial institutions (S127). Assuming that the relevant units pass the institu-

tional test, they should be classified as part of S125, if they purchase assets on

the open markets while raising funds on the open markets; if they do not operate

in the open markets on either assets or liabilities, they should be classified in

S127.


Sector S125 - Other financial intermediaries except insurance corporations and

pension funds or S127 - Captive financial institutions and money lenders

TF4 - Profiling assessment: we agree; for units of that kind classified under

S125, profiling should consider the securitisation company as an “enterprise”

(activity carried out for the market); for the exceptions under para. 4.59 (SNA

2008) profiling treatment is the same of points TF1 and TF2.





TF5: Conduit

Function: Raising or borrowing funds, often from unrelated enterprises, and re-

mitting those funds to its parent or to another related enterprise

Criteria: According to SNA 2008, para 4.114 c, conduits should be classified in

S.127 (captive financial institutions), if they qualify as institutional units and

raise funds in open markets to be used by their parent corporation. Conduits typ-

ically do not transact on the open markets on the asset side.


Sector S127 - Captive financial institutions and money lenders

TF5 - Profiling assessment: it is, mutatis mutandis, the same as concerning the

TF1 and TF2 cases: if possible these units should be grouped with the enterprise

they contribute to create with their specific activities (raising or borrowing

funds).

TF6: Royalty and licensing company

Function: Concentrating group receipts concerning royalties and similar flows

received from intellectual property rights and trademarks

Criteria: An SPE-type of entity holding intellectual property rights or trade-

marks and receiving royalties or similar flows for a group of enterprises or indi-

viduals is regarded as an independent royalty and licensing company. The issue

of economic ownership of the relevant non-financial assets needs further discus-

sion: see issue 4 (of the original paper).

Industry ISIC Section N 7740

Sector S11 - Non-financial corporations

TF6 - Profiling assessment: we agree, up to the point that we will take the rele-

vant companies as part of the perimeter of the GEG that has to be profiled. If

possible these activities should be split to the different enterprises otherwise a

specific “enterprise” should be created (in practise, the same treatment foreseen

for the GDC).

TF7: Captive leasing company (including mobile equipment renting com-

pany)

Function: Financial leasing or operational leasing within a group

Criteria: Financial leasing companies operating on open markets are to be clas-

sified under S125 (see SNA 2008, para. 4.110). Captive leasing companies

should be classified under S127. Operational leasing company should be classi-

fied as non-financial corporations (S11).

Industry ISIC Section K 6491 for financial leasing companies, ISIC Section N

7730 for operational leasing companies


pension funds, S127 - Captive financial institutions and money lenders or S11 -

Non-financial corporations 21

TF7 - Profiling assessment: we agree, up to the point that we will take the rele-

vant companies as part of the perimeter of the GEG that has to be profiled. The





solution of the TF that considers as crucial the distinction “within a group/to the

open markets” is fully consistent with the profiling methodology.

TF8: Factoring and invoicing company

Function: concentrating sales claims and invoicing sales of enterprises

Criteria: An SPE-type of entity providing factoring and invoicing services with-

in a group is classified as captive financial institutions (S127). If the unit deals

with counterparties on the open markets, it should be rather classified under

S125.



pension funds or S127 - Captive financial institutions and money lenders

TF8 - Profiling assessment: we never met such a case, even when the GEG has

created cash management process (this means that we do not know if they keep

in-house the factoring and invoicing operations or if they outsource them). Thus,

without experience, we probably will propose to put this type of company in a

specific “enterprise” which main activity is financial. On the other hand it may

be concerned to belong to “ordinary business” of an enterprise to assure reve-

nues for deliveries. For all the activities carried out within the group we general-

ly followed the approach of point TF1 while for market activities a specific “en-

terprise” could be created.

27 Treatment of SPEs in profiling; the global and national perspective

27.1 Profiling raises expectations for a coherent and extensive identification of

units generally defined as SPEs. An important outcome from profiling could be

flagging SPEs in EGR where different statistical domains such as FDI, NA and

SBS could obtain the SPE status in a coherent way.

27.2 The core of the profiling methodology consists of the global perspective,

the top-down approach and the use of IFRS standards. This has implications for

the enterprise delineation, which is specifically demanding when recognition and

treatment of SPEs is concerned: the usual conceptual approach relies on legal

units or branches taken as quasi-legal units; our approach needs at the end to

decide what “enterprises” are to be built and what are their links with the legal

units the other have in mind.

27.3 The global perspective and the top-down approach imply a precise order in

the enterprise delineation: GEG first - separated from its upward holding(s) as

treated in the previous chapter- then GENs and eventually TENs as national

parts of them. The IFRS standards are used to delineate GENs: the financial

statement discloses segments each of which usually consists of several LeUs or

parts of them, and a GEN is generally derived from a segment or a GEN closely

corresponds to a segment. The IFRS standards allow MNE holdings, financial





units, headquarters and SPEs being reported in segments. Thus a GEN also may

include these types of activities.

27.4 According to the model adopted for profiling (Chapter 2) SPEs are consid-

ered individually as quasi enterprises, part of ordinary enterprises, or grouped to

build ordinary or specific (quasi) enterprises to have a full coverage of the enter-

prise group. More specifically, legal units that cannot be included in operational

GENs or TENs are treated in a way similar to SPEs.

27.5 The problem of SPEs has also emerged in the accounting sector. The IFRS

10 standard has been effective from the 1st of January 2010. The principle

SIC12 in force until the end of 2012 but useful for our understanding deals with

SPEs55. The IFRS 10 standard which replaces SIC12 introduces a single consoli-

dation model for all entities based on control, irrespective of the nature of the

investee (i.e., whether an entity is controlled through voting rights of investors or

through other contractual arrangements as is common in special purpose enti-

ties)56.

27.6 There are two alternative sources available for SPE identification: one

based on the IFRS standards, and the other based on NACE codes recorded in

EGR.

2.7 The IFRS standards suggest two types of legal units to be investigated as

SPE candidates in profiling UCI-based GEGs as explained in 24.4: a) the LeUs

that are not consolidated in the financial statements of the group, and b) the

LeUs that are consolidated in the residual segment of the financial statement

typically named as “Other”.

For the first type, we should normally make a distinction between the “marginal

units” (in an accounting sense) and the eventual SPEs; the solution is to flag all

the concerned LeUs as potential SPEs.

For the second type it is necessary to understand whether the LeUs within the

“Other” segment can be organized in autonomous and meaningful GENs. If it is

55 Under SIC 12, an entity must consolidate a special purpose entity ("SPE") when, in substance,

the entity controls the SPE. The control of an SPE by an entity may be indicated if:

The SPE conducts its activities to meet the entity's specific needs

The entity has decision-making powers to obtain the majority of the benefits of the SPE's

activities

The entity is able to obtain the majority of the benefits of the SPE's activities through an

'auto-pilot' mechanism

By having a right to the majority of the SPE's benefits, the entity is exposed to the SPE's

business risks

The entity has the majority of residual interest in the SPE

Examples of SPEs include entities set up to effect a lease, a securitisation of financial assets, or

R&D activities. 56

Under IFRS 10, control is based on whether an investor has 1) power over the investee; 2)

exposure, or rights, to variable returns from its involvement with the investee; and 3) the ability

to use its power over the investee to affect the amount of the returns.





the case, the specific GENs have to be created independently from the residual

“Other” GEN. If not, then the concerned LeUs will remain in the “Other” GEN

and flagged as potential SPEs. It is noteworthy that the IFRS 10 instructs most

SPEs to be consolidated in the financial statement. As a consequence, on one

hand most LeUs outside the scope of consolidation are SPEs, and on the other

hand more LeUs consolidated in the residual “Other” segment are in fact SPEs.

27.8 The use of EGR data including NACE code in the identification of SPEs is

described in the report by the FDI Task Force57

. Concerning the types introduced

by the GGNA manual (financing and holding companies; royalty and licence

companies; factoring companies; leasing companies) profiling could help inte-

grating EGR and desk results, especially based on the financial statements. Good

results could also be obtained in delineating empty shells during the UCI evalua-

tion. In general, at the global level flagging the financial sector should be easier.

27.9 Based on either IFRS standards, or the EGR data, or a combination of the

two sources, the UCI profiler first flags the suspected SPEs. Next, the partnering

country will either confirm or disapprove the suggested SPE status based on the

national first-hand sources such as registers and surveys. The SPE delineation in

profiling is realised in a close co-operation between the UCI profilers and the

partnering countries. Coherence with the GEN implies that for example the deci-

sion tree for the identification of SPEs of “Eurostat Task Force on the recording

of certain activities of multinationals in national accounts (TF MUNA)” is not

completely applicable. In fact, an entity controlled by another resident institu-

tional unit could be part of another GEN and data consolidation following only

the territorial aspects should not be the proper solution. Anyway, specialists in

global profiling members will be aware that in terms of automatic procedures

and for situations in which a complete international profiling cannot be under-

taken the decision trees developed in different Task Forces will lead to good

solutions.

27.10 Here some important proposals of the FDI task force are copied. The FDI

Task Force report presents the most recent and the most operational definition of

SPEs; it is also nearly described as a process to delineate them. So the content of

the Box 6 of the report of the FDI Task Force leads us to issues such as: can it

either be used as a starting point in our profiles or as a set of requirements to be

fulfilled for further use by the FDI statisticians?

57 Final report of the Task Force ”FDI Requirements on the EGR”, p.22 Box 6: Recommenda-

tions for the identification of SPEs.





Box 6: Recommendations for the identification of SPEs

6.1. SPEs have to be flagged in the EGR for FDI and FATS purposes. Three

categories should be identified:

(i) Empty group heads,

(ii) SPEs used for “passing through capital” and possibly

(iii) Other SPEs.

6.2. The European SPEs, which are a subgroup of the national SPEs, should be

also identified in the EGR.

6.3. The definition of SPE (national and European concept) as agreed by the BoP

Working Group and the WG-External Statistics should be used as a basis to

identify SPEs in the EGR.

6.4. The following criteria included in the definition of SPE could be used to

produce a list of potential candidates for national SPEs using the available in-

formation in the EGR:

(i) The enterprise is a legal entity incorporated in a Member State or a branch

registered in the country → in the EGR, it should be a legal unit resident in a

Member State.

(ii) The enterprise is ultimately controlled by a parent not resident in the

Member State, directly or indirectly58

→ in the EGR, the UCP/UCI should be

resident in another Member State.

(iii) The enterprise has no or few employees59

→ in the EGR, the number of

employees should be 0, 1 or blank.

