OECD Benchmark Definition of Foreign Direct Investment (Fifth Edition)

3. FDI financial and income transactions

Abstract

This chapter describes two of the main accounts for foreign direct investment (FDI) statistics: FDI financial transactions and FDI income transactions. Chapter 4 discusses another account for FDI positions, and Chapter 5 covers the other changes in volume and revaluation accounts and the reconciliation of FDI transactions, other flows and FDI positions.

The first part of this chapter discusses FDI financial transactions, including the types of financial instruments involved. This is followed by a discussion of FDI income transactions, with a focus on the importance of measuring income on equity according to the current operating performance concept (COPC). For both of these accounts, there is a brief overview of the presentations according to the asset/liability and directional principles. Finally, the valuation of transactions under transfer pricing is discussed.

3.1. Introduction

167. This chapter begins by describing the FDI financial transactions account. It discusses the two types of financial instruments covered (equity and debt) as well as the recording according to the asset/liability and directional presentations. This is followed by a discussion of the FDI income transactions account. It emphasises the need to measure income on equity according to the current operating performance concept (COPC) and explains the adjustments needed to move from income from company financial accounting statements to income on the COPC basis. The last section discusses the valuation of transactions under transfer pricing.

3.2. FDI financial transactions

168. Direct investment financial transactions are all transactions in financial instruments between entities in a direct investment relationship through mutual agreement or through operation of law.1 The main financial instrument components of foreign direct investment (FDI) are equity and debt instruments (see Box 3.1). In the case of transactions, equity is further subdivided into two sub-components: equity other than the reinvestment of earnings and reinvestment of earnings. Direct investment equity and debt are: (a) financing provided by a direct investor to a directly or indirectly owned direct investment enterprise (DIE); or (b) financing received from a directly or indirectly owned DIE by a direct investor; or (c) financing provided by or to fellow enterprises. It is recommended that separate figures be collected and published for transactions in equity capital, reinvestment of earnings and debt for both direct investment assets and direct investment liabilities. Therefore, these will be discussed separately in the following subsections. This will be followed by a brief description of the presentation of financial transactions according to the asset/liability and the directional principles.

169. Transactions in financial derivatives between entities in a direct investment relationship should be excluded from direct investment.

3.2.1. Equity and reinvestment of earnings

170. Equity includes common and preferred shares (exclusive of non-participating preference shares which should be included under debt), reserves, capital contributions and reinvestment of earnings. Reinvested earnings and reinvestment of earnings are separately identified components of equity in the FDI income account and in the FDI financial transactions account, respectively. All cross-border transactions in equity between FDI-related enterprises are included in FDI. Transactions by a direct investor in the equity of its DIEs include both reinvestment of earnings and other equity transactions. Transactions by a DIE in the equity of its direct investor or in the equity of a fellow enterprise do not include reinvestment of earnings.

Equity other than the reinvestment of earnings

171. Equity is defined as all instruments and records acknowledging claims on the residual value of a corporation or quasi-corporation after the claims of all creditors have been met. Ownership of equity is usually evidenced by shares, stocks, participations, depository receipts or similar documents.

172. Equity increases result from a direct investor’s establishment of a new DIE through:

• its initial acquisition of equity that represents a 10% or more voting power interest in an existing enterprise

• its acquisition of an additional voting share ownership interest in an existing enterprise which takes the accumulated holding to at least the 10% voting power threshold

• its equity contributions to an existing DIE.

173. Equity decreases result from:

• the liquidation of a DIE2

• the partial or total sale of an ownership interest in a DIE

• the return of capital contributions

• liquidating dividends, which are considered to be a withdrawal of equity rather than a distribution of income.

174. For a given category of equity transactions, decreases in assets are deducted from increases in assets to derive the net transactions in assets within a given period, and similarly for liabilities. Equity transactions exclude changes in equity that result from the reinvestment of earnings, which constitute a separate sub-component of the accounts.

Box 3.1. Financial instruments related to foreign direct investment

Equity comprises: (i) equity in branches; (ii) all shares in subsidiaries and associates (except non-participating, preferred shares that are treated as debt securities and included under direct investment, debt instruments); and (iii) other contributions of an equity nature. Ownership of equity is usually evidenced by shares, stocks, participations, depositary receipts or similar documents. Shares and stocks have the same meaning while depositary receipts are securities that represent ownership of securities by a depositary. This category includes proprietors’ net equity in quasi-corporations, as well as shares and equity in corporations. It also includes preferred stocks or shares that provide for participation in the residual value on dissolution of an incorporated enterprise. Reinvestment of earnings comprises the claim of direct investors (in proportion to equity held) on the retained earnings of direct investment enterprises (DIEs). Reinvestment of earnings represents financial account transactions that contribute to the equity position of a direct investor in a DIE.

Deposits: Typical forms of deposits include savings deposits, term deposits, transferable and non-transferable deposits in local or foreign currencies (see the 2025 System of National Accounts (2025 SNA, (United Nations et al., Forthcoming[1])) for a more specific definition of deposits).

Debt securities include non-participating preferred shares, bonds, debentures, commercial paper, promissory notes and other non-equity securities.

Loans: Loans are financial assets that are created when a creditor lends funds directly to a debtor through an instrument that is not intended to be traded. This category includes all loans and advances (except accounts receivable/payable which are treated as a separate category of financial assets). It also covers the treatment of financial leases and repurchase agreements.

Trade credit (receivables and payables) between FDI-related enterprises. It represents short-term credit in the ordinary course of business by suppliers/buyers of goods and services. These credits are registered from the time the goods or services are provided until payment is received (or vice versa).

Other accounts receivable/payable includes miscellaneous other items due to be paid or received.

Note: Financial derivatives are not included in direct investment.

Source: IMF ( (Forthcoming[2]), Integrated Balance of Payments and International Position Manual, Seventh Edition (BPM7).

175. Equity transactions may arise either from transactions between a direct investor and its DIE (such as contributed surplus or liquidations), or from transactions between a direct investor and a third party (such as purchases (sales) of stock in a DIE by a direct investor from (to) an unaffiliated third party). Note that these third-party transactions may need to be based on the records of the direct investor rather than on the records of the DIE, because data on these transactions may not be available from the records of the DIE.

176. The sale and purchase of a non-resident DIE between two resident institutional units are domestic transactions. Such transactions, however, affect the external asset positions of the two resident units involved and should, for example, be recorded in the external accounts as a reclassification of sectors of holding (i.e., in the other changes in financial assets and liabilities account) in the sectoral breakdown of the international investment position (IIP). Similarly, when a resident DIE is sold and purchased between non-residents, no transactions are recorded in the balance of payments and there is no change in overall external liabilities of the compiling economy. However, compilers in economies that are members of economic or currency unions may record two offsetting transactions in the statistics in these cases. For example, if a DIE resident in a member of an economic union is sold and purchased between non-residents, then the compilers in the economy of the DIE may record two transactions of opposite signs that will entirely offset each other to ensure bilateral symmetry in the statistics for the economic union (see Annex 8.C).3

Reinvestment of earnings

177. Reinvestment of earnings of DIEs reflects earnings accruing to direct investors (proportionate to the ownership of equity) during the reference period less earnings declared for distribution in that period. The retention of some or all of the earnings in a DIE is deemed to be a deliberate decision of the direct investor. While reinvested earnings are not actually transferred to the direct investor, the recording shows them remitted to the direct investor as property income and then reinvested in the DIE, increasing the direct investor’s investment in its DIE. Therefore, an entry that is equal to that made in the direct investment income account, but that flows in the opposite direction, is made in the direct investment financial transactions account. In the direct investment income account, this form of income is referred to as “reinvested earnings.” However, in the direct investment transactions account, “reinvestment of earnings” is the term that is used, to more clearly differentiate between the income and financial transactions (see the discussion of reinvested earnings in the direct investment income account for more details, Section 3.3).

