Key Words: Foreign Direct Investment (FDI), Globalisation, Intra-Firm Trade, Intrastat

13th International Roundtable on Business Survey Frames Paris, 27 September-1 October 1999

Sessions No 5 Paper N°3 Sabrina CIARALLI and Enrica MORGANTI1, ISTAT, Italy Infra-firm trade information in Business Registers: a feasibility analysis

Key words: Foreign Direct Investment (FDI), Globalisation, Intra-firm trade, Intrastat Register, Transnational Enterprise Groups (TEGs).

1. INTRODUCTION

The realisation of Business Registers on enterprise groups has become one of the major challenges for statisticians in order to satisfy the increasing demand for information related to the study of globalisation.

Although the Council Regulation 2186/93 of the European Community still considers as a faculty the introduction of information on groups in Business Registers, common standards need to be defined.

This paper would like to provide a contribution to this debate, focusing on the problem of how to identify foreign units within the Business Register and whether this is a relevant matter for the analysis of the nationality of transnational groups, i.e. for the identification of the group head.

At the moment, with reference to foreign units, the Italian Register on enterprise groups does not contain any identification variables, only the first shot country or geographical area of direct controlling foreign units is available. This structure only allows to reconstruct truncated transnational groups and to know the first shot country. As a matter of fact, globalisation and its impact on statistics could be studied only if a map of transnational groups is available and this requires the possibility of collecting and integrating information at international level.

An important source of information which links units from different countries and already records their identification variables are Customs' Documents and in particular for the European Community the Intrastat Register.

Moreover, Eurostat is currently discussing the possibility of starting to record intra-firm trade among member countries, even if there is not yet agreement on how to do it, in fact the change to the definitive VAT system will cause Intrastat to modify according to the new fiscal environment. A feasibility analysis on the costs and benefits of different ways to collect intra-firm trade, whether through the present Intrastat form or through a survey, is currently being studied.

This paper would like to stimulate a reflection on what appears to be as a sort of inconsistency: on one hand Business Register on Enterprise Groups could largely benefit from the use of the Intrastat Register as administrative source, especially if this would be used also to record intra-firm trade, on the other hand the necessity of reducing the burden on enterprises will probably lead to substitute it

1 This paper is the result of the authors’ common work, who share the responsability for it. The ideas here expresses do not involve the Italian National Statistical Institute. E. Morganti wrote paragraphs 1, 2 and 5, while S. Ciaralli wrote paragraph 3 and 4. E-mail addresses: [email protected], [email protected]. with sample surveys, but these still require reliable and updated lists from the Business Register about enterprises belonging to groups. The content of both the two Registers is presented and a feasibility analysis on the advantages and disadvantages of the use of the Intrastat Register is considered, with regards to the provision of identification variables which could enhance the delineation of TEGs and the attribution of nationality in the Business Register.

2. THE BUSINESS REGISTER ON ENTERPRISE GROUPS

A prototype of the Italian Business Register on enterprise groups has been obtained trough integration of different statistical and administrative sources for year 1996.

Several aspects concerning harmonisation of definitions, choice of the variables, methodology of up-dating, dissemination of information are still under discussion and require the delineation of standards to follow. For this purpose the Italian National Statistical Institute established a Task Force were external experts in co-operation with ISTAT researchers are in charge of studying which standards should be suitable for Italy. The Task Force will finalise its work to the compilation of a Report containing proposals according to the Italian point of view. The experience of this work would then be brought to the attention of the international community for further discussion.

An important characteristics of Business Registers on enterprise groups could be the possibility of integrating them with Registers of other countries, in order to obtain reliable maps of transnational groups and consequently to compute significant economic variables, such as value added of TEGs, share of intra-firm trade, etc. In particular, the nationality of the group head would be necessary in the evaluation of globalisation effects on the domestic economy and for the comparability of figures among countries.

Nevertheless information available in the Italian Register on enterprise groups does not allow to carry on a satisfactory analysis with reference to foreign control, since only the first shot country is known, but the foreign controlling unit is not identified. Structural statistics on enterprise groups such as those on Foreign Affiliates Trade Statistics cannot be based on this. The quality of data concerning the nationality of transnational groups could be improved only by an exchange of information among involved countries.