(iv) The core business of the unit frequently consists of group financing or

holding activities → in the EGR:

– Units under NACE codes 6420, 6430 or 7010 could perform activities po-

tentially related to SPEs (codes 6492, 6499 and 6619 could be also consid-

ered) and,

– A legal unit will not very likely be a SPE if there is another entity in the

group performing a production activity in the same country of residence.

6.5. The information on SPEs could be fed into the EGR in two possible ways:

(i) National FDI compilers provide their own list of SPEs to be incorporated

and flagged in the EGR.

(ii) Alternatively, the EGR produces a list of potential candidates for being

SPEs (at national and EU/EA level) using the criteria described in Recom-

mendation 6.5. This list is checked by the national institutional contacts and

the validated entities are flagged as SPEs in the EGR.

58 we should add “or controls affiliates that are all non-residents –case of the empty

group head”; but the conclusion stays right: the UCI/UCP is resident in another mem-

ber state; 59

The TF on HOs HCs and SPEs identifies “few” with 3 (and not “0” or 1); but this

change does probably not create substantial difference.





28 Auxiliary activities and R&D according to SNA

28.1 National account statistics are identified as important end-users of data

compiled for new profiled statistical units, and hence discrepancies with SNA

are to be avoided as much as possible. BPM6 is considered here next to SNA,

since it focuses on cross-border transactions which play a significant role in

GEG activities. Therefore, both SNA and BPM6 are to be acknowledged when

deciding on how to deal with GEGs’ auxiliary activities and R&D in profiling.

SNA and BPM6 apply the term institutional unit for a unit, supposed to be close

to TEN in the profiling terminology, and establishment for a unit supposed to be

close to LKAU60

.

28.2.1 Ancillary activities and artificial subsidiaries. The SNA 2008 makes a

distinction between artificial subsidiaries and a unit undertaking only ancillary

activities.

The SNA 2008 Chapter 5 discusses the role of ancillary activities. When the

basic routine services61

that are required by all enterprises are provided in-house,

they are called ancillary activities. According to SNA, an ancillary activity is a

supporting activity undertaken within an enterprise in order to create the condi-

tions within which the principal or secondary activities can be carried out.

According to SNA, ancillary activities are not separately identified for small

enterprises with single location but for larger enterprises with multiple locations

it may be useful to treat them as secondary or even as principal activities.

SNA specifies that activities, such as producing own machinery and equipment

for the enterprise or carrying out own R&D, are not (to be treated as) ancillary.

Concerning the treatment of ancillary activities, SNA states that if an establish-

ment undertaking ancillary activities is statistically observable or it is in a differ-

ent location from the establishments it serves, it may be useful to treat it as a

separate establishment unit.62

However, ancillary activities are not satisfying the

conditions of being separate institutional units in the SNA framework) neither of

having sufficient autonomy in the Profiling method).

Within SNA, the artificial subsidiary is a subsidiary corporation wholly owned

by a parent corporation and created only to provide services to the parent corpo-

60 Statistical units used in present statistics (including national accounts) and implications of

changing the units are discussed in more detail in the chapter 11 and 12. 61

Such as keeping accounts; providing communication facilities; purchasing materials and

equipment; hiring, training, managing and paying employees; storing materials or equipment:

warehousing; transporting goods or persons inside or outside the producer unit; promoting sales;

cleaning and maintenance of buildings and other structures; repairing and servicing machinery

and equipment; and providing security and surveillance. Paragraph 5.35 of the SNA2008. 62

Paragraph 5.41 of the SNA2008.





ration or other corporations in the same group. Artificial subsidiaries are not

regarded as separate institutional units in SNA but as an integral part of the par-

ent, and their accounts are consolidated with those of the parent (unless they are

resident in an economy different from that of their parent and treated as SPEs).63

However, SNA does not discuss whether activities of artificial subsidiaries may

be treated as separate establishments when possible.

In conclusion, attempting to translate the SNA64

guidelines into the profiling

approach, SNA allows ancillary activity units to be treated as nationally truncat-

ed parts of GENs where GEN represents the principal activity and ancillary ac-

tivity units form a TEN that is dual coded to represent the national activity

which is different from the GEN activity. SNA indicates the similar treatment

for artificial subsidiaries. Thus, remaining in line with SNA, ancillary activities

or artificial subsidiaries may not constitute a GEN but be dual coded TENs.

28.2.2 Research & Development. According to SNA, research and development

is not an ancillary activity, and it is recommended that a separate establishment

should be distinguished for it when possible. The output of R&D should be val-

ued at market prices or at the sum of total production costs plus an appropriate

mark-up. Moreover, the output of R&D should be capitalized as intellectual

property products.65

However, SNA does not discuss directly whether a subsidiary carrying out R&D

activity is to be interpreted as an artificial subsidiary or as a conventional subsid-

iary which is treated as a separate institutional unit.

In conclusion, attempting to translate the SNA guidelines into the profiling ap-

proach, SNA bypasses altogether the question whether R&D subsidiaries should

form a GEN. As SNA recommends R&D to be interpreted as LKAU, brought to

the profiling terminology, a national R&D unit should be included in the GEN

which manages it (either a productive GEN whose R&D activities are split from

the production, or a specialised R&D GEN), presented as a TEN (i.e. one TEN

per GEN per country) with R&D activity code if convenient (or just part of the

convenient TEN), even in case the GEN does not present R&D as its principal

activity. The introduction of dual coding (see chapter 6) will contribute to a solu-

tion here.

63 Paragraphs 4.62-4.64 of the SNA2008.

64 It is important to have in mind that the SNA is written from a national perspective

65 Paragraph 6.207 and 10.104 of the SNA2008.





29 The treatment of R&D and auxiliary activities, with focus on crossing

border services

29.1 The problems of R&D and auxiliary activities in the frame of the multina-

tional groups are related to different kind of issues.

First, we need to decide whether the R&D or auxiliary activities of the enter-

prise group can form a global enterprise (GEN “other” or GEN “auxiliary”).

Especially this question arises in cases where the R&D and/or auxiliary activities

are organised and reported as own operational segments according to IFRS rules.

Second question is what is the impact of GENs and TENs on treating the finan-

cial flows of such activities between countries? Do the GENs and TENs help the

identification and measurement of cross-border services?

Auxiliary activities are by nature similar to those of R&D. The only difference is

that auxiliary activities are limited in scope to the type of service functions that

virtually all enterprises need to some extent. R&D, instead, is not necessary to

all enterprises.

29.2 There are several ways to organize the R&D or auxiliary activities inside

the group. Three different examples are put in the annex V to illustrate the issue.

Further examination of the issues and experiences from testing must lead to

more concrete recommendations.

30 Branches and the question of VAT positions

30.1 Some specific situations as for example VAT positions66 need to be further

investigated. Here follows some first insights of the phenomena.

30.2 GEGs often open VAT positions in different countries mainly for fiscal

reasons. In some cases high levels of turnover and/or exportations are recorded

for these, mostly empty, shells. In these cases it may not be clear whether the

values are related to other resident subsidiaries or to foreign units of the same

group. A practical solution often adopted in a national perspective is to look for

units of the same GEGs and consolidate the data. Profiling methodology could

be a valid tool also in such situations in defining the activities carried out by the

units and finding the proper solutions especially evaluating the intra-group flows

(cross-border) or the presence of particular agreements (for example, contract

manufacturing) within the GEG.

66 A tax position is a position that an entity takes in a previously filed tax return or which it ex-

pects to take in a future tax return, which it uses to measure current or deferred income tax assets

and liabilities. A tax position can yield a permanent reduction or deferral of income taxes paya-

ble.

Examples of tax positions are the decision to not file a tax return, to shift income between tax

jurisdictions, and to classify a transaction as tax-exempt.





30.3 In some cases a VAT position may be considered as an SPE but in this doc-

ument the choice was to separate the NA aspects (chapters 24 and 25) from other

concepts. According to the GGNA manual67

, the value added tax (VAT) regis-

tration is not a sufficient condition in the European Union for an entity to be

classified as a resident institutional unit. Such an entity is deemed to be resident

in a country for certain administrative purposes but not for statistical purposes.

However, (global) profiling methodology can help in identifying such VAT enti-

ties that are not resident for statistical purposes. The interrelationships between

the UCI and the partner countries should be sufficient to solve the possible in-

consistencies in the statistics (see Annex VI).

30.4 Branches defined as “local units without separate legal entity”, which are

dependent on foreign enterprises, and classified as quasi-corporations according

to ESA95 and SNA93 principles, shall be treated as enterprises in the business

registers” (BRRM 2010). For the SNA2008 a branch may be identified as an

institutional unit “when a non-resident unit has substantial operations over a sig-

nificant period in an economic territory, but no separate legal entity” and “this

unit is identified for statistical purposes because the operations have a strong

connection to the location of operations in all ways other than incorporation”. In

global profiling these kind of units will belong to the perimeter of the GEG they

belong to. From here these will be part of the analysis of the GEG into the statis-

tical units structure of the group via the profiling exercise.

30.5 Regardless of the definitions within the European Community it seems very

difficult to imagine a situation in which an administrative source of a Country

does not record a branch as a separate legal entity. Generally it should be easy to

understand if the unit is a national one or a branch but the main consequence for

the EGR is the presence of more records for the same unit (even if in different

countries).