3.2.2. Debt instrument transactions

178. Debt instruments include marketable securities, such as bonds, debentures, commercial paper, promissory notes, non-participating preference shares and other tradable non-equity securities as well as loans, deposits, trade credit and other accounts payable/receivable. All cross-border transactions related to these instruments between enterprises covered by a FDI relationship, other than between related financial intermediaries, are included in FDI.

179. Debt financing can flow in the same direction as the influence or control, i.e., from the investor to the DIE. In addition, a DIE may raise loans that they on-lend to their direct investor or may make loans to their direct investor from their own resources, so-called reverse investment. Such loans should be treated as direct investment debt and be included in the direct investment statistics.

180. Similarly, loans involving fellow enterprises should be included under debt in direct investment statistics. For example, B, a DIE of A, may raise funds that, under instructions from A, it lends to C, another DIE of A. Such transactions should be considered direct investment between the economy of B and the economy of C, even though there is no equity participation between B and C. Similarly, if a resident direct investor, A, has a DIE abroad, B, as well as a resident subsidiary, C, then C is, by definition, not a DIE of A, but B and C are fellow enterprises within the framework for direct investment relationships (FDIR) covering A, B, and C. Therefore, transactions between B and C should be recorded as direct investment.

181. Direct investors may make loans to or borrow funds from their indirectly owned DIEs. An indirect ownership interest exists when a DIE that is directly owned, in turn, has an equity holding in another non-resident DIE, thereby making the first DIE a direct investor in the second DIE. In this example, the direct investor at the top of the ownership chain holds an indirect ownership interest in the enterprise at the bottom of the ownership chain. Debt transactions between all these directly and indirectly owned enterprises should be included in direct investment if they meet the requirements of the FDIR (see Section 2.4.3).

182. Under the FDIR, if the indirect ownership in DIEs is not included in direct investment relationships, then some transactions between the direct investor and its indirectly owned DIEs may be excluded from the direct investment statistics as well as the corresponding earnings. While world-wide consolidated data cannot be used to construct FDI statistics, it is the case that economies that do not require their companies to produce world-wide consolidated company accounts may have difficulties in obtaining information on all indirectly owned subsidiaries and associates in order to produce direct investment statistics according to the FDIR.

183. A DIE or a fellow enterprise may also have loans or balances due to or from fellow enterprises abroad. None of these related enterprises needs to hold a 10% or more voting power in the other as long as they have, directly or indirectly, a common parent.

184. For each category of debt instrument, decreases in assets are deducted from increases in assets to derive the net transactions in assets within a given period, and similarly for liabilities. However, debt transactions between FDI-related financial intermediaries (such as commercial banks, savings institutions, credit unions, mutual funds or finance companies) are excluded from direct investment (see Annex 6.A).

• For debt instrument assets, included are transactions that increase or decrease:

  • the resident direct investor’s debt instrument claims on the DIE

  • the resident DIE’s debt instrument claims on direct investors

  • other resident fellow enterprises’ debt instrument claims on fellow enterprises abroad, distinguishing whether the ultimate controlling parent is resident or non-resident.

• For debt instrument liabilities, included are transactions that increase or decrease:

  • the financial obligations of a resident DIE to direct investors

  • the financial obligations of a resident direct investor to DIEs

  • the financial obligations of other resident fellow enterprises to fellow enterprises abroad distinguishing whether the ultimate controlling parent is non-resident or resident.

185. When a direct investor lends funds to its DIE, the level of the direct investor’s claims (receivables) on the enterprise increases. Subsequently, when the DIE repays the principal owed to its direct investor, the level of the direct investor’s receivables from the enterprise is reduced. Similarly, when a direct investor borrows funds from its DIE, the level of the direct investor’s liabilities (payables) to the enterprise increases and when the direct investor repays the principal, the level of the direct investor’s payables is reduced. The same applies to fellow enterprises.

186. Increases in the resident’s receivables from, or reductions in the resident’s payables to, its foreign direct investor or fellow enterprises abroad give rise to outflows on inter-company debt accounts. Reductions in the resident’s receivables from, or increases in the resident’s payables to, its foreign direct investor or fellow enterprises abroad give rise to inflows.

187. The net change in inter-company debt includes changes in the value of financial (or capital) leases between direct investors and their related enterprises abroad. Financial leases are treated as loans. A financial lease is a contract under which a lessee contracts to pay rentals for the use of a good for most or all of its expected economic life. The rentals enable the lessor to recover most or all of the costs of goods and the carrying charges over the period of the contract. While there is not a legal change of ownership of the good, under a financial lease the risks and rewards of ownership are, de facto, transferred from the legal owner of the good, the lessor, to the user of the good, the lessee. For this reason, under statistical convention and standard accounting rules, the total value of the good is imputed to have changed ownership. So, the debt liability at the inception of the lease is defined as the value of the good and is financed by a loan of the same value, a liability of the lessee. The loan is repaid through a series of payments (which comprise a blend of the accrued interest since the last payment and principal payment elements) and any residual payment at the end of the contract (or alternatively, by the return of the good to the lessor).

3.2.3. FDI financial transactions according to the asset/liability and directional principles

188. The asset/liability principle is used to present the standard components related to direct investment where the investment is organised according to whether it relates to an asset or liability of a resident entity (i.e., a resident direct investor, resident DIE, or a resident fellow enterprise). Direct investment assets and liabilities for both equity and debt can be further classified by the nature of the relationship between the resident and non-resident FDI counterpart to the FDI transaction.

• Direct investment assets can be ascribed to the following three categories:

  • investment by resident direct investors in non-resident DIEs

  • reverse investment by resident DIEs in non-resident direct investors

  • investment by resident fellow enterprises in non-resident fellow enterprises.

• Direct investment liabilities can be ascribed to the following three categories:

  • investment of non-resident direct investors in resident DIEs

  • reverse investment of non-resident DIEs in resident direct investors

  • investment of non-resident fellow enterprises in resident fellow enterprises.

189. The presentation of FDI statistics according to the directional principle requires the rearrangement of some of these building blocks. The presentation of outward foreign direct investment transactions is different to that of foreign direct investment assets. Similarly, the presentation for inward foreign direct investment transactions is different to that for foreign direct investment liabilities. These differences essentially involve transposing reverse transactions and transactions between fellow enterprises in the two presentations so that the directional presentation presents results from the perspective of the home economy of the parent company (see Annex 2.B).

3.3. Direct investment income

190. Direct investment income is part of the return on the direct investment position; that is, it is the return on equity and debt investment. Direct investment income includes all investment income arising from direct investment positions between resident and non-resident institutional units; it consists of earnings on equity investment (for example, a resident direct investor’s share in the net income or earnings of its DIEs) plus income on debt between direct investors and DIEs and between fellow enterprises. Direct investment income payables are calculated in a similar way. Direct investment income is recorded as it accrues. However, as debt instruments involving FDI-related financial intermediaries are excluded from direct investment, so is the debt income between them (see also Section 3.2.2).

191. Direct investment earnings are measured before deduction (or gross) of withholding taxes on distributed earnings and interest. Withholding taxes are viewed as being levied on the recipient of the distributed earnings or interest to which the taxes are applied, and thus as being paid across borders even though, as an administrative convenience, the tax payments are actually made by the company whose disbursement gave rise to them. Thus, foreign withholding taxes on distributed earnings and on interest received by a resident direct investor are recorded as if they were paid by the direct investor, not by the DIE. Similarly, the resident economy’s withholding taxes of the reporting country on interest payments by resident direct investors or resident DIEs are recorded as if they were paid by the non-resident, not by the resident.