This would require:

 The definition of standards for the variable that should be used as key for linkage between Registers among different countries.  The identification of sources to collect this variable and the possibility of statistically treat it.  The availability of international agreements for the exchange of information among countries.

The available information in the Italian Business Register on enterprise groups concerning foreign legal units are provided below, by source of reference:

1) Survey on Employment - Nationality of direct controlling legal unit, 2) Survey on Scientific Research - The geographical area of the majority owner. 3) Italian Exchange Office Register - Nationality of the majority owner. 4) Archive of the National Committee of Inspection on Quoted Societies - Nationality and denomination of direct controlling enterprise 5) Bureau van Dijk data bank - Majority owner nationality and denomination, - Ultimate Beneficial Owner nationality and denomination.

2 Thus the 1996 version of the Italian Register only provides the first shot country of direct controlling or majority owning legal units. This can be asserted for 89% of the legal units considered.

The up-dating of the Register for year 1998 will use different sources and in some cases some identification variables on foreign units will be available. A summary of the sources which will be used and their variables is provided below:

Surveys not conducted anymore: 1) Survey on Employment New sources available: 2) Intermediate Census on Industry and Services - Nationality of direct controlling and group head Sources with improved content: 3) Bureau van Dijk data bank. - Majority owner nationality, denomination and , index number 2. - Ultimate Beneficial Owner nationality, denomination and , index number. Sources with the same content: 4) Survey on Scientific Research 5) Italian Exchange Rate Office Survey - Nationality of the majority owner. 6) Archive of the National Committee of Inspection on Quoted Societies - Nationality and denomination of direct controlling enterprise.

The denomination of foreign units is probably the identification variable which can be more easily obtained from national sources, although in Italy we still have difficulties about that. In particular this variable could be used for statistical treatment, even if probabilistic techniques of record linkage, which are going to be developed, are costly and at the moment are not yet used as automatic procedures.

A more suitable identification variable for foreign units could be the VAT number, which is largely adopted to identify units in Business Registers. An important source for obtaining it at European level could be the Intrastat Register, which records it for every foreign EU partners in trade of goods.

The availability of an identification variable for foreign units could be useful, since it would lead to link the Italian unit belonging to a group to some other units resident in different countries. As it will be discussed later there exists a strong correlation between trade and FDI, and in particular the share of intra-firm trade is high with respect to enterprises belonging to groups. Further analysis could then be conducted in foreign Registers to check whether the trading foreign units are part of a foreign group.

ITALIAN BUSINESS REGISTER ON GROUPS FOREIGN BUSINESS REGISTERS

INTRASTAT ITALIAN UNIT REGISTER GROUP'S INFORMATION Trading relationships VAT N. UNIT X VAT N. UNIT X GROUP HEAD ……………………... VAT N. UNIT Y VAT N. UNIT Y CONTROLLING UNIT …………………….. VAT N. UNIT Z

VAT N. UNIT Z Not belonging to groups ------

2 In most of the cases it is the Registration number at the local Chamber of Commerce.

3 Moreover, since the collection of data on intra-firm trade at European level is considered as a fundamental improvement in statistics on foreign trade, a further step could be done, if the approach for recording intra-firm trade would be chosen in line with the development of the Business Register on enterprise groups.

In other words if intra-firm trade would be signalled in the Intrastat Register, it could help to restrict the search on foreign partners only to those involved in trade within the same group, with substantial reduction of costs and improvement of the analysis. With respect to the above scheme it means to have links among domestic and foreign units belonging to the same group, even if the nature of the link is not specified, i.e. the position of the foreign units in the chain of control with respect to the domestic one is not known.

The content of the Intrastat Register as well as the feasibility of its utilisation for enriching the Business Register will be considered in the next paragraph.

In order to proceed along such an approach, the support of international agreements among countries will be fundamental, not only for the comparison of populations of legal units resulting from different Registers, but also a in view of a real exchange of data. This step could be easier at least at European level if confidentiality problems will be solved.