67 See pages 43-44, 269 and Chapter 9









List of abbreviations

A&L Assets and Liabilities

BRRM Business Register Recommendations Manual (2010)

BR Business Register

BD4 The OECD Benchmark Definition of Foreign Direct Investment, 4th

edition

BoP Balance of Payments

BPM6 Balance of Payments and International Investment Position Manual,

sixth edition

BR Business Register

CBS Centraal Bureau voor de Statistiek (Statistics Netherlands)

D&B Dun & Bradstreet

ECB European Central Bank

EG Enterprise Group

EGR European Groups Register

ENT Enterprise

ESS European Statistical System

EU European Union

FATS Foreign Affiliates Statistics

FDI Foreign Direct Investment

GAAP (United States) Generally Accepted Accounting Principles

GDC Global Decision Centre

GDP Gross Domestic Product

GEG Global Enterprise Group

GEN Global Enterprise

GGH Global Group Head

GGNA Expert Group on the impact of Globalization on the National Ac-

counts

GNI Gross National Income

GNP Gross National Product

GOD Group Operating Division

IDBR UK Interdepartmental Business Register

IFATS Inward Foreign Affiliates Statistics

IFRS International Financial Reporting Standards

INSEE Institut National de la Statistique et des études économiques (French

National Institute for Statistics and Economic Studies)

ISTAT Istituto nazionale de statistica (Italian National Statistical Institute)

KAU Kind of Activity Unit

LKAU Local Kind of Activity Unit

MNE Multinational Enterprise Group

MUNA Multinationals in National Accounts

NA National Accounts





NACE Nomenclature statistique des Activités économiques dans la Com-

munauté Européenne

NSI National Statistical Institute

OECD Organisation for Economic Co-operation and Development

OFATS Outward Foreign Affiliates Statistics

ONS Office for National Statistics (UK)

P&L Profit and Losses

Prodcom Production Communautaire

R&D Research and Development

SBS Structural Business Statistics

SNA System of National Accounts (UN)

SPE Special Purpose Entity

STATFIN Statistics Finland

STS Short Term Statistics

SU Regulation Statistical Unit Regulation

TEN Truncated Enterprise

UCI Ultimate Controlling Institute

UK United Kingdom

UN United Nations

UNECE United Nations Economic Commission for Europe

VA Value Added

VAT Value Added Tax

WPA Work Package A (of the ESSnet profiling)





ANNEX I: BR recommendation manual 2010 chapter 21, the points 21.31to

21.46

“21.31 For the definition of control in the BR Regulation, the definition given in

point 2.26 of Annex A of Council Regulation (EC) No 2223/96 (the European

System of Accounts ESA 1995) shall be used:

“Control over a corporation is defined as the ability to determine general

corporate policy by choosing appropriate directors, if necessary. “

A single institutional unit (another corporation, a household or a government

unit) secures control over a corporation by owning more than half the voting

shares or otherwise controlling more than half the shareholders’ voting power.

In addition, government secures control over a corporation as a result of a

special legislation decree or regulation which empowers the government to

determine corporate policy or to appoint the directors.

In order to control more than half the shareholders’ voting power, an

institutional unit need not own any of the voting shares itself. A corporation C

could be a subsidiary of another corporation B in which a third corporation A

owns a majority of the voting shares.

Corporation C is said to be a subsidiary of corporation B when either

corporation B controls more than half of the shareholders’ voting power in

corporation C or corporation B is a shareholder in C with the right to appoint

or remove a majority of the directors of C.

21.32 The definition states that control may be exercised in different ways. The

acquisition of an absolute majority (50 % +1) of shareholdings with voting

rights is the main instrument used to take control over a legal unit and in the

absence of other information it is generally used as a proxy to control. On the

other hand, the absolute majority of ownership of the capital share ownership is

not always necessary or a sufficient condition to have control.

21.33 It may not be a necessary condition because there may be situations in

which a large relative shareholding with voting rights but without absolute

majority is enough to take control. This can be due to:

(a) Legislation, contracts or agreements affecting control;

(b) Absenteeism in meetings on the part of other shareholders. This is more a de

facto situation and difficult to prove in practice.

21.34 It may not be a sufficient condition because the ability to effectively

exercise control depends on the ability to actively participate in the decision-

making process. This may be limited by:

(a) Shareholdings with limited voting rights;

(b) Statutory provisions that limit the transferability of shares;

(c) Temporary suspension of voting rights.





21.35 Effective minority control means having effective control of a unit

without holding the majority of voting stock. It does not include indirect control

via a majority-controlled subsidiary. The most common case is a minority but

large shareholder and a very large number of dispersed small shareholders,

none of whom hold a significant share of the capital. The minority shareholder

can thus exercise effective control insofar as no majority of shareholders is

really able to oppose it. However, it is possible that the small shareholders could

join forces in order to have more influence over strategic decisions. Effective

minority control is, in general, difficult to prove in practice and a shareholding

between 10 and 50 percent is generally regarded as influence, not control.

21.36 Situations vary considerably from country to country and depend on the

legal framework concerning corporate governance, i.e. the legislation that

regulates the allocation of property rights and control of enterprises in the

economy. In particular, the principles vary sometimes notably between civil law

systems and common law ones.

21.37 Control can be a de facto situation without legal basis or other proof and

in such a case it is not to be stored in the business register. Strategies of

outsourcing, aimed at reducing production costs and increasing productivity,

such as exclusive sales or supply contracts, may generate dependency of one

legal unit on another without any direct participation on the part of the latter in

the capital share of the former. A legal unit can thus be ‘captured’ by another

unit without being owned by it. The link may be a commercial contract, which

ensures the ‘de facto controlling’ legal unit the exclusive rights to the work of

the ‘subordinate’ unit. In the case of natural persons, such subordinate units

have often been referred to as false self-employed in business demography. At

least in theory such a subordinate can cease this control by closing down their

legal unit. This is not possible for a subsidiary that is owned by the parent.

21.38 According to the SU Regulation (Annex III C, Explanatory notes 4), ”The

subsidiary enterprises of a subsidiary enterprise are considered to be

subsidiaries of the parent enterprise. (…)”. This means that a parent unit may

have indirect control over a legal unit (sub-subsidiary) through one or many

other subsidiaries. Indirect control does not require the parent unit to own a

majority of an integrated shareholding in the capital share of the sub-

subsidiaries. The difference between control and ownership is shown in

Figure 3.

21.39 The example in figure 3 shows that X has indirect control over unit C,

even though it owns indirectly (60 % * 30 %) + (60 % * 30 %) = 36 % of its

capital share, X controls C through its two subsidiaries A and B by combining

their voting rights in the meeting of C (30 % + 30 %) = 60 %. On the other

hand, Y owns (40 % * 30 %) + (100 % * 40 %) = 52 % of C, but has no power

to control it, since the voting rights that it has in its meeting of C amount only to





40 % of its capital share. In other words, the voting rights resulting from paths

X-A-C and X-B-C have to be cumulated to determine actual control (sometimes

this is called ‘cumulative control’).

Figure 3: How control can differ from ownership

X

A B

C D

Y 60% 60%

100% 40%

40%

30% 30%

21.40 Control is a (direct or indirect) relationship between legal units such that

either one legal unit is controlled by exactly one other legal unit or it is not

controlled by any other legal unit. The ownership of a unit or a group of units is

related to the holding of its assets, and determines the distribution of financial

flows and income. If a unit or group of units is owned by shareholders, its

ownership is vested in the shareholders collectively and can be seen as diffused

among the legal units that own its shares in proportion to their shareholdings

and independently of voting rights.

21.41 In fact, deriving control links from the ownership structure between legal

units defines an operational hierarchical structure of the enterprise group with

one legal unit at the top (the global group head) which is not controlled by any

other legal unit and which controls all other legal units in the hierarchy.

Therefore it is necessary to also record minority intermediate shareholdings into

the business register, in case there is indirect control where the links can only be

derived from the complete ownership structure.

21.42 The control hierarchies in Figure 4 are derived from the example in

Figure 3 and should be recorded in the business register.





Figure 4: How to record control links from ownership structures

X

C A B D

YY

21.43 The group head can be either resident in the country that compiles the

business register, if the group is domestically controlled, or abroad. Unless

otherwise noted, ‘group head’ refers to the ultimate or global group head, not to

a national (or European) group head, which has a foreign parent.

21.44 If the group head is a resident legal unit, it must be recorded in the

national business register as a single legal unit, which may possibly form an

enterprise in combination with other legal units, according to the principles

stated in Chapter 7.

21.45 The statistical concept of the enterprise group is different from the

accounting concept, as can be derived from the Seventh Council Directive (see

the Annex). In fact, as it is stated in explanatory note 3 of section III C of the

Annex to the SU Regulation “this definition (of accounting groups …) is not

suitable for statistical analysis because they do not constitute mutually exclusive,

additive groups of enterprises. A statistical unit known as ‘enterprise group’

based on the ‘accounting group’ concept must be defined by applying the

following four amendments:

- Consider accounting group at the highest consolidation level (group head);

- Include in enterprise group units whose accounts are entirely integrated in

those of the consolidating company;

- Add majority-controlled units whose accounts are not included in the overall

consolidating by virtue of application of one of the criteria allowed by the

Seventh Directive, i.e. difference in the type of activity or small relative size;

- Discount temporary links of less than a year.”

Operational rules for identifying control links

21.46 Control is a complex concept in economic terms. Statistical operational

rules need to rely on observable criteria: Proof of control. Therefore it is

sufficient that at least one of the following applies, in order to identify a link of

direct or indirect control between two legal units:

1) A legal unit directly owns more than 50 % of the voting rights of another

legal unit (direct control);

2) A legal unit indirectly owns more than 50 % of the voting rights of another

legal unit, through subsidiaries (indirect control);





3) Existence of special legislation decree or regulation, which empowers the

government to determine corporate policy or to appoint the directors of the

legal unit;

4) A legal unit fully consolidates the accounts of another legal unit, according

to the criteria of the Seventh Directive, and no other legal unit consolidates

the same legal unit (control by virtue of full consolidation);

5) Administrative sources, collecting declarations in application of specific

laws for market regulation, provide the information that a legal unit

controls one or a set of legal units, even though it owns less or 50 % of its

voting rights (effective minority control) and no other legal unit owns more.

Note — It may be possible that two rules, e.g. both cases 1 and 4, could apply

simultaneously. As one unit cannot be controlled by two different units, the de

facto controlling unit should then be chosen. Case 4 can in general be

considered as weaker than 1, because there can be consolidation situations with

less than 50% ownership and situations with over 50% ownership without

consolidation.”

End of quotation out of the BR recommendations manual.





ANNEX II: Background information related to autonomy

The concept of autonomy in the present European Statistical System (ESS)

and in the SNA

II.1 The concept of autonomy in the Statistical Units Regulation

The Council Regulation (EEC) N. 696/93 “on the statistical units for the obser-

vation and analysis of the production system in the Community” does not clearly

define the concept of autonomy for a given statistical unit. It mentions this con-

cept in different areas of the Annex:

1. Section II/A. legal, accounting and organisational criteria: “In order to define

units that are recognisable and identifiable in the economy, legal or institu-

tional criteria must be applied. In some case, legally separate units must be

grouped together as they are not sufficiently autonomous in their organisa-

tion.”

2. Section III/A Enterprise: “The enterprise is……..which benefits from a cer-

tain degree of autonomy in decision making, especially for the allocation of

its current resources”.

3. Section III/B Institutional unit: “The institutional unit is an elementary deci-

sion-making centre characterized by uniformity of behaviour and decision-

making autonomy in the exercise of its principal function. ….. In order to be

said to have autonomy of decision in respect of its principal function, a unit

must be responsible and accountable for the decisions and actions it takes”

4. Section III/C Enterprise Group: “An enterprise group…… . … can have more

than one decision-making centre, especially for policy on production, sales

and profits. It may centralize certain aspects on financial management and

taxation”.