192. While company accounts are typically the source of data on the earnings of DIEs, there are notable differences between the measurement of net income from business accounting and income measured in macroeconomic statistics. Therefore, data collected from the financial statements of enterprises needs to be adjusted so that income is measured consistently across macroeconomic statistics. This is especially important given the role that cross-border income payments play in linking gross domestic product (GDP) and gross national income (GNI). The GNI of an economy is the total income earned by all residents within an economic territory during an accounting period. The difference between the GNI and GDP is equal to the difference of earned income receivable from non-residents and earned income payable to non-residents, often described as “net income from abroad”. FDI income can be a significant share of the “net income from abroad”, and, so, it is important in measuring GNI consistently across economies. To ensure this consistency, the Benchmark Definition recommends that compilers measure the earnings of DIEs according to the current operating performance concept (COPC). The COPC adjusts net income from business accounting to align with distributable income used in the System of National Accounts (SNA) and the Balance of Payments and International Investment Position Manual (BPM).

193. This section will begin with a discussion of the adjustments necessary to measure a DIE’s earnings according to the COPC, including the exclusion of holding gains and losses and adjustments to depreciation; it will also include a description of the application of the COPC to financial companies. Then, it will discuss how the earnings are recorded in the FDI income account that shows distributed and reinvested earnings separately. Finally, the section describes the measurement of income on debt.

3.3.1. Measuring direct investment earnings

194. Direct investment earnings need to measure earnings from current operations. However, business accounting, which is often the source data, likely measures income on an all-inclusive basis. All-inclusive income is the amount remaining after all items, including holding gains and losses and write-offs, are included in the income statement. Therefore, direct investment earnings should be calculated before recognition of holding gains and losses and certain other items. Operational earnings of the DIE should be reported after deducting provisions for depreciation and for corporate taxes charged on these earnings by the government in the host economy. Depreciation should, in principle, be measured at current replacement cost, particularly if market values are available for stock figures. If data on depreciable assets and on depreciation are available only on a book value or historical cost basis, those values should be adjusted wherever possible to a current replacement cost basis. Therefore, direct investment earnings measured according to the COPC need two key adjustments to net income measured in business accounts to align them with income in other macroeconomic statistics: i) the exclusion of holding gains and losses and certain other non-recurring items, and ii) adjustment of depreciation (including provisions for this purpose) to align financial or tax depreciation with economic depreciation. These will be discussed separately below.

Exclusion of holding gains and losses and other non-recurring items

Holding gains and losses

195. The earnings of DIEs reported using the COPC exclude holding gains and losses because they reflect changes in prices and do not arise from production. Examples of holding gains and losses and other items that should be excluded from FDI income on a COPC basis are:

1. any gains or losses arising from valuation changes, such as inventory write-offs, write-downs, or write-ups

2. gains or losses on plant and equipment from the closure of part or all of a business

3. writing-off of intangible assets, including goodwill, due to unusual events4

4. provisions for losses on long term contracts

5. exchange rate gains and losses incurred by the DIE both from its trading activities and from its holding of foreign currency assets and liabilities

6. unrealised gains or losses from the revaluation of fixed assets, investment and liabilities

7. realised gains or losses made by the enterprise from the disposal of assets or liabilities.

196. Earnings exclude currency exchange gains and losses and other holding gains and losses, whether or not such gains and losses are included in net income for financial accounting, tax, or other purposes. However, these earnings include the impact of changes in foreign currency exchange rates on the operating revenues and expenses of DIEs because these are not due to holding gains and losses. This treatment is intended to make earnings correspond to the current operating performance of the relevant enterprises in the ownership chain, in accordance with international guidelines.

197. The exclusion of realised and unrealised holding gains and losses is applicable to all DIEs, including financial corporations, such as banks and securities dealers, for whom the making of such gains is an important or even the main part of their business. This promotes consistency with the calculation and treatment of earnings in the national economic accounts, prepared pursuant to the SNA. Box 3.2 provides details on the items that should be excluded from the profit and loss statements of financial corporations to put their earnings on a COPC basis.

198. The treatment of provisions on financial assets is another case where business accounting can differ from economic accounting. In the SNA, provisions are defined as “funds set aside by an economic unit to cover future liabilities of uncertain timing or amount.” As a consequence, provisions are not treated as liabilities in macroeconomic accounting (with the exception of standardised guarantees) because there is no corresponding financial asset held by a counterparty. Some accounting standards, such as the international financial reporting standard 9 (IFRS 9), require that changes in impairment allowances for credit losses be reported in the profit and loss statement. If this is the case, in contrast to the treatment of current provisions, these impairment charges should be excluded under the COPC. The COPC seeks to measure earnings from current operations, which means only including revenues and expenses that arise from current operations. In the case of impairment allowances for credit losses, they represent a probable future expenditure and anticipate the amount of that expenditure; therefore, they should not impact earnings from current operations. In the case of banks, if this kind of provisions is covered by a reduction in the equity capital, as allowed by IFRS 9, the amount of the reduction should be excluded from the calculations of earnings on a COPC basis.

199. This treatment can result in large differences between income reported in the financial statements of financial and non-financial corporations and that recorded in direct investment; for example, when financial conditions are deteriorating, FDI income will likely exceed income reported by credit institutions while FDI income will likely fall below income reported by credit institutions when financial conditions are improving. Compilers in economies where these differences are significant may want to publish a memorandum item on provisions for financial instruments to help users interpret the statistics.

200. It should be noted that the System of National Accounts 2008 (SNA 2008, (United Nations et al., 2009[3])) and the Balance of Payments and International Investment Position Manual, Sixth Edition (BPM6, (IMF, 2009[4])) both distinguished trading margins earned by companies for services they provide as market-makers from holding gains and losses. “Dealers, market makers, foreign exchange bureaux, and other intermediaries producing this kind of [financial] service are distinguished from other traders by their characteristic of generating a buy-sell spread, which shows that they serve the market in a somewhat similar way to a wholesaler, by providing liquidity and inventory” (Integrated Balance of Payments and International Investment Position Manual, Seventh Edition (BPM7, (IMF, Forthcoming[2]), Chapter 11, Section F, paragraph 11.122)). Therefore, for consistency in the measurement of income, conceptually these trading margins should be considered ordinary earnings and hence, included in FDI income and not treated as holding gains and losses. However, practically it is very difficult to compile such trading margins. Therefore, BPM7 recommends only including trading margins in trade in financial services when they are significant. Similarly, compilers should only include them in their FDI income where they are significant to their economies.

Box 3.2. How to move from the financial statement to a statistical concept (COPC)

In applying the COPC to financial corporations, some expenses and revenues that are part of the ordinary activity of the company must be adjusted in line with what is included in the following table.