3. THE INTRASTAT REGISTER

On the 1st January 1993 with the completion of the European Internal Market customs procedures and controls concerning the exchange of goods between EU member states were definitively abandoned. This created statistical problems as Single Administrative Document (SAD)3 no longer had to be submitted at the Community’s internal borders. The Intrastat system was then introduced according to which EU operators are required to send monthly declarations to national authorities competent for data collection. These include the information concerning all the transactions of goods (both arrivals and dispatches) between EU members during the reference month.

In Chapter II of Regulation (EEC) n. 3330/914 - the legal basis of Intrastat System - Eurostat recommended the use of intra-Community operators register (Intrastat registers) to guarantee the completeness of response, once customs controls were no more allowed. The close link with the VAT reporting system for intra-community trade in goods is the main tool for register updating. According to the above cited regulation, this link provides “statistical services with a minimum degree of indirect verification without thereby increasing the burden on taxpayers”.

The majority of member states use VAT data to compare their statistical figures on intra- community trade, while some member states – among which Italy - opted for a joint return of tax and statistical data. This last choice represents the easiest way to ensure all operators are have complied with their obligations in full.

The change to the definitive VAT system will cause Intrastat system to modify according to the new fiscal environment. In this perspective Eurostat suggests the use of Business Registers – or other administrative sources – to update Intrastat register. Until any decision is taken concerning fiscal changes, VAT link is the main source of information.

The unit of reference is the legal unit, the one who is responsible for VAT declaration. However Intrastat register also includes institutional parties not liable to account for VAT. Regulation 3046/92 defines the minimum data to be recorded in Intrastat register. They are:

 VAT registration number of PSI  full name and address of PSI  the year and month of entry in the register  the typology of operator (consignor, consignee, declarant or a party responsible for providing information, or a declaring third party)

3 Member States have been forwarding external trade statistics in standard form since 1978, in accordance with Council Regulation (EEC) n. 1736/75. 4 Council Regulation (EEC) N. 3330/91 of 7 November 1991 on the statistics relating to the trading of goods between Member States.

4  Value of transactions by month and by flow

Additional variables available in Intrastat forms are the following:

 Merchandise code (Combined Nomenclature)  Consignment/destination country  Country of origin of goods  Value of single transaction  Nature of transaction  Quantity of goods  Statistical value  VAT registration number of EU partner

In particular the VAT registration number of EU partners represents a very important variable that could be used in Business Register on enterprises groups. Moreover the information on the nature of the transaction, which is currently recorded using numeric codes, could be easily used to indicate intra-firm transactions, for example using alphabetic codes, without significantly increasing the statistical burden on enterprises.

These two pieces of information put together, i.e. the VAT number and the indication of an intra- firm transaction, would substantially improve the knowledge of transnational groups' maps in the Business Register on enterprise groups.

4. INTRA-FIRM TRADE

The relationship between trade and FDI has been investigated in many empirical studies. The main findings show that they are not substitute, but complementary activities of TEGs. This is more evident in vertical TEGs, where units produce different stages of a product, since this stimulates trade of intermediate goods.

More generally, enterprises belonging to groups show a higher propensity to trade than local enterprises. WTO estimates that 2/3 of world trade is generated by TEGs, of which 1/3 is intra-firm trade. These figures result from statistics available in a limited number of countries – United States, Japan, France – because of the difficulties in measuring intra firm trade. The need of intra-firm data is clear to Eurostat and filling this lacuna in statistics is considered now a major purpose. As far as foreign trade statistics are concerned, intra-firm trade has a deep impact on data quality, the most important factor being “transfer pricing” effect. Price behaviour in intra firm trade reflects fiscal considerations, being a tool to shift taxable profits to subsidiaries located in countries with a more favourable taxation system. This manipulation of the cost of imported inputs is also due to the difficulty in establishing the market value of some inputs. This leads to “wrong” value declarations that can affect the quality of trade statistics. Improvement of data quality is therefore animportant reason to collect intra-firm information.