Concluding remarks on SU Regulation: differences in the concept of autonomy

between enterprise and enterprise group are due to different types of “decision

making processes”: allocation of current resources for the enterprise (but what

are they?) and financial management and taxation for the group. Somehow it

seems that time is the discriminant: for the enterprise, autonomy is related to

decisions taken in the short and medium term; for the enterprise group, autono-

my is related to strategic, long term decisions.

II.2 The concept of autonomy in the new SNA

The SNA is “the internationally agreed standard set of recommendations on how

to compile measures of economic activity” (chapter 1, A.1.1), at the same time

“the SNA …..serves as a coordinating framework for economic statistics” be-

cause it “is seen as the conceptual framework for ensuring the consistency of the

definitions and classifications used in different, but related, statistics” and it

“acts as an accounting framework to ensure the numerical consistency of data

drawn from different sources…” (Chapter 1, E.1.57).





According to this point of view, the SNA should not only be the point of arrival,

but mostly the starting conceptual basis, on which to build up - or base (?) adapt

(?) - the concept of autonomy.

II.3 The main conceptual element of the SNA is the following:

The Institutional Unit (IU) is the fundamental unit identified in the SNA. It is

defined as: “…. an economic entity that is capable, in its own right, of owning

assets, incurring liabilities and engaging in economic activities and in transac-

tions with other entities. The main attributes are:

a. An IU is entitled to own goods or assets in its own right: … able to exchange

the ownership of goods and assets in transactions with other IU.

b. It is able to take economic decisions…..for which it is itself held be directly

responsible and accountable at law

c. It is able to incur liabilities on its behalf…..

d. Either a complete set of account…..exists for the unit or it would be possible

and meaningful, from economic viewpoint, to compile a complete sets of

accounts if they were to be required” (chapter 4, A.4.2).

From this SNA approach it can be concluded that the focus is on the economic

meaningfulness of the basic statistical unit; from there on the ability to exchange

ownership (buy and sale), to take decisions and to incur liabilities; and not on the

legal basis. The words “meaningfulness” and ability need further explanation.

First we have to assess the meaningfulness and from there the ability.

II.4 Other fundamental points are:

The two different types of ownership: “The legal owner of entities such as

goods and services, natural resources, financial assets and liabilities is the IU

entitled in law and sustainable under the law to claim the benefits associated

with the entities”….”The economic owner as goods and services, natural re-

sources, financial assets and liabilities is the IU entitled to claim the benefits

associated with the use of the entity in the course of an economic activity by

virtue of accepting the associated risks” (chapter 3, B.3,21, B.3.26). “…when

the expression of ownership or owner is used and the legal and economic

owner is different, the reference should be understood to be the economic

owner” (chapter 3, B.3.27)

Valuation of transactions: “Market prices of transactions as defined as amount

on money that willing buyers pay to acquire something from willing sellers; the

exchanges are made between independent parties and on the basis of commer-

cial consideration only, sometimes called “at arm’s length” (chapter 3,

E.3.119).





National boundaries: “The total economy….consists of all the IUs which are

resident in the economic territory of a country. … The concept of residence in

the SNA is not based on national or legal criteria. An IU is said to be resident in

a country when it has a centre of predominant economic interest in the economic

territory of that country” (Chapter 2, B.2.19).

In all of these statements the economic aspects are said to be predominant as

compared to the legal ones (see what has been shown in bold).

II.5 At the same time the SNA contradicts these “predominant economic ele-

ments” when it says: In practice some IU are controlled by others and thus in

such cases autonomy of decision is not total and may vary over time. Legally

independent holding of assets and liabilities and autonomous behaviour do not

always coincide. In the SNA preference is generally given to the first case aspect

because it provides a better way to organise the collection and presentation of

statistics….” (Chapter 2, B.2.16). And

“…. However, each individual corporation should be treated as separate IU,

whether or not it forms part of group……Although the management of a subsid-

iary corporation may be subject to the control of another corporation, it remains

responsible and accountable for the conduct of its own production activi-

ties…….Another reason for not treating groups of corporations as single IU is

that groups are not always well defined, stable or easily identified in practice”

(Chapter 4, B.4.51-4.52).

In these points the SNA seems to follow a pragmatic policy because even if “its

usefulness is limited in some cases” the autonomy is considered in terms of le-

gally independent holding of assets and liabilities.

Concluding remarks on SNA concepts: even if the SNA prefers economic as-

pects (see transaction evaluation at arm’s length and the concept of economic

ownership), at the same time it suggests that these items are preferably identified

under "legal" viewpoint and inside the National boundaries (in order to simplify

the statistical data acquisition?).

The SNA does not want to consider the existence of complex organisational

structures (among which enterprise groups at national or global level are the

main and the most clear) and the dependence links that characterize the relation-

ships between the different legal units of these structures.

The fact that the SNA does not consider the existence of the complex organisa-

tional structures (at national or global level) and the dependence links that char-

acterize the relationships between the different legal units of these structures

must lead to a reconsideration of or addition to what is described here in the

SNA. The issue of the data collection is to be considered after initial establish-

ment of the most adequate statistical unit. Adaptation of the statistical unit to





solve data collection problems should only be done by exception in the cases

where it has appeared to be impossible to collect according to the usual SUs.

As we can see in practice, operational economic structures of an Enterprise

Group can vary from the formal legal structure. Here we cannot find a general

appearance. Some groups operate economically according the legal structure,

although combinations of legal units can be necessary. With other groups the

operational economic structure has no or only a few correlation with the legal

structure. Following the legal structure in the last case leads to meaningless eco-

nomic figures/data in statistics. On the contrary, the “enterprises” that we pro-

pose are more realistic (and also more pragmatic) that the present IUs; they can

be made consistent with the other concepts of the SNA.





ANNEX III: Variables for reconciliation with SBS statistics, NA use and their

links with accounting standards.

III.1 The needs of NA68

are presented along of 3 different lines:

- the components of value added as a source for sectorial accounts (as well by

Institutional Sectors as by industry);

- the basic data for evaluation of fixed capital (elements coming from the bal-

ance-sheets or the so-called “financial statement”)

- bases for wealth estimates (coming from the rest of the balance-sheets); these

data could also be useful for checking the fixed capital elements as part of the

balanced items of a global account.

III.2 The IFRS accounting standard (International Financial Reporting Standard)

provides a template of Profit &Losses accounts, also for operational segments of

a GEG. This is a tentative version of a very simplified data set that try to include

enough variables to produce the main aggregates of sectorial accounts for NA

flows; it includes nearly all variables that appear in SBS requirements (missing

at this moment change in merchandise inventories) plus as few variables as nec-

essary to have complete accounts.

These accounts and the data of these seem very difficult to obtain when the En-

terprise statistical unit has insufficient autonomy regarding its production pro-

cesses from a financial (production process related) point of view, but, in this

case, the existence of a specific “enterprise” including holdings, managing activ-

ities (and other residual ( mainly auxiliary)activities of the GEG) is very proba-

ble; this residual “enterprise” would also include most of the “production’ ori-

ented financial-type variables.

III.3 Very important: it works from a by-activity version of the P&L ( in which

purchases, wages and salaries, depreciation of fixed capital, etc. are displayed

explicitly) and not from the frequently displayed version, which is by- function

(in which the main variables are “cost of sales, distribution costs, administrative

costs, etc.”). So that the existence (and GEG the agreement to display) of this

by-nature version of the accounts is crucial.

The beneath table with variables reflect the Enterprise and Truncated Enterprise

statistical units, resulting in the operational (truncated) results (remark: in some

cases the information of this table is less detailed that requested by the present

SBS questionnaire e.g. on splitting between sales of own production, sales of

merchandise etc.; the same for inventories):

68 See also the UNECE Handbook on the impact of globalisation on National Accounts, 2011. In

this handbook also attention is given to topics like Special Purpose Entities (SPEs).

(http://live.unece.org/fileadmin/DAM/stats/groups/wggna/GuideNA_April.pdf)

http://live.unece.org/fileadmin/DAM/stats/groups/wggna/GuideNA_April.pdf





P & L by nature

(not by function)

(consolidated for the GEN or the

TE)


1st evaluation of VA

( by the production

side )

=

“Production” = Proxy of the “Revenue” variable?

+ pure T-O

+ other activity products

+- produced inventories

T-O (sales to 3rd parties) net of granted

discounts & rebates (IAS18) if possible split between sales of merchandise and

other sales.

Newly produced inventories and fixed assets (incl. grants on fixed assets)

+- Other products and expenses Patent, franchise & brand royalties etc.;

more useful if split between products and

charges.

- Used purchases

- Other external expenses

Purchases of goods (raw material, equip-ment and parts etc.), services and merchan-

dises, net of in inventories of received

discounts and rebates +ancillary costs on purchases (CIF etc.

2nd

evaluation of VA

( by the compo-

nents) =

+ Employees wages and salaries Including bonuses and share of results

+ Taxes on products and indirect taxes

+Depreciations Physical and value change

= Current operating re-

sult (optional)

Close to net operating result of the NA

+- Other current products and charge Other current non-recurring products &

charges (e.g. selling’s of assets, deprecia-

tions of goodwill)

Operational result

III.4 Depending on the size of autonomy some more variables can be associated

to the enterprise unit, but this will not be a general situation. So these variables

can be considered as in between belonging to the Enterprise unit and the Enter-

prise Group unit. The next table gives some insights in these variables. Also

large investments can belong to this category. The investment variable needs

more attention because decision making on investments can done on different

levels depending on the size of the investments and/or the kind of the invest-

ments (strategic or operational).





Financial result

Operational result+ Treasury prod-

ucts

Net costs of net financial debt

- Cost of debt

+- Other financial products and costs

- Taxes costs Taxes on result + deferred taxes + participa-

tions of employees in the results

+- Net result quota-share of minority owning of non-consolidated interests

When the GEG has a real influence on deci-sions

+- Pre-tax net result of:

. non-continued activities

. ceased or being sold activities

IFRS 5

Net result

- Minority interests

Part of the Net result accruing to minority

holders, for globally consolidated affiliates

Net result,

share of the group

III.5 The IFRS also defines templates for A&L (asset & liabilities) tables. As

argued in the introduction (see 7.3) the variables presented in the A&L-accounts

are applicable to the Enterprise Groups units’ types and less for the Enterprise

units’ types. A very simple table for assets and liability is shown in the tables

below.

ASSETS


Non floating

assets

Intangible asset

Goodwill

Other intangible (patents, brands, etc.)

Tangible assets

Equipment, machines etc.

Buildings for hire Biological non-current assets (forest, orchard,

cattle, etc.)