Table 3.1. Moving from the financial statement to the COPC

		Benchmark Definition recommendation	Items also in the financial statement (examples)
A		Ordinary earnings	Profit and loss (all-inclusive concept)
B	+	Provisions for losses and long-term contracts	Impairment allowances for losses on loans and advances Impairment allowances for loss on property, plant, equipment, and intangible asset
C	-	Realised gains or losses made by the enterprise from the disposal of assets and liabilities	Gains (losses) from other financial securities. Income on sales or liquidation of fixed assets, intangible assets, and assets for disposal.
D	-	Gains or losses arising from valuation changes: write-ups, unrealised gains or losses from the revaluation of fixed assets, investment and liabilities	Gain on acquisition of enterprises. Net trading income and revaluation.
E	+	Share of profits of associates that is not distributed	Should be calculated as share of investment in the associate: “Share of voting rights of direct investor in DIE Z x (AZ+BZ-CZ-DZ) – dividend received”, with AZ representing the Ordinary Profit for company Z (concept A in this Table); BZ representing the provisions for losses for company Z (concept B); and so on.
=		Direct Investment earnings (COPC)

Other non-recurring items

201. While it is clear that some items, such as holding gains and losses, should be excluded when measuring COPC earnings, other cases are less clear. While it may be necessary to exclude certain other non-recurring items to derive COPC earnings, it is necessary to consult with the national accounts to ensure consistent treatment. For example, while the payment of a fine or penalty may be extraordinary for the company, it should not necessarily be excluded from their COPC earnings. When cross-border fines and penalties are imposed on multinational enterprises, they are relevant to FDI. Due to the increasing frequency and size of such fines and penalties in recent years, the international standards were updated to provide additional guidance on their recording. Fines and penalties are defined as being punitive in nature and are treated as miscellaneous current transfers; they are distinguished from major compensation payments that are intended to recover losses incurred over a multi-year period or to replace an asset (financial or non-financial) and that should be recorded as capital transfers. While it may appear that fines, penalties, and major compensation payments are not part of the ordinary operations of a DIE and, so, should be excluded from COPC earnings, it is not clear that should be the case.

202. Compilers should base their determination about whether to include fines or penalties as part of COPC earnings on the specific characteristics of the fine or penalty and in close coordination with national accountants. For example, consider the case where a wholly-owned DIE in country A is fined 100 by the government of A. The payment of this fine by the DIE would be a domestic transaction; if it is recorded as a current transfer from the corporate sector to the government, then the fine should reduce the earnings of the DIE (that is, should not be excluded from the COPC earnings). In this way, the gross domestic income (GDI) of economy A is not impacted by the imposition of the fine as the drop in domestic corporate profits of 100 is completely offset by the 100 increase in transfers to the government of A. This treatment would increase GNI because income payments to the rest of the world decreased due to the fine. These results are logical as an economy should not be able to increase GDI by imposing a fine on a resident enterprise, but GNI would increase as the non-resident direct investor no longer has a claim on the amount of the fine that has been transferred to the government of A. In summary, whether fines, penalties, and major compensation payments are excluded from COPC earnings would depend on a number of factors, including whether the payment is treated as a current or capital transfer. Close coordination with national accounts is needed to ensure consistency in recording and preventing unreasonable impacts on key macroeconomic aggregates.

Depreciation in direct investment income

Depreciation

203. Depreciation methods favoured in business accounting and those prescribed by tax authorities almost invariably deviate from the concept of depreciation used in macroeconomic statistics. In national accounts, depreciation is measured by the value, at current replacement cost, of the fixed assets used up (as a result of physical deterioration, normal obsolescence, or normal accidental damage) during an accounting period. In the calculation of depreciation, the expected economic life of an individual asset should be taken into account (expected life and normal obsolescence or damage do not include losses due to wars or major natural disasters). Depreciation used in the business accounts is not necessarily the same as depreciation used in the national accounts as the business accounts may base depreciation on historic cost or book values, or may use a different depreciation model from the models recommended in the national accounts. Therefore, compilers should make adjustments to depreciation based on business accounts where the calculation of depreciation rates diverge from the rates used in the national accounts.

Capitalisation of research and development expenditures

204. Another issue is that the national accounts capitalise some expenditures that may be treated as operating expenses in business accounting. One example of this is research and development (R&D). The 2008 SNA recognises expenditures for both purchased and own-account (in-house) R&D as gross fixed capital formation (GFCF) and the depreciation of these assets as consumption of fixed capital (CFC).

205. Capitalisation of R&D impacts FDI earnings through:

• expenses on purchased R&D that should be treated as gross fixed capital formation (GFCF) rather than intermediate consumption

• the recognition of output and GFCF from own-account (in-house) R&D

• the consumption of fixed capital (CFC) from R&D assets.

206. The two main international business accounting standards differ in their treatment of R&D. The international financial reporting standards (IFRS), which replaced the international accounting standards (IAS), set out the criteria under which intangible assets can be capitalised in IAS 38. A key criterion is the identifiability of the asset, which means that it is either separable or arises from contractual or other legal rights. This is, for instance, possible if R&D has led to patent-protected innovations. IAS 38 clearly limits the scope for recognising R&D as an asset, as it requires a clear probability that future economic benefits of the R&D asset would flow to the company, and it also requires that the cost of the asset can be measured accurately. The probability of future economic benefits must be based on reasonable and supportable assumptions about conditions that will exist over the life of the asset. IAS 38 makes a distinction between the research phase, which is to be expensed, and the development phase, which is seen as an investment. If the development phase cannot be separated from the research phase, the total is to be treated as research, i.e., considered as a current expense.

207. In contrast, under the other main international business accounting standard, United States generally accepted accounting principles (US GAAP), R&D costs are expensed as incurred because this standard considers the future benefits of these activities as uncertain. Both business accounting standards generally allow for R&D to be recognised as an asset when it is acquired, provided that the assets can be separated, and a value can be assigned to it.

208. Beside these two main international accounting standards, there are many national accounting standards and practices. There is no standard treatment of R&D across these national accounting standards. Therefore, compilers need to investigate how corporate R&D expenditures are recorded in companies’ responses to determine if an adjustment for the capitalisation of R&D is needed.

209. If it is verified that the individual enterprises’ data are following IAS 38 (hence, they are mostly consistent with SNA 2008 principles in terms of capitalisation of R&D expenses and depreciation), then the FDI compiler can assume that the capitalisation and depreciation of R&D is included in the source data as long as the costs of the research phase are negligible compared to the costs of development phase.5 However, if the costs of the research phase are significant, then an adjustment to reflect the capitalisation and depreciation of R&D may be needed because the costs of the research phase are treated as expenses under IAS 38. These adjustments will require that the expenses of the research phase are no longer treated as current expenses in the profit and loss statement but are treated as capital formation. However, depreciation of the R&D capital should be included in the profit and loss statement.

210. If the verification of respondents’ data indicates that business accounts diverge from IAS 38, such as US GAAP or potentially other national accounting standards, further adjustments and estimations are needed to measure FDI earnings on the COPC basis. Compilers are encouraged to adjust the data using one of the following options:

1. collect the COPC earnings, including capitalisation and depreciation of R&D, via annual FDI surveys, providing guidelines to the reporters

2. apply conceptual adjustments for R&D capitalisation and depreciation at the macro level to the aggregated microdata on COPC earnings

3. introduce specific statistical surveys on R&D

4. apply the capitalisation of R&D at the microlevel and the depreciation at a semi-aggregated level.

The choice of which option to use is left to the compiler given the resources and the information available to them.

3.3.2. Recording income on equity in the FDI income account

211. Direct investment income on equity consists of “distributed earnings” and “reinvested earnings”. For investment by a DIE in its direct investor or investment between fellow enterprises, income on equity consists only of distributed earnings because reinvested earnings are not included. The reason for this is that the DIE does not hold 10% or more of the voting power in its direct investor. Consequently, the enterprise is not considered able to influence the savings and distribution policies of the direct investor or fellow enterprise. If, however, the DIE does hold 10% or more of the voting power in its direct investor, it then becomes a direct investor in its direct investor, and reinvested earnings are attributed to it.

Distributed earnings

212. Distributed earnings consist of dividends and withdrawals from income of quasi-corporations, i.e., distributed branch profits. Dividends include those to shareholders, both common and participating preferred stock, whether voting or non-voting, according to the contractual relationship between the enterprise and these various types of shareholders, before deduction for withholding taxes. Dividends exclude liquidating dividends and bonus shares (which are dividends in the form of additional shares of stock). Liquidating dividends are excluded because they are a return of equity rather than a remittance of earnings (liquidating dividends are included instead as transactions in the direct investment equity). Bonus shares are excluded because they are a capitalisation of retained earnings – a substitution of one type of equity (capital stock) for another (retained earnings). In an accounting sense, they reduce the amount of retained earnings available for distribution but leave total owners’ equity unchanged.