At the moment the most obvious way to collect figures is by directly asking EU operators to declare whether Intrastat transactions are intra-firms or not. In principle, this is the easiest way to do it, but in practice many difficulties are still there: i) Enterprises are required to have a clear knowledge of the structure of their group. Eurostat has recently promoted a sample survey5 on enterprises belonging to transnational groups in some member states, among which Italy. A sample of enterprises belonging to transnational groups has been selected with the aim of analysing the level of transparency in the exchange of information within a group. In particular, the possibility to distinguish intra-firm from arm- length trade was investigated. The results of the survey show that while the group heads have a complete knowledge of the structure of the group, subsidiaries mainly are able to distinguish intra-firm trade with directly linked enterprises. However, the level of knowledge of intra-firm trade is quite high and possibly the inclusion of this piece of information in an administrative form, would increase it.

5 The survey is part of the mandate of Task Force “Globalisation”, Unit C-4.

5 ii) Intrastat data collection is generally not complete because of the existence of trade value thresholds, under which operators are not requested to send statistical data. However, this problem can only partially affect the monitoring of intra-firm trade for the following reasons: i) information about under threshold trade could be obtained through VAT data; ii) enterprises belonging to a group often are above these thresholds. Anyway, Italy has no exclusion threshold. iii) Even though Intrastat form already exists, some changes should be introduced in order to insert intra-firm information.

On the other hand, the use of Intrastat form to collect intra-firm data could rely on the following advantages: i) It would not require another form to collect this information, thus avoiding more burden for enterprises. ii) It has a common structure for all Member States, allowing EU comparisons. iii) Intrastat survey is based on monthly declaration. This means a continuos updating of figures. iv) Very detailed sectorial figures are available. v) It limits the analysis to foreign trade operators, with a considerable reduction of costs.

5. CONCLUSIONS

The nationality of TEGs is a key variable in the analysis of globalisation. The availability of this information requires the knowledge of the entire chain of the group, or at least an identification variable for foreign units to have a link with registers of other countries. The VAT registration code seems the most suitable variable, as it is commonly used in Business Registers and allows for easy statistical treatment.

The Italian Intrastat Register already contains such a variable and the Business Register on enterprises group could largely benefit from the integration with that source, but probably this is the case for other countries, too. This development could lead to delineate TEGs, especially if intra-firm trade information would be signalled in the Intrastat Register.

In summary this approach presents the following advanteges: i) It would help in the reconstruction of the group's chains with foreign legal units by using the VAT registration number of foreign trade partner. ii) The monthly collection of Intrastat data would help in rapid updating of the Business Register on Enterprises Group. iii) A detailed sectorial analysis would be available, contributing to check the correct economic activity of the units in the Business Register.

However some difficulties are present: i) Information only refers to EU foreign trade operators and, among these, to those trading. However, this is less a problem due to the evidence of group enterprises high propensity to trade. ii) International links between transnational enterprises is far from being limited to goods exchange. Trade in services is becoming increasingly important and Intrastat statistics do not include it. Alternative sources of information would therefore be required to fill the gap. iii) The use of Intrastat register with the inclusion of intra-firm information can only help in finding foreign enterprises belonging to the same group. This cannot show which position the enterprise occupy within the group.

6 In order to reach a complete implementation of such approach, international agreements across countries to define procedures for the exchanging of data would be necessary. At least for European Community member countries this step could be easier.

References

1. Commission of the European Community, “Report on the link between Intrastat and the value added tax system”, Statistical Office Unit C/4, internal document. 2. Working Group on Business Registers "Methodological Manual on Business Registers", Doc.EUROSTAT/D1/BRSU/99 -11-b.EN, Sections 20 - XX. 3. European Community - Council Regulation 3330/91. 4. European Community - Council Regulation 3046/92. 5. European Community - Council Regulation 2186/93. 6. Eurostat-Planistat "The impact of Globalisation on Statistics", Recommendations and Report, July 1998, Unit D/1. 7. WTO, “The Relationship between Trade and Foreign Direct Investment”, Note by the Secretariat. 8. WTO, “Trade and Foreign Direct Investment”, New Report. 9. WTO, “Communication from the OECD”, Working group on the Relationship between Trade and Investment.