Financial assets

Equity share in associate enterprises (Equity share in TENs of other countries)

Other disposable (sellable) financial assets

Non-current assets, disposable to be sold?

Deferred taxes (asset type)

Floating as-

sets

Stocks Goods and merchandise

Biological current assets (crops, vegetable and

fruits, animal products, etc.)

Financial floating assets Credits to clients Other financial current assets

Cash and similar

Total Assets





In order to be able to give sufficient information to the stakeholders (mainly the

NA) this table has to be completed by specific data that are to be found in the

Notes and annexes to the Annual Report, at least:

Tangible assets ( Gross value 1st January + Increase – acquisition, creation, etc. -

less Decrease – sales, withdrawal of tangible assets, etc. = gross value at the 31st

December)

Amortisation accounts (Total value 1st Jan + Increase of the year less Withdraw-

als (e.g. when selling) = Total value 31st December)

The same for depreciations including P&L accounts.

Some extra, nationally specific, information can be necessary.

LIABILITIES


Shareholders funds

Shareholders funds

+ Equities

+ Other non-distributed reserve funds + Non distributed net results

+ Value of non-current assets disposable

for sale (directly accounted for in the shareholders funds)

= Total of shareholders funds

- Minority shareholding

= Shareholders funds, part of the group

Non current liabili-

ties

Long term debt Deferred taxes

Long term reserves

Current liabilities

Suppliers credit

Short term financial debt Short term part f long term debt

Eligible taxes

Short term reserves

Liabilities directly linked to non-current

assets disposable for sale

TOTAL LIABILITIES





ANNEX IV: SPEs - classification tables

Special purpose entities, financial sector: classification table by Eurostat





Special purpose entities, non-financial sector: classification table by Eurostat





Decision tree for the identification of SPEs69

69 (Source: “Eurostat, Task Force on the Recording of Certain Activities of Multinationals in National

Accounts, final report, 2009c”)





ANNEX V: R&D problem statement examples

Example 1: R&D activities of the GEG is centralized in one LeU in one country

and sold as a R&D service

In this example, R&D services are separate items over which ownership right

can be established.

A GEG has 2 GENs and operates in 2 countries France and Italy. It also has, in

France1 a R&D centre, which has a role of supporting the operational entities

worldwide. It has financial flows with all the legal units in both GEN1 and

GEN2 and in both countries.

To keep the example “simple”, we assume that all other LeUs except that of

R&D activities are operating in the market. Thus, there are no other intra-group

flows expect those of the R&D LeU4.

The money flows from LeUs 1, 2 and 3 to R&D LeU4 are drawn into the figure.

GEN1 GEN2

NACE: 152 NACE: 141

Empl: 830 Empl: 520

Operating revenue: 2500 Operating revenue: 2900





Different options:

a- Consider LeU4 as a separate GEN3 (and TEN3 in France)

with an activity of R&D (NACE:721)

b- Split LeU4 into GENs and TENs according to value added

(employment?)

c- Allocate LeU4 to GEN1 (NACE: 152) which generates the

highest value added (employment?) and split it then into

TEN1_IT and TEN1_FR.

d- Allocate LeU4 to GEN1 (NACE: 152) which generates the

highest value added (employment?) and then into TEN1_IT,

which generates the highest value added inside the GEN1

f- Other solution

………………………………………………………

Purely from the conceptual and theoretical point of view, and ignoring all possi-

ble practical or technical problems, the recommended option is b.

However, taken into account the practical constraints, several options remain

open. One possible pragmatic solution is to follow the idea in the identification

rule 8, introduced in paragraph 5.21. This would mean choosing option a.

Option a could be pragmatic choice also in case of ancillary activities (instead of

R&D) even though there the option b is even more recommended as in case of

R&D.

Example 2: R&D of the GEG is included in each LeU in each country

In this example, R&D services are not sold outside a legal unit.

Otherwise, the example is the same: a GEG has 2 GENs and operates in 2 coun-

tries France and Italy.

We assume that all the LeUs are operating in the market. Thus, there are no in-

tra-group flows.

Compared to example 1, the idea of this example is to illustrate a situation,

where similar R&D activities exist but from point of view of the legal structure

they are organised differently.





GEN1 GEN2

NACE: 152 NACE: 141

Empl: 830 Empl: 520

Operating revenue: 2500 Operating revenue: 2900

Different options:

a- Consider each LEU as a TEN and use the activity codes of

LeUs, too.

b- Consider R&D activities as a separate GEN3 (and TEN3 in

France and TEN3 in Italy) with an activity of R&D

(NACE:721)

c- Other solution

…………………………………………………………

………………………………………………

F R

IT

IT

IT

L e u 1 = T E N 1 _ F R

N a c e : 1 5 2

E m p l: 4 0 0

o f w h ic h R & D

p e o p le 5 0

O R : 2 0 0 0

L e u 3 = T E N 2 _ F R

N a c e : 1 4 1

E m p l: 5 2 0

o f w h ic h R & D

p e o p le 5 0

O R : 2 9 0 0

L e u 2 = T E N 1 _ IT

N a c e : 1 5 2

E m p l: 4 3 0

o f w h ic h R & D

p e o p le 5 0

O R : 2 5 0 0

F R

IT

IT

IT

L e u 1 = T E N 1 _ F R

N a c e : 1 5 2

E m p l: 4 0 0

o f w h ic h R & D

p e o p le 5 0

O R : 2 0 0 0

L e u 3 = T E N 2 _ F R

N a c e : 1 4 1

E m p l: 5 2 0

o f w h ic h R & D

p e o p le 5 0

O R : 2 9 0 0

L e u 2 = T E N 1 _ IT

N a c e : 1 5 2

E m p l: 4 3 0

o f w h ic h R & D

p e o p le 5 0

O R : 2 5 0 0





Example 3: R&D of the GEG is centralized in one LeU in one country but not

sold as such (global production)

Services, such as R&D, are not generally separate items over which ownership

right can be established and cannot generally be separated from their production.

For example, merchanting arrangements may be used for the management and

financing of global manufacturing processes. It is said in BPM6 paragraph 10.42

that ”In cases where the merchant is the organizer of a global manufacturing

process, the selling price may also cover elements such as providing planning,

management, patents and other know-how, marketing, and financing. Particu-

larly for high-technology goods, these nonphysical contributions may be large in

relation to the value of materials and assembly.”

Thus, in such cases, the merchant is involved in activities such as research and

development but that activity is not directly recorded as balance of payments

transaction of R&D services.

FR

IT

Leu1

Nace: 152

Empl: 300

OR: 500

Leu3

Nace: 141

Empl: 420

OR: 500

Leu2 =

Nace: 152

Empl: 330

OR: 500

LeU4: R&D and

sales office

Nace: ?

Empl: 450

500 500

500





In this example LeU4 in France is the R&D centre of the group and it also sells

all the final products to customers. The responsibility for the production process

is in France. The other three legal units are producing the products based on

cost-plus contract. Their operating revenue is costs plus fixed fee.

Different options:

a- Consider LeU1 and LeU 2 as GEN1, Leu3 as GEN2 and

LeU4 as GEN3 with an activity of R&D (NACE:721)

b- Consider LeU1 and LeU 2 as GEN1, Leu3 as GEN2 and

LeU4 as GEN3 with an activity of wholesale (NACE:46)

c- Consider LeU1 and LeU 2 as GEN1, Leu3 as GEN2 and

LeU4 as GEN3 with an activity of manufacturing

(NACE:152)

d- There is only one GEN…

e- There are two GENs… Allocate LeU4 into GEN1 (NACE:

152) and GEN2 (NACE: 141) based on…?

f-

g- Other solution

…………………………………………………………





ANNEX VI: Example of VAT position case

Introduction

It is possible for a non-resident company to have a VAT number in the reporting

economy, and to import, export or sell on the domestic market. It may be that no

staff is employed in the country but there is only a VAT number to comply with

the necessary customs and Intrastat declarations. Usually, it is the case that dec-

larations are prepared by the non-resident company or by using the services of a

fiscal agent.

However, according to the GGNA manual70

, the value added tax (VAT) registra-

tion is not a sufficient condition in the European Union for an entity to be classi-

fied as a resident institutional unit. Such an entity is deemed to be resident in a

country for certain administrative purposes but not for statistical purposes.

An example of a VAT position case

A is a metal group whose activity centres on the early stages of metal pro-

cessing. A's main products are zinc and copper. The groups' head office is in

Sweden. Its factories are located in Finland, Sweden and Norway. The group has

mines in Sweden and Ireland. The sales offices located in Sweden; Germany and

the UK look after the sales and marketing of the products.

A has two production plants in Finland: a copper smelting plant Ab and a zinc

manufacturing plant Ac. The production plants operate on the tolling fee princi-

ple. In addition, the group has a legal unit Aa (company form “foreign organisa-

tion) in Finland, which is only registered as liable for value added tax and has no

own personnel and fills no tax return to Finland. The only data available on it are

those on its sales subject to VAT from the periodic tax returns, and on its im-

ports and exports from the foreign trade statistics.

Aa Non-resident corporation liable for VAT

Ab Copper-melting plant

Ac Zinc manufacturing plant

A's Swedish company procures the necessary raw materials for the production

plants through Aa. Swedish company also bears the responsibility for the mar-

keting and sales of the processed products. The production plants Ab and Ac do

not own the raw materials and processed products at any stage. Their turnover is

comprised of the processing premium.

In the Finnish statistics, describing turnover (structural business statistics,

monthly indicators of turnover, the Business Register) the turnover of the pro-

70 See pages 43-44, 269 and Chapter 9









duction plants Ab and Ac equals the value of processing (processing premium).

Thus, the non-resident entity Aa liable for VAT is not included in BR, SBS or

STS statistics in Finland. The turnover from which the Aa is liable for VAT “be-

longs” to A’s Swedish company and is included in statistics in Sweden.

However, Aa is included in foreign trade statistics (FTS) in Finland as it is the

entity that imports the raw material and exports the finished products. Moreover,

PRODCOM statistics describe the real volume and value of produced products

and used raw materials. The production plants Ab and Ac are able to provide

data on volumes, but the data on values have to be estimated in the PRODCOM

statistics. The estimation is performed by utilising value and volume data from

the foreign trade statistics (Aa).

Profiling

Profiling methodology can help in identifying such VAT entities that are not

resident for statistical purposes. For example, in the case presented above, Fin-

land could suggest Aa to be an affiliate of the group A and report high turnover

for it. However, Sweden as the UCI country, would probably question the exist-

ence of such an affiliate and such a high turnover.