213. Distributed earnings can be paid out of current or past earnings and may result in negative reinvested earnings if the distribution of dividends exceeds COPC earnings in a particular reference period. Dividends paid by corporations to their shareholders and withdrawals from income of quasi-corporations do not include withdrawals of funds realised by the sale or disposal of the corporation’s or quasi-corporation’s assets in the reference period or in the past (e.g., the sale of inventories, fixed assets, or land or other natural resources). Transmittal of funds resulting from such disposals of assets is recorded as a withdrawal from the equity in the financial account. Therefore, if distributed earnings in a period exceed COPC earnings in that period and are not proceeds from the sale of a financial or non-financial asset, then accumulated COPC earnings should be used as the source of those distributions if they are large enough to support the distribution.6

214. This treatment of dividends in excess of current period earnings is unique to FDI. In the 2025 System of National account (2025 SNA, (United Nations et al., Forthcoming[1])) and BPM7, the term superdividends is used to refer to “large and irregular payments or payments that exceed the entrepreneurial income of the year. They are funded from accumulated reserves or sales of assets and are recorded as withdrawal of equity equal to the difference between the payment and the entrepreneurial income of the relevant accounting period”. While these manuals note that the concept of superdividends does not apply to foreign direct investment where only exceptional payments due to sales of assets are recorded as withdrawal of equity, they do suggest that it may be useful to separately identify exceptional payments from accumulated reserves to direct investors from other distributed earnings on a voluntary basis. This would enable users to construct consistent measures of dividends and withdrawals from income of quasi-corporations across the statistics.

215. In rare cases, companies may distribute earnings to their shareholders before a company has determined its full-year earnings and the annual general meeting has taken place. Companies may follow two different treatments:

• Interim dividend: they are considered to be regular dividends, however, they are paid before the final earnings are known and before the financial statements of the current year are approved and released. As a result, the values may be set lower than the final dividend to avoid problems if the annual earnings are less than expected, and the enterprise may be required to have sufficient retained earnings to cover the interim dividend. Any necessary adjustments to the interim dividends can either be made in any subsequent interim dividend or in the final dividend. Interim dividends may also be declared to distribute exceptional earnings or if there is some advantage in distributing income at a particular point in time, such as a change in the law.

• Advanced dividend: they are considered a binding distribution to shareholders from current earnings before the end of the financial year and are treated as loans to shareholders, which are settled with the dividend payments.

216. In other words, in terms of bookkeeping and from the point of view of the distributing enterprise, an interim dividend is an income distribution whereas an advanced dividend is a financial asset. Table 3.2 illustrates the recording under direct investment from the point of view of the direct investor. Assume that the DIE has COPC earnings of USD 1 000 in period T and USD 1 500 in period T+1 and that it distributed USD 100 in dividends to its shareholders before the full year earnings and their allocation had been officially determined in T; it does not pay any dividends in period T+1. Depending on whether the DIE treats them as advanced or interim dividends, the recording will differ. In the case that the DIE treats it as an interim dividend, it is recorded as a dividend in the period in which it is paid, and there are no additional entries. In the case that the DIE treats it as an advanced dividend, an account payable to the DIE from the direct investor is recorded in the period they are distributed; this liability is extinguished once the earnings are determined and the shareholder’s meeting determining the final dividend that will be paid by the DIE has taken place.

Table 3.2. Recording of interim and advanced dividends

	Case 1: Interim		Case 2: Advanced
	T	T+1	T	T+1
Income on equity (COPC earnings)	1 000	1 500	1 000	1 500
Dividends (interim or advanced)	100	0	0	100
Reinvested earnings	900	1 500	1 000	1 400
Financial account
Reinvestment of earnings	900	1 500	1 000	1 400
Debt instruments	0	0	-100	100

Note: All values in USD.

217. The compiler should record the interim or advanced dividend in accordance with how the transaction is recorded by the company. That is, whether it is considered an advance to the shareholders (and, thus, is recorded as a financial asset that is settled when the final dividend is paid) or whether it is considered as paid and so, the final dividend will be lower.

Reinvested earnings

218. Reinvested earnings of DIEs reflect earnings on equity accruing to direct investors less distributed earnings, proportionate to the percentage ownership of the equity owned by the direct investor(s). As noted in the discussion of “reinvestment of earnings”, reinvested earnings are included in direct investment income because the earnings of the DIE are deemed to be the income of the direct investor (proportionate to the direct investor’s holding of equity in the DIE), whether they are reinvested in the enterprise or remitted to the direct investor. However, because reinvested earnings are not actually distributed to the direct investor but rather increase the direct investor’s investment in its affiliate, an entry that is equal to that made in the direct investment income account but of opposite sign is entered in the direct investment transactions account. In the direct investment income account, this transaction is referred to as “reinvested earnings”.

219. These transactions are identified only between the DIE and its immediate direct investors (although the value of these transactions should reflect income earned from directly and indirectly owned DIEs through the COPC, see Annex 3.A). In cases where the equity asset holder has less than 10% voting power (reverse investment and investment in fellow enterprises), reinvested earnings and reinvestment of earnings are not recorded.

220. Reinvested earnings are measured after the DIE’s earnings in a period are measured on the COPC basis, by subtracting distributed earnings in the same period, or:7

$Reinvested earning{s}_t=COPC earning{s}_t-dividends and withdrawals from income of quasi-corporation{s}_t$

221. When a direct investment ownership chain exists, direct investment earnings should reflect income from direct and indirect enterprises. All earnings from an ownership chain are geographically allocated to the enterprises directly owned. However, these earnings should include the claims of directly owned enterprises on the earnings of enterprises below them in the ownership chain, proportionate to the immediate direct investor’s ownership of shares. For example, if A (resident in Country A) owns 100% of B (resident in B), which, in turn, owns 100% of C (resident in C), B’s FDI earnings will include all of the earnings from its current operations, including its investment income, which, by definition, includes all of C’s reinvested earnings (as C is 100% owned by B, B will be deemed to receive all of C’s reinvested earnings). As a consequence, the reinvested earnings receivable by A from its ownership of all the shares in B will include C’s reinvested earnings. Therefore, A does not need to seek the information on C’s reinvested earnings directly from C, in order for that income to be measured correctly, but it is recommended that the compiler of direct investment data in Country A makes sure that B understands that it should report C’s reinvested earnings, even though it is an imputed transaction.

222. In instances where the direct investors do not hold 100% of the equity in an immediate DIE, their reinvested earnings receivable should be in accordance with the proportion of the shares they own (see Annex 3.A on reinvested earnings for another example of calculation of reinvested earnings along a chain of related enterprises). The compiler will often find that the information required in order to determine a direct investor’s share of the reinvested earnings of indirectly owned DIEs becomes more difficult to determine once its share of indirect ownership falls below 50%. In that instance, it is recommended that it be impressed upon respondents to direct investment surveys the importance that this information be collected. Additional data sources, such as other business surveys, administrative data, and quarterly/annual company financial statements, may also help in the compilation of reinvested earnings.

3.3.3. Direct investment income on debt

223. Direct investment interest payables (on liabilities) and interest receivables (on assets) are separately recorded. Thus, interest receivables comprise interest accruing to residents (direct investors, DIEs and fellow enterprises) on their debt receivables, and interest payables comprise interest accruing to non-residents (DIEs, direct investors and fellow enterprises) on debt payables.