ANNEX VII: Example of profiled GEG and the impact on business statistics

The goal of the following example is to show the impact on the business statistics of

taking into consideration the global dimension of the statistical units in the case of 2

countries C1 and C2. It also shows that several options are possible to delineate the

GENs and the TENs among which one needs to choose.

The impact will be measured in country C1. In this country, there are 8 legal units

among which 6 belong to a multinational enterprise group and 2 are independent legal

units (LeU 10 and LeU11).

Description of the situation and the relationships between the units without taking

into consideration the multinational enterprise group:

The above schema presents the legal units in the two countries C1 and C2, their activity

and their relationships in terms of turnover.

The blue arrows show intra group turnover inside a country

The green arrows show export turnover

The purple arrows show turnover outside the group

The description of the overall activities based on legal units' observation leads to the

following statistics:

LeU9

Nace: 7010

Empl:50

OR:1500

C1

C2

LeU1

Nace:151

Empl:0

OR:2000

LeU3

Nace:141

Empl:0

OR:1800

LeU2

Nace:152

Empl:0

OR:4000

LeU6

Nace:741

Empl:150

OR:500

LeU5

Nace:7830

Empl:1000

OR:1000

LeU4

Nace:4642

Empl:0

OR:3000

LeU8

Nace:4772

Empl:50

OR:6000

LeU7

Nace:141

Empl:150

OR:800

LeU11

Nace:4772

Empl:100

OR:6000

LeU10

Nace:152

Empl:200

OR:1000

3000

6000

800

500

500

5002000 800

12002800

1000

500

6000

380

300

300

20

1000





Country Activity NACE

code

Employ-

ment

Operating

revenue

Export

revenue

intra-

group

reve-

nues

C1-LeU3 Manufacture of wearing apparel 141 0 1800 0 800

C1–LeU1 Tanning and dressing of leather 151 0 2000 0 2000

C1-LeU2

+ LeU10 Manufacture of footwear 152 200 5000 500 1200

C1-LeU4 Wholesale of clothing and footwear 4642 0 3000 3000 3000

C1-

LeU11 Retail sale of footwear and leather goods 4772 100 6000 0 0

C1-LeU9 Activities of head offices 7010 50 1500 1000 1500

C1-LeU5 Other human resources provision 7830 1000 1000 0 1000

C1-Total Total in country C1 1350 20300 4500 9500

C2-LeU7 Manufacture of wearing apparel 141 150 800 0 800

C2-LeU6 Specialised design activities 741 150 500 500 500

C2-LeU8 Retail sale of footwear and leather goods 4772 50 6000 0 0

C2-Total Total in country C2 400 7300 500 500

From now, we take into consideration the existence of the multinational group of enter-

prises and the relationships between its legal units.

The multinational EG has two global activities: one of manufacturing of wearing appar-

el (NACE: 141) and one of manufacturing of footwear (NACE:152). It is composed of 9

subsidiaries and is acting in two countries: C1 and C2.

The headquarters (LeU9) are in C1.

In C1, the 2 global activities are represented into 2 truncated enterprises. TEN1 per-

forms the activity of manufacturing of footwear and TEN2 performs the activity of

manufacturing of wearing apparel. TEN1 sells a part of its production outside the group

and the rest to a wholesale company in the group. TEN2 sells all its production to the

same wholesale company. This company exports all the production to a retail trade

company in C2. This retail trade company belongs to the group.

Moreover, in C1, there is one legal unit which manages the employees for all the legal

units.

In C2, the two global activities are represented into 2 truncated enterprises. TEN3 per-

forms the activity of specialised design and TEN4 mainly performs an activity of retail

trade.





Legal units' structure of the group

It is assumed that:

LeU1, LeU3, LeU4, LeU5, LeU6 and LeU7 have no access to the market

LeU1 accesses the market with operating revenue of 600

LeU9 (the Headquarters) has global revenue from TEN1 and TEN4, but it is not possi-

ble to split the revenue by TEN. It also has outside revenue from royalties for licensing.

LeU9 is also funding the activity of TEN3.

The proposed profiling takes into consideration 3 GENs: GEN1 is performing the manu-

facturing of footwear (NACE:152), GEN2 is performing the manufacturing of wearing

apparel (NACE: 141) and GEN3 is the constituted of the transversal activities. In that

case, it is constituted only of the HQ.

In that case, the activities of LeU4 and LeU5 are split into GEN1 and GEN2 and more

precisely between TEN1 and TEN2 in country C1.

GEN1

Nace:152

Empl:842

GEN2

Nace:141

Empl:508

LeU9

Nace: 7010

Empl:50

OR:1500C1

C2

Leu1

Nace:151

Empl:0

OR:2000

LeU3

Nace:141

Empl:0

OR:1800

LeU2

Nace:152

Empl:0

OR:4000

LeU6

Nace:741

Empl:150

OR:500

LeU5

Nace:7830

Empl:1000

OR:1000

LeU8

Nace:4772

Empl:50

OR:6000

LeU7

Nace:141

Empl:150

OR:800

LeU4

Nace:4642

Empl:0

OR:3000





Other possibilities to constitute the GENs:

1) Create only 2 GENs (GEN1 and GEN2) and split the HQ activity into the 2 GENs.

This option needs to have information on the criteria to apply to split the activi-

ty.

2) Create 3 GENs, but arrange the LeUs differently: Include LeU5 and LeU6 in GEN3

LeU5 is working for both GEN1 and GEN2. However, it is very important to

associate the employees to the production in order to calculate productivity ratio

like VA/employees. Moreover, LeU5 has relations only with other subsidiaries

in the same country and ancillary information to split the activity is available

(number of employees by subsidiary).

LeU6 is performing a design activity for GEN1. However, it has financial rela-

tions with GEN3 which is funding it. The choice of including LeU6 in GEN1 or

GEN3 is made balancing between the functional structure (LeU6 activity is

used by GEN1) and the financial structure (GEN3 is funding its activity).

3) The treatment of trade activities can be made on several ways:

In C1, LeU4 sells production from both TEN1 and TEN2, and its activity is

split into the two TENs

In C2, LeU8 sells production from both GEN1 and GEN2 and it is integrated

into TEN4 that belongs to GEN2.

The choice between these two solutions depends on the information transmitted

by the group itself and the ancillary information available to split the activity of

one legal unit into two different TENs.

Observation by activity:

One important question is how to treat the part of the GENs outside the country of the

UCI.

In the example, GEN1 (NACE:152) can be split into one TEN in C1 (NACE:152) and

one TEN in C2.

It has been chosen to attribute to TEN3 in C2 the NACE corresponding to the design

activity, and not the NACE of the GENs it belongs to since no production takes place in

the country. Proceeding that way does not make any difference between including

TEN3 in GEN1 or including TEN3 in GEN3.

In C2, again for TEN4, the NACE 4772 corresponding to the retail trade activity has

been chosen rather than the NACE code of the GEN (manufacturing of wearing appar-

el). This decision is based on the fact that the most part of the revenue is generated by

the retail trade activity (the production activity is marginal in TEN4).

The treatment of LeU8 in country 2 differs from the one of LeU4 in country1. Indeed,

the retail trade activity report both to GEN1 and GEN2, but in country 2, GEN1 does

not have any production activity (but only a service activity).

Treatment of intra-group flows

Several options are possible:

Remove the intra-TEN flows





Remove the flows inside a country, even extra-TEN

Remove all intra-group flows, including between 2 countries

In the example, the intra-country flows have been removed, except intra-flows between

TEN1 and TEN5 but intra-group flows between 2 countries have been kept in the oper-

ating revenue.

Economic structure of the group

Taking into consideration this new economic structure leads to the following schema of

the economies and the flows between the new economic entities. TEN1 to TEN5 belong

to the group and TEN6 and TEN7 are respectively the same than LeU9 and LeU10.

GEN1

Nace:152

Empl:842

GEN2

Nace:141

Empl:508

TEN5

Nace: 7010

Empl:50

OR:1500C1

C2 TEN3

Nace:741

Empl:150

OR:500

GEN3

Nace:7010

Empl:50

TEN1

Nace:152

Empl:692

OR:4600

TEN2

Nace:141

Empl:308

OR:2200

TEN4

Nace:4772

Empl:200

OR:6000





Description of the situation and the relationships between the units taking into

consideration the global and truncated enterprise:

The description of the activities based on truncated enterprises' observation leads to the

following statistics:

country

NACE

code

Employ-

ment

consolidated

operating

revenue

Export rev-

enue

C1 Manufacture of wearing apparel 141 308 2200 1200

C1 Manufacture of footwear 152 892 5600 1800

C1 Retail sale of footwear and leather goods 4772 100 6000 0

C1 Activities of head offices 7010 50 1500 1000

Total in country C1 1350 15300? 4000

C2 Specialised design activities 741 150 500 500

C2 Retail sale of footwear and leather goods 4772 200 6000 0

Total in country C2 350 6500 500

The changes in the figures between the statistics based on legal units and statistics based

on enterprises are, in this particular example, the following:

The activity of "tanning and dressing of leather" disappears, since it was an integrated

activity of the manufacture of footwear.

The support activities in country C1 disappear as well ("retail sale of footwear and

leather goods" and "other human resources provision") since they were serving only

economic entities in the group.

TEN6

Nace:152

Empl:200

OR:1000

TEN7

Nace:4772

Empl:100

OR:6000

TEN5

Nace: 7010

Empl:50

OR:1500

C1

C2 TEN3

Nace:741

Empl:150

OR:500

TEN1

Nace:152

Empl:692

OR:4600

TEN2

Nace:141

Empl:308

OR:2200

TEN4

Nace:4772

Empl:200

OR:6000

500

500

6000

6000

500

1000

500 28001200

1800

1000





The comparison between the figures by TEN and the figures at the global level of the

group are not consistent on the level of the revenue and on its split by activity codes.

Indeed, the group presents its results according to 3 segments:

Manufacture of wearing apparel

Manufacture of footwear

Administrative services (completely internal to the group)

According to the group, no operating revenue is dedicated to an activity of sales, but the

total revenue is split between the manufacture of wearing apparel (4100) and the manu-

facture of footwear (5700). Moreover, the group removes all intra-group flows, so the

global revenue (9800) is lower than the sum of the countries revenue (14800).

This problem of inconsistencies by activities can be solved by the double codification.

Depending on the geographical level the figures are relating to, the NACE code of the

TEN or the NACE code of the GEN can be used.

The following graphics allow comparing the situations by using legal units or truncated

enterprises as statistical units:

The use of the enterprise rather than the legal units allows giving a picture of the em-

ployment more in line with the economic activity.

Figures on employment by activity according to the statistical unit

0

200

400

600

800

1000

1200

1400

1600

Manufacture

of wearing

apparel

Tanning and

dressing of

leather

Manufacture

of footwear

Wholesale of

clothing and

footwear

Retail sale of

footwear and

leather

goods

Activities of

head offices

Other human

resources

provision

total country

C1

Legal units

Truncated enterprises





The use of enterprises instead of legal units reduces the operating revenue by removing intra-

group flows between the operating units in country C1. The revenue in the support and

integrated activities disappears since it was internal revenue inside the group.

The figures on exportation do not change in total, but the share between activities changes, the

exportations are affected to the production activities rather than to a wholesale activity.

Figures on operating revenue by activity according to the statistical

unit

0

5000

10000

15000

20000

25000

Manufacture

of wearing

apparel

Tanning and

dressing of

leather

Manufacture

of footwear

Wholesale

of clothing

and

footwear

Retail sale

of footwear

and leather

goods

Activities of

head offices

Other

human

resources

provision

total country

C1

Legal units


Figures on exportation by activity according to the statistical unit

0

500

1000

1500

2000

2500

3000

3500

Manufacture of

wearing

apparel

Tanning and

dressing of

leather

Manufacture of

footwear

Wholesale of

clothing and

footwear

Retail sale of

footwear and

leather goods

Activities of

head offices

Other human

resources

provision

Legal units






ANNEX VIII: International profiling strategy paper for communication with

MNE’s.

International Profiling Strategy Paper for Communicating with the MNEs

Sarah Eaton

International Business Profiler

Office for National Statistics

Contents:

Introduction to Theme

1. Material Self Interest - What is in it for me?

1.1 Reduction of Burden

2.1 Better Quality Data

2. Reciprocation

2.1 Providing a Service to Support the GEGs

2.2 Feedback to GEGs

2.3 Reciprocation with User

2.4 Reciprocation with Profiling Partners

3. Commitment and Consistency

3.1 Verbal or Written Commitments

3.2 Regular contact

4. Social Proof – Cite co-operation rates from other competitors

4.1 Referencing Competitors

4.2 New NSIs

5. The “Liking” Principle

5.1 Being Liked by Businesses

5.2 Inter-Personal Skills

5.3 Face to face Communication

5.4 Liked by Users and Partners

5.5 Like you because you like me!

6. Authority

6.1 Conveying Roles and Responsibilities of NSIs

6.2 Conveying Importance of the ESSnet on International Profiling

6.3 Contacting Authoritative Personnel

6.4 Security of Data

7. Scarcity – If there is less of something, then it is more valuable

8. Timing of Contact

Conclusions

References





Introduction to Theme

The following paper discusses how the ESSnet on International

Profiling may apply research and best practice techniques to im-

prove and build upon relationships with respondents (Multi Nation-

al Enterprises, MNEs), statistical users within National Statistics

Institutes (NSIs) and also to enhance communication between fel-

low international profilers.

Communication with MNEs, statistical users and partnering NSIs

are all vital parts of the process required to succeed in carrying out

an international profile. It is therefore important that we reflect and

learn from well-established techniques to improve these relation-

ships. There have been numerous studies carried out by statistical

organisations across the world which focus on improving the rela-

tionships between the statistical collector and the respondent. This

paper discusses how we may use this research and apply it to the

methodology of profiling. Many of these methods can also apply to

communication within NSIs between statisticians and users of the

data and also between the partnering NSIs involved in the profiling

project. It must be noted that due to different approaches and struc-

tures within NSIs, it may not be possible to utilise some of the rec-

ommendations contained in this paper. Therefore it should be treat-

ed as a list of possible techniques and not specified guidelines.

Much of the research which focuses on improving response rates is

based upon work carried out by an American psychologist called

Robert Cialdini. He has produced several papers on the topic of The

Science of Persuasion and Influence.

Other sources of information include Jackie McCarthy from the

National Agricultural Statistics Service (NAAS) in the USA who

presented a paper at the ICES (International Conference on Estab-

lishment Surveys) in Montreal in June 2012. McCarthy demon-

strated that Cialdini’s social psychology techniques could be ap-

plied to persuading respondents for statistical data collection pur-

poses.

Cialdini states in his research that there are 6 main principles of

persuasion and influence and McCarthy adds an additional princi-

ple of Material Self Interest.

1. Material Self Interest - What is in it for me?

1.1 Reduction of Burden

For most people, this will be the main motivator for responding to a

data request. In terms of international profiling, the main draw for

large multi-national businesses to co-operate in profiling would be

for profilers to explain that a long term goal would be to reduce

response burden placed on the business. NSI’s can and often do,

place a large amount of administrative burden on the largest of

GEGs.

Some of the largest businesses can receive hundreds of question-

naires from NSIs every year. Therefore, the main motivator for

responding to a data request is the possibility (now in the future) of

a reduction in this burden.

It is suggested that profilers could explain that one of the long term

goal of this ESSnet is to test the possibility of collecting data at a

higher level than which is done currently. (i.e. Global Enterprise

and Truncated Enterprise level rather than at an LEU level) which

could potentially reduce burden. It could also be made clear that





the project is testing if all data could be collected once by the NSI

UCI (from the GEGs Group Accounts). It can also explained that

the ESSnet is looking at the feasibility of changing the all EUS

NSIs statistical structure for data collection to bring it in line with

the GEGs operational structure (IFRS if applicable) which could

make it easier for GEGs to provide accurate statistics to NSIs.

However, the issue of response burden needs to be treated with

caution. This project is still only in a testing phase and therefore

profilers should not promise the GEGs that cooperation will lead to

a reduction in response burden.

Profilers could explain that the project is aiming to improve the

quality of national data and therefore could result in them receiving

fewer queries. Profilers could also explain that analysing the busi-

ness at a global level could result in the removal of duplicate in-

formation and the completion of missing information. As a result

this could benefit the business as less information will need to be

gathered.

1.2 Better Quality data

For the statistical users, profilers can draw upon the aims of the

project and to the collection of better quality data from MNEs. A

global Top Down approach could result in the elimination of dupli-

cation, omissions and inconsistencies. As international profiling

will improve the quality of units on the EuroGroups Register

(EGR), this will directly affect the Outward Foreign Affiliates Sta-

tistics (OFATS) and Foreign Direct Investment (FDI) surveys.

Therefore profilers could demonstrate these improvements in order

to better relationships with these users. It should also be noted to

users that there will an increase in the level of quality for their cus-

tomers which include Central Governments, Treasuries and the

Central Banks.

2. Reciprocation. This principle is based upon a favour being provided in return. One

small favour will often provide a sense of obligation to return it

with a large favour at a later date. Reciprocation can work both

ways. Respondents may already feel obliged to help if in the past

the NSI has helped them on a previous matter. Plus if a reward can

also be given in advance then the business may feel obliged to help

as they may have received something for nothing.

2.1 Providing a Service or Support the GEGs

There are many reciprocating techniques that can be applied to

international profiling, especially in relation to offering help and

services to the businesses. For example techniques that profilers

could adopt include providing the MNE with information about

particular surveys and the likely timings of receiving national sur-

vey forms. Profilers could also offer that the team be a point of

contact for any queries that the business may have with any of the

surveys. One of the biggest incentives for the MNE participation in

the project is the offer to examine the MNEs current national re-

porting structure and to investigate if there is any opportunity to

reduce the number of survey questionnaires they receive.

It is also worth explaining to the business that there is an opportuni-

ty to ensure that all contact information is kept up to date and that

the right surveys are going to the correct contacts at the business.





Profilers could also offer if possible, an option to return survey data

in an electronic format rather than in paper form.

2.2 Feedback to GEGs

Studies have shown that providing positive feedback to the re-

spondent on actions they may have carried out in the past also

strengthens relationships. For example if a business is a consistent

responder to surveys then profilers could explain this and thank

them for their commitment. Profilers could also provide examples

of the good quality of data being returned to the NSI.

2.3 Reciprocation with Users Convincing statistical users of the new methodology of profiling

and in particular the changes to the definition of Enterprise is not an

easy task. However there are principles we could apply which may

help them in their decision. In the short term, profiling of the most

important MNEs in the economy can result in immediate improve-

ments to quality of outputs. Therefore users could be consulted in

order to establish which cases are most important to our users and if

they meet the currently international profiling criteria these could

be targeted as a test case.

2.4 Reciprocation with Profiling Partners

The International Profiling process relies heavily on the co-

operation between NSIs. MNE groups have to be analysed by mul-

tiple partners and data shared amongst partners. Therefore recipro-

cation features heavily in the profiling process. An NSI may send a

file to a partnering country, requesting data. They would then want

to action data that is sent to them in return.

3. Commitment and Consistency

3.1 Verbal or Written Commitments

This principle is based upon concrete research which states that if

people commit to something, more often or not they will follow

through on their actions in order to maintain their self image. Peo-

ple think that it is right or morally correct to follow up on a com-

mitment.

Applying this technique to profiling, it may be productive to seek a

verbal or written commitment from a MNE to help at the beginning

of the process. For example ONS seek to agree a date for a visit

even though it may be 5 to 6 months until both parties are able to

meet. A few weeks before the meeting is due to take place the pro-

filer will contact the business again to confirm the arrangements for

the meeting are still suitable. This was a successful tactic as all 8

visits during 2012 went ahead as planned.

If the MNE has already agreed to help with the project, ensure you

have at least a verbal understanding from them, that there is an

expectation that the business will have to carry out some adminis-

trative (desk) work, for example providing or checking legal units

in the group. Therefore if they agree to supply this at the outset of

the project, this may improve the chance of success in obtaining

information at a later date.





3.2 Regular contact

“Consistency is a principle that states that people want to be and to

be seen as consistent with their existing commitments," says

Cialdini.

Therefore when profiling, involving the same profilers or personnel

will allow for the building of more effective relationships with all

involved parties. (Group Accountants at GEGs, statistical users and

profiling partners).

It is also very important that if there has been an agreement to pro-

vide something, then profilers must ensure that it is done. For ex-

ample if you have stated that you will answer questions or concerns

after a visit, then ensure that these are always answered. It will also

be very important to keep regular communication with all involved.

It is suggested that regular meetings are held, for example every

month with the main data users including statisticians from Nation-

al Accounts, Foreign Direct Investment, Structural Business Statis-

tics (SBS) and OFATS. During this meeting, all ongoing cases are

discussed including cases received from partners and feedback is

provided from any developments discussed at each co-ordination

meeting or workshops.