224. No direct investment interest receivables or payables are recorded when both parties are related financial intermediaries (such as commercial banks, savings institutions, credit unions, mutual funds or finance companies).

225. Interest includes the interest component of transactions under financial leases between enterprises in a direct investment relationship, assuming the outstanding capitalised value of such leases is included in the debt component of the direct investment position at discounted value.

226. The interest component of direct investment income reflects accruals of interest on debt in the current period (i.e., interest accrued), whether or not paid.8 Interest receivable and payable should be compiled separately. Interest receivable by direct investors from their DIEs, receipts from DIEs from their direct investors and receipts from fellow enterprises are included. Payables are calculated in an analogous manner.

227. Interest accruals on marketable securities should be calculated under the debtor basis, not the creditor basis. Under the debtor basis, interest accruals on fixed interest rate securities reflect the amount of interest that the debtor is contractually obligated to pay, and changes in market interest rates, since the debt was issued, are not taken into account. In contrast, under the creditor basis, interest accruals on fixed interest rate securities reflect market interest rates in the current period, not the interest rates in effect at the time(s) that the debt securities were originally issued.

228. Interest on debt accrues continually over the life of the debt and adds to the principal. Thus, actual payments of the debt (as opposed to accruals) are investment transactions and not income. Therefore, they should be recorded in the FDI financial transactions account.

229. At inception, future cash flows are determined in the relevant currency. Interest expressed in foreign currency is to be converted into the domestic currency units at the mid-point market exchange rate for the periods in which the interest accrues.

FDI income recorded according to the asset/liability and directional principles

230. Under the asset/liability presentations, direct investment income should be shown separately for assets and for liabilities. Income on direct investment assets should be recorded under income receivables, and income on direct investment liabilities should be recorded under income payables. When, during a reference period, a DIE pays a dividend that is larger than the earnings from current operations during that period (or where it incurs an operational loss), negative reinvested earnings will result. The latter should be recorded as a negative credit/revenue for income on direct investment assets and as a negative debit/expenditure for income on direct investment liabilities. All income credits/revenues on reinvested earnings (whether negative or positive) should have an equal and opposite entry in the FDI financial transactions account (under “FDI assets, reinvestment of earnings”). Similarly, all income debits on reinvested earnings (whether negative or positive) should have an equal and opposite entry in the FDI financial transactions account, (under “FDI liabilities, reinvestment of earnings”).

231. Just as for FDI financial transactions, FDI income can also be recorded according to the directional measurement principle. Similar to the recording under the asset/liability principle, all income credits/revenues on reinvested earnings (whether negative or positive) should have an equal and opposite entry in the FDI financial transactions account (under “outward FDI, reinvestment of earnings”). Similarly, all income expenditures/debits on reinvested earnings (whether negative or positive) should have an equal and opposite entry in the FDI financial transactions account, (under “inward FDI, reinvestment of earnings”). For details, see Annex 2.B.

3.4. Valuation of FDI financial transactions and transfer pricing

232. When a transaction in goods or services occurs between two enterprises, this transaction is to be recorded at market prices. BPM7 defines market prices as “amounts of money that willing buyers pay to acquire something from willing sellers … on commercial considerations only” – sometimes called at “arm’s length”.

233. Due to the nature of the relationship between enterprises related under the FDIR, the transaction value for a good or service between related enterprises may not always reflect market values. ‘Transfer pricing’ refers to this distortion between transaction values and market values. It can be motivated by income distribution or equity injections or withdrawals.

234. Identification of instances of transfer pricing and selection of the best market value equivalents to replace reported transaction values is an exercise calling for cautious and informed judgement. In most cases, sample surveys, contacts with enterprises and government agencies engaging in international transactions on a large scale, exchanges of information between compilers in partner countries, or similar statistical research will be necessary to provide the basis for such judgement. Adjustments for transfer pricing have implications for the data of the counterpart economy; therefore, it is useful to exchange information with compilers in counterpart economies (to the extent possible) to avoid asymmetries.

3.4.1. Hidden dividends

235. Where a DIE is over-invoiced on a good or service provided by the direct investor, the difference in payment between the market value and the invoice price is effectively a distribution by the DIE to the direct investor (a ‘hidden dividend’). Distributed earnings and total earnings of the DIE should be adjusted upwards by the difference (in the balance of payments, this would be balanced by an adjustment to the value of trade in goods or services).

3.4.2. Hidden withdrawals of equity

236. Where a direct investor is under-invoiced on a good or service provided by the DIE, the difference in payment between the market value and the invoice price is effectively a return of assets by the DIE to the direct investor (goods) or a rundown of the assets of the DIE by the direct investor (services). This is a withdrawal of equity and equity transactions should be adjusted by the difference. In addition, the earnings of the DIE should be adjusted upwards by the same amount.

3.4.3. Hidden injections of equity

237. Where a DIE is under-invoiced on a good or service provided by the direct investor, or a direct investor is over-invoiced on a good or service provided by the DIE, the difference between the market value and the invoice price is effectively an injection of equity into the DIE by the direct investor. This injection takes the form of provision of additional assets (under-invoiced goods), improvement in the operational capacity (under-invoiced services) or cash (over-invoices). Equity transactions should be adjusted to remove the impact of the transfer pricing. Also, the earnings of the DIE should be adjusted downwards by the same amount.

238. While compilers are encouraged to make adjustments to remove the impact of transfer pricing when the distortion is significant and data are available to do so, the complexities involved to arrive at a consistent recording of the adjustments should be recognised. The availability of relevant information on the distortions in the observed exchange values mean that national accounts and international accounts often refrain from trying to approximate true market prices. Here, one can also add that the actually observed exchange values, which may be motivated by global tax avoidance or other reasons, also represent an economic reality of its own, albeit not one that is based on market prices and other commercial considerations.

References

[4] IMF (2009), Balance of Payments and International Investment Position Manual, Sixth Edition (BPM6), International Monetary Fund, Washington D.C, https://doi.org/10.5089/9781589068124.069.

[2] IMF (Forthcoming), Integrated Balance of Payments and International Investment Position Manual, Seventh Edition (BPM7), International Monetary Fund, Washington D.C.

[5] OECD (2009), OECD Benchmark Definition of Foreign Direct Investment, Fourth Edition (BD4), OECD Publishing, Paris, https://doi.org/10.1787/9789264045743-en.

[3] United Nations et al. (2009), System of National Accounts 2008, United Nations et al., New York, https://unstats.un.org/unsd/nationalaccount/docs/sna2008.pdf.

[1] United Nations et al. (Forthcoming), 2025 System of National Accounts, United Nations et al., New York.

Annex 3.A. Reinvested earnings and reinvestment of earnings

Definition

239. In a relationship between a direct investor and a direct investment enterprise (DIE), the net current earnings of a DIE that are not distributed as dividends to the shareholders (or the equivalent in the case of quasi-corporate enterprises) are deemed distributed, as investment income, to the direct investor, proportionate to its (their) holdings of shares (or equivalent) in the DIE.9 As this is an imputed transaction, a counterpart imputation (of equal value, but opposite direction) is required in the financial account representing the reinvestment of the funds back into the DIE. The income imputation is referred to as reinvested earnings (RIE) (Annex Box 3.A.1), while the financial account entry is referred to as reinvestment of earnings, to differentiate it from the income transaction.