4. Social Proof (Cite co-operation Rates from other Competi-

tors)

4.1 Referencing Competitors

Cialdini’s research proved that people have a tendency to do things

that they see others doing and this technique can quite easily be

applied to the work with international profiling. A simple method

which relates to conformity is when profilers are attempting to re-

cruit an MNE to help with the testing. Profilers could mention

which other large MNEs (even better, their competitors) who have

also agreed to participate in the project. An example of this is men-

tioning to Oil Company One that Oil Company 2 was already in-

volved. This technique needs to be treated with a little caution as

due to confidentiality reasons it may be sensitive in some NSIs to

reference others in the project.

4.2 New NSIs

More controversially, this technique could be applied to encourage

other NSIs to participate in the project and to help the participation

levels from partnering NSIs. For example if the performance of a

particular partnering country is falling behind the others it could

encourage them to raise their output to match the other partnering

countries.

Additionally profilers could explain to users that NSIs across Eu-

rope are meeting with their own stakeholders and users to encour-

age involvement. Profilers could also stress how important users

are to the success of the project and highlight the need to get all

their views and feedback.

5. The “Liking” Principle

This principle can be interpreted in two ways. Firstly, it is well

proven that people are more willing to comply with people they

like.





5.1 Being Liked by Businesses

For many NSIs, it may be difficult to be liked by businesses espe-

cially for the largest MNEs where NSIs often place large adminis-

trative burden on them. Respondents are often frustrated by NSIs

requests to collect data from them and in extreme cases employ

staff just to complete survey questionnaires for the NSI. This is

sometimes reflected in the relationship that profilers have with

businesses.

However, this difficulty could be used as an advantage. Using the

“liking” technique, profilers should listen and trying to resolve any

concerns they may have and this may give some opportunity to

build better relationship. Listening to the respondent’s issues re-

garding burden, and then if possible take these issues forward, can

result in a more positive image of the NSI. Profilers could show

empathy with the MNE in relation to the amount of burden placed

on them and how complex some of the NSIs data requests are.

It is also valuable to find something in common with the business

to use as a starting point when attempting to build a relationship.

For example, it would be advantageous to understand their business

as much as possible especially if you are due to telephone the busi-

ness or are planning a visit. Profilers could ask questions about the

MNEs structure and main operations and based upon experience,

contacts often thrive when talking about their own businesses.

Showing how much you understand about the business can really

help start a good relationship.

5.2 Inter-Personal Skills.

Profilers require a variety of skills in order to build up sustainable

relationships with all customers. For example, a profiler needs to be

friendly, polite and professional but also needs to balance this with

being clear and direct on their ambitions. Often the language used

in statistics is very different to the accountancy terminology used

by the contacts at the business. International Profiling could be said

to be a difficult topic to explain and therefore it can be difficult to

convey what it is we are trying to achieve. Therefore it is vital that

profilers try to use business language and try to keep the terminolo-

gy as simple as possible. It is also important to avoid acronyms and

terms only applicable to NSIs.

The language barriers can also be a hindrance that some NSI will

experience especially as in some cases, multiple languages are spo-

ken within the same country. Therefore the most appropriate lan-

guage to be used in order to make the subject as clear as possible

should also be taken into consideration.

The main aims and objectives should be clearly explained to the

MNE. It should also be made clear what is expected from the busi-

ness at an early stage. For example, a profiler would indicate an-

other meeting may be required and how much information would

be required from the business. This could be checking of the legal

unit perimeter of the global group or the provision of employment

and turnover data from the business.





5.3 Face to face Communication

Profilers also see the benefit in meeting with the business face to

face. It is not always possible but some of the benefits to visiting

the business include:-

Easier to build up a rapport with the business if meeting up in

person.

Enforces trust between NSIs and the Business.

It raises the profile of NSIs.

It is much easier to discuss complex subjects on a face to face

business.

Visual tools could be used to make the subject much easier to

get the message across.

For MNE’s which act predominantly in more than one NSI, it is

also very advantageous to carry out a dual visit where more than

one NSI can meet up the business. This has been extremely useful

in several testing cases including EADS where DESTATIS and

INSEE attending a meeting in Germany. Also Nestle which operate

predominantly in Switzerland and France also carried out a com-

bined visit to a head office.

For some NSI’s Business Federations can heavily influence coop-

eration from the large Multi-National. For example in Belgium,

The Federation of Enterprises is the “voice” for over 80% of the

workforce in the private sector, representing more than 50,000

businesses. Therefore for some NSIs it may be vital to meet up with

business federations in order to get their support, approval and un-

derstanding of the project in order to help get buy in from MNE’s.

5.4 Liked by Users and Partners

When liaising with users, being liked by them may not be as vital to

a successful relationship as they already have a commitment to help

and contribute as they work to the same visions and values within

an organisation. However it is possible being liked may help the

cause.

There are many benefits to meeting with users and fellow profilers

on a face to face basis on a regular basis. As the topic can be com-

plex, it is worth considering carry out presentations with practical

case examples which clearly defines the aims, the methodology and

the issues with profiling.

It is suggested that profilers present the test cases to the users show-

ing the positives of the method and outstanding issues and then

given them the opportunity to ask questions and feedback their

views. All main points are then documented and are taken forward

with partnering NSIs and the businesses.

For partnering NSIs, meetings often take place at training seminars

and workshops. Profiling has already realised the benefits of meet-

ing up as new countries to the project have been paired up with an

ESSnet NSI. Most have held a coaching meeting which has signifi-

cantly helped the training process.

The new “Top Down Approach” to International Profiling and in-

cluding the Global and Truncated Enterprise definitions are a com-

plex topic to discuss in detail and often users have many questions

that they need to be answered. For example some of the questions

from Users in the Latvian Statistical Office included, how will pro-

filing ensure a time series of variables, what will be the benefits,

when will the MNE have to report data in this new way. Profilers





should try address some of these concerns and if there are outstand-

ing questions, then they should be noted and then addressed to the

ESSnet team who should then take all these outstanding issues for-

ward. It is very important to let all users know that all unanswered

questions will be taken forward and addressed by the project team.

5.5 I like you because you like me! The other side of the liking principle is that people like people who

like them. Therefore, profilers should always show that they like

and appreciate the customer. For example it is worth reiterating

how valued they are as a customer and how important their help is

in the success of the project. A profiler could refer to the outputs

that the MNE are generating for the NSI and they are one of a se-

lect few businesses that have been targeted for the testing process.

6. Authority

This principle is based on the fact that people respond to and re-

spect authority. People want to follow the lead of others especially

those who portray an image of importance and professionalism.

6.1 Conveying Roles and Responsibilities of NSIs

In terms of international profiling, (unlike for national data collec-

tion) there is currently no legal requirement for businesses to com-

ply. In actual fact, mentioning legal requirement may be seen as a

threat and be detrimental to a relationship. The threat of applying

legal action should only be used as a last resort if there is a legal

requirement in place.

However, it should be emphasised that they are dealing with a legit-

imate and trustworthy organisation. The main roles and responsibil-

ities of NSIs should be conveyed to the MNE and include how they

contribute to the data that is used by Central Governments. For

example data collected is used in the production of Gross Domestic

Product (GDP) estimates and by the Central Banks to set Interest

Rates.

As profilers, there will be many experiences where it will be diffi-

cult to get compliance from the GEGs. With no legal back up, it

may take several attempts to convince businesses of the benefits.

Therefore in some cases profilers may need to make several calls in

order to influence and convince then of the benefits for them. The

message is not to give up when one reaches the first hurdle.

6.2 Conveying Importance of the ESSnet on International Pro-

filing

For relationships with both MNE and internal users, the potential

impact this would have on National and EU statistics should be

clearly defined. For MNEs this would be in terms of the production

of much more accurate data for global companies. For users, it

should be shown the potential impact of changes to data collection,

statistical unit and the improvement in quality of the data.

6.3 Contacting Authoritative Personnel

The profiling guidelines state that a letter could be sent from the

Director General of the NSI to the Chief Executive Officer (CEO)

of the MNE requesting their help and involvement in the project.

Using high level contacts indicate the importance and stature of the





project and have already been put into practice by INSEE who have

had a high success rate with this strategy.

6.4 Security of Data

It is also important to explain that the data collected is treated with

the upmost of security. The data collected is confidential and there

are strict processes in place to keep the data secure. There is also a

need to explain the process involved in how the data is securely

transferred from NSI to NSI.

7. Scarcity – If there is less of something, then it is more valua-

ble

Profilers can use the very limited opportunity to be involved in the

testing phase of the project. For example, profilers could advise the

GEG that they are 1 of only a few (average of 5) involved in the

project with only 100 of the most crucial MNEs across Europe

involved.

Larger companies may understand to a certain extent how im-

portant their contributions are to both national and global statistics

but this could be reiterated to them.

8. Timing of Contact

An additional practice that is a vital ingredient to having a success-

ful relationship with a business is the timing of the initial contact

with them. Evidence from the initial testing phases of profiling has

shown that initial contact should be made with the business after

the release of their Annual Consolidated Accounts. This is for sev-

eral reasons;

i. the most likely contacts required for profiling are often at

the group accounts level and are usually very busy during

the period running up to the publishing of Annual consolidated

accounts. An approach during the period of time when the ac-

counts are being produced is more likely to be met with a refusal.

ii. Once their accounts have been published there is far less

data sensitivity and more likely to be prepared to share their

data.

It is also very important to contact our statistical customers at the

very start of the profiling of cases. Profiling could establish if there

are any concerns with the particular cases that could be addressed

by profiling.

Conclusions

This paper demonstrates that there are a number of tools and tech-

niques available that can be used and adapted to improve commu-

nication with all of the various users, stakeholders and MNE con-

tacts that we interact with during the International Profiling Project.

This list is not exhaustive and there are always new techniques and

ideas that could be added to. However, the suggestions in this paper

are a good starting point in terms of building successful relation-

ships with all relevant parties. It is also important to note how

communication differs between NSIs due to cultural differences

and therefore there is no strict methods that can be applied to every

country. Each NSI should use the most appropriate techniques de-

pending on existing experience and knowhow.





To conclude, communication with each of the different actors is all

as vital as each other. Regular, clear communication is a key ele-

ment to the success of the ESSnet on International Profiling project.

References Cialdini R.B. (2006) Using the Science of Influence to improve the Art of

Persuasion. www.Influenceatwork.com 6 July 2006

Berkenbosch B (2011) Data Collection Strategy. (Response Enhancing

Surveys). Statistics Netherlands Heerlen

Mccarthy J (2012) USDA/NASS. Why Should I? Employer Social Pshy-

cology to Increase Cooperation from Large Establishments. Powerpoint

Presentation. ICES IV Meeting Montreal. 11 – 14 June 012.

http://www.influenceatwork.com/

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