Annex Box 3.A.1. Reinvested earnings on direct investment

The income earned by the production of goods and services (operating revenue minus operating expenses and depreciation)

  plus:

property income receivable1 (including dividends or withdrawals from income of quasi-corporations, reinvested earnings, interest and similar returns, rent and other property income) and current transfers receivable

  minus:

property income payable (including dividends payable to direct investor(s)),2 current transfers payable,3 including current taxes payable on the income, wealth, etc., of the direct foreign investment enterprise, but excluding withholding taxes4 and taxes on holding gains.

  times

the direct investor’s share of the DIE’s equity (or equivalent)

  equals

reinvested earnings payable

Notes:

1. For a DIE, the property income receivable includes reinvested earnings from any DIE in which it is a direct investor.

2. Including branch profit remittances.

3. Capital transfers, e.g., investment grants received, should not be included.

4. Withholding taxes are deemed to be paid by the non-resident owner, not by the resident entity.

Source: Based on OECD (2009[5]), OECD Benchmark Definition of Foreign Direct Investment, Fourth Edition (BD4), https://doi.org/10.1787/9789264045743-en.

240. It should be noted that RIE (and reinvestment of earnings) can be both negative or positive in sign for both the direct investor and the DIE. Typically, RIE will be a debit/expenditure for income payable by the DIE to the direct investor, and a credit/revenue for such income receivable by the direct investor (with the offsetting entries for reinvestment of earnings in the direct investment financial transactions account reflecting the opposite directions for these flows). However, if a DIE generates a loss from its current operations (that is, the sum of its operating surplus and its net property income is negative), or if it declares a dividend for more than it has earned in the reference period, a negative debit/expenditure should be recorded in the direct investment income account under RIE for the DIE (and, correspondingly, a negative credit/revenue for the direct investor). An offsetting negative entry should also be recorded in the direct investment financial transactions account (and also be reflected in the direct investment positions account) of the DIE’s economy for the reinvestment of earnings; correspondingly, a positive entry for the same amount should appear in the same accounts of the direct investor’s economy. These entries should be made for both the asset/liability and the directional presentations for both economies. Where a DIE is 100% owned by its direct investor(s), it will have no net saving of its own, but where there are shareholders not in a FDI relationship with the DIE (whether portfolio investors, if residents of economies other than that of the DIE, or other shareholders who are residents of the same economy of the DIE), the DIE will have savings of its own.

241. To illustrate the recommended treatment, take for example, a DIE that is 75% owned by a direct investor and the remaining 25% of the equity is held by small investors (resident or non-resident). If the profits (calculated as described) in a reference period are USD 1 500 and USD 500 in dividends are paid out to all investors, the direct investor’s share of reinvested earnings is calculated as 75% of profits (i.e., direct investment income on equity amounts to 0.75 x USD 1 500 = USD 1125) less 75% of dividends (i.e., 0.75 x USD 500 = USD 375), which equals USD 750. This is shown below in Annex Figure 3.A.1.

242. The savings of the DIE are therefore USD 250, i.e., USD 1 500 – USD 500 (dividends) - USD 750 (reinvested earnings attributable to the direct investor).

Annex Figure 3.A.1. Example of a DIE with 75% direct investor holdings

Source: OECD (2009[5]), OECD Benchmark Definition of Foreign Direct Investment, Fourth Edition (BD4), https://doi.org/10.1787/9789264045743-en.

Components

243. The calculation of reinvested earnings begins with the entrepreneurial income of a corporation or quasi-corporation, which is equal to the income from the production of goods and services plus net interest income receivable plus dividends and distribution of profits of quasi-corporations receivable. Entrepreneurial income is used in the calculation of distributable income of the corporation, which is equal to entrepreneurial income plus net current transfers receivable minus the adjustment for the change in pension entitlements relating to the pension scheme of that corporation.10 Reinvested earnings are then calculated from this distributable income by subtracting dividends and withdrawals from income of quasi-corporations payable.

Income earned by the production of goods and services

244. It is recommended that this income be recorded on the same basis as in the national accounts, that is, all value added from the operations of the enterprise (that is, gross output less intermediate inputs) less consumption of fixed capital. Income from the production of goods and services does not include property income (receivable or payable) or any realised or unrealised holding gains or losses arising from valuation changes, exchange rate changes, write-offs, etc.

Net interest income receivable

245. Net interest income receivable is the difference between the accrual, during the current period, of interest receivable on all interest-bearing financial assets less the accrual, during the current period, of interest payable on all interest-bearing liabilities, regardless of whether any payments have been made. Included is all interest payable or receivable to/from direct investors and/or DIEs.

Dividends and distribution of profits of quasi-corporations receivable and payable

246. Dividends are paid to a company’s shareholders from its earnings and are recorded in FDI statistics as of the date they are declared payable. Dividends may be declared payable from current period operations, but they may also be financed from other sources, e.g., from reserves developed during a longer period or from capital sales or realised capital gains. However, if the dividend is from a capital sale or realised capital gain, it is recorded as a financial transaction (a reduction in equity) rather than as a dividend. Dividends may be declared payable even if the enterprise is losing money. For quasi-corporations, remitted profits are treated in the same manner.

Net current transfers receivable

247. Net current transfers are the difference between current transfers receivable and current transfers payable. They cover all items for which there is no quid pro quo of a current nature. Most common are corporate income taxes and other kinds of tax payable but withholding taxes and taxes on capital gains are not included. These are deemed payable by the shareholders.

Current operating performance concept

248. Direct investment income on equity as defined under the current operating performance concept (COPC) covers the sum of income earned on the production of goods and services plus net interest receivable plus dividend income receivable plus reinvested earnings receivable plus net current transfers receivable. It does not include any realised or unrealised holding gains or losses arising from valuation changes, exchange rate changes, write-offs, etc. See Section 3.3 for the full definition.

Accounting practices

249. Accounting practices vary across the world, so it is recommended that direct surveys of both DIEs and direct investors be conducted to obtain the data on the appropriate conceptual basis, as set out in Annex Box 3.A.1. However, in some instances, it may not be possible to conduct direct surveys and recourse may have to be made to other sources of information, most notably, the annual reports of enterprises. However, in many cases annual reports do not include an aggregate that fully complies with the COPC, even though income for the year is calculated and published with a number of sub-components and sub-aggregates. Accordingly, it will be necessary for the compiler to make adjustments in order to express the published aggregates on a COPC basis.

250. If, for example, companies publish an aggregate of profit/loss after financial items, the link to the COPC will be as shown in Annex Box 3.A.2.

Annex Box 3.A.2. Profit/loss after financial items

Profit/loss after financial items1

  plus share of profits of associates (proportionate to holdings of shares on issue)2

  minus realised capital gains

  minus unrealised capital gains

  plus realised capital losses

  plus unrealised capital losses

  minus realised exchange rate gains

  minus unrealised exchange rate gains

  plus realised exchange rate losses

  plus unrealised exchange rate losses

  plus write-down/write-offs (excluding consumption of fixed capital as a charge has already been made for this in the calculation of “net profit/loss after financial items”)

  minus any extraordinary or exceptional income included in profit/loss after financial items and not included in the adjustments above

  plus any extraordinary or exceptional expense included in profit/loss after financial items and not included in the adjustments above

  minus net interest receivable on financial derivative contracts3

  plus net interest payable on financial derivative contracts3

  minus current taxes on profit for the period (excluding withholding taxes and taxes on holding gains)

  = income for the period, using the COPC

Notes:

1. This item is obtainable from company accounts and normally represents, for the reference period, all revenue arising from trading activity including revenue from extraordinary and exceptional items as well as relevant capital or currency exchange gains/losses and interest or other income receivable from financial assets; less associated expenses arising from such trading activity including extraordinary and exceptional expenses as well as any interest payable or other expenses on loans or other debt. It is calculated before deduction of any taxes.

2. It is assumed that the profit/loss of controlled enterprises has already been included in the profit/loss after financial items. If this is not the case, it should be included in this line.

3. In compiling FDI income, net interest receivable and payable on financial derivative contracts are not treated as income. This is in line with the balance of payments and national accounts recording of income. The treatment here is to remove them from the books of those enterprise accounts that treat them as if they were income.

Source: OECD (2009[5]), OECD Benchmark Definition of Foreign Direct Investment, Fourth Edition (BD4), https://doi.org/10.1787/9789264045743-en.

251. If there is no sub-aggregate available, the calculations may have to be made from the total profit published (the so-called “all-inclusive”), which adds some more variables as in Annex Box 3.A.3.

Annex Box 3.A.3. Net profit/loss for the year

Net profit/loss for the year

  minus realised capital gains

  minus unrealised capital gains

  plus realised capital losses

  plus unrealised capital losses

  minus realised exchange rate gains

  minus unrealised exchange rate gains

  plus realised exchange rate losses

  plus unrealised exchange rate losses

  plus write-downs/write offs (excluding consumption of fixed capital as a charge has already been made for this in the calculation of “net profit/loss”)

  minus certain non-recurring income,

  plus certain non-recurring expenses,

  minus other current taxes (excluding withholding taxes and taxes on holding gains)

= income for the period, using the COPC

Source: Based on OECD (2009[5]), OECD Benchmark Definition of Foreign Direct Investment, Fourth Edition (BD4), https://doi.org/10.1787/9789264045743-en.

Recording in FDI statistics

252. In principle, income on direct investment is recorded at the time it is earned.11 However, actual data for the calculation of income are often only available on an annual basis, with a considerable time lag; in the meantime, it is necessary to provide estimates of the net disposable income (equivalent to COPC earnings) for the current period, often on a quarterly basis. In that case, information should be sought directly from the DIEs and the direct investors resident in the economy, from which indicators may be developed to calculate dividends payable and reinvested earnings. These indicators might include estimates of gross and net value added, net income receivable, and net current taxes. In addition, an indication from past practice of dividend payments might also be used – companies often maintain the same dividend payments, regardless of the underlying earnings of the enterprise, for many years. But as both dividends and reinvested earnings are components of income, approximating the totality of dividends and reinvested earnings is more important than approximating the components. While preliminary and subject to revision, this approach is preferable to merely extending the data for past year(s) to the current period (and dividing by four to provide quarterly estimates), until the information is available from the respondents’ complete annual reports and/or tax returns.

Consolidation

253. In line with the framework for direct investment relationships (FDIR) (see Annex 2.A), the RIE of each enterprise down the ownership chain should be attributed to each of the direct investors up the chain. Accordingly, if A (Level 1) is owned 100% by B (Level 2), B is owned 50.01% by C (Level 3), and C is 40% owned by D (Level 4), then A’s RIE represent part of the net investment income of B, and, as a result, they are part of the sources of revenue that form part of the RIE that are deemed distributed to C by B, and then as part of C’s RIE that are deemed distributed to D (Annex Table 3.A.1). Where ownership is less than 100%, the proportional ownership should be applied, even when there is more than one direct investor. This principle applies whether A, B, and C are each in separate economies from D, or are in the same economy, but separate from D.

Annex Table 3.A.1. Calculation of reinvested earnings along an ownership chain

	Level 1	Level 2	Level 3	Level 4
	A	B	C	D
Ownership by next level	100 %	50.01 %	40 %
Income earned on the production of goods and services	200	250	300	350
Minus Corporate taxes payable	-50	-60	-70	-90
Plus Dividends receivable from DIE	0	+50	+60	+100
Minus Dividends payable to all shareholders	-50	-120	-250	0
Plus Reinvested earnings receivable from DIE	0	+100	+110	+60
Minus Reinvested earnings payable to direct investor	-100	-110	-60	0
Equals Net saving	0	110	90	420
In direct investment transactions and positions account
Direct investment liabilities: reinvestment of earnings	+100	+110	+60	0
Direct investment assets: reinvestment of earnings	0	-100	-110	-60

Note: All values are in USD. The offsetting reinvestment of earnings entries in the direct investment transactions and positions accounts should be reflected in both the asset/liability and directional presentations.

Source: OECD (2009[5]), OECD Benchmark Definition of Foreign Direct Investment, Fourth Edition (BD4), https://doi.org/10.1787/9789264045743-en.

254. In the situation where enterprise C owns 50% or less of B, then enterprises A and B are not in a direct investment relationship with enterprise D under the FDIR. As enterprise D is not considered to have significant influence over enterprise B, enterprise D cannot be considered to have significant influence over the earnings distribution and savings decisions of enterprise B. As a result, the reinvested earnings that accrue to enterprise C from enterprise B are not considered part of enterprise C's current operating profit that accrues to enterprise D. The calculation in Annex Table 3.A.1 would show USD 16 in reinvested earnings accruing to enterprise D from enterprise C (rather than USD 60, calculated as 0.4*(300-70+60-250+110)) with USD 16 being reinvested by enterprise D in enterprise C (this is calculated as 0.4* (300-70+60-250)=16).

255. Normally, when companies perform elimination of group transactions, they use data on the total profits, including holding gains and losses, foreign exchange gains and losses, write-offs and write-downs, and dividends. It is, therefore, imperative that clear instructions be provided to respondents to enable them to report on the required basis.

Notes

← 1.  Operation of law would cover transactions like the payments of taxes or purchases of licenses.

← 2.  The recording of the liquidation of a direct investment enterprise will be more fully described in Chapter 5 where the distinction between transactions and other changes in volume will be delineated.

← 3.  The recommendation that no transactions be recorded in the balance of payments when a resident DIE is sold and purchased between non-residents follows the application of the transactor principle as recommended in the 2008 SNA and BPM6. While no change in this principle was made for the 2025 SNA and BPM7, the need for clarification has become particularly important in the context of from-whom-to-whom matrices, which have emerged as a key analytical element in macroeconomic analysis. As such, more research into the transactor versus the debtor-creditor principle needs to be conducted to explore the options and to arrive at guidance that balances conceptual and practical considerations. Therefore, this issue has been placed on the joint SNA and BPM research agenda.

← 4.  The standard amortisation of intangible assets is, however, included as an expense under the COPC.

← 5.  As opposed to the treatment following IAS 38, in the National Accounts the costs of both the research and development phases should be capitalised.

← 6.  Distributed earnings follow the complete chain of ownership. If the distributed earnings from direct investment enterprise (DIE) A to B are the proceeds from the sale of an asset, and thus, recorded as a withdrawal of equity, then it should also be recorded as a withdrawal of equity when the proceeds are distributed from DIE B to direct investor C. However, in practice it may be difficult for compilers to identify distributions representing proceeds from the sales of assets further down the chain.

← 7.  In practice, compilers are confronted with a time mismatch, as dividends distributed in period t (and therefore reported when announced, i.e., in period t) are usually related to earnings generated in t-1. In the standard case, earnings from the past business year can only be distributed once the shareholders’ meeting has taken place, the accounts have been approved, and the use of the recent earnings has been decided upon. All this does not occur until the following year, hence period t. In the absence of additional information, it is accepted as a general practice to calculate reinvested earnings by deducting from the current earnings the dividends announced and paid in the reference period of the calculation.

← 8.  Accrual accounting records flows at the time economic value is created, transformed, exchanged, transferred or extinguished. This means that flows that imply a change of economic ownership are entered when ownership passes and services are recorded when provided. In other words, the effects of economic events are recorded in the period in which they occur, irrespective of whether cash was received or paid or was due to be received or paid (2025 SNA, Chapter 4).

← 9.  That is, shares on issue for an incorporated enterprise, or the equivalent for an unincorporated enterprise. Where the shares issued (or equivalent) differ from voting power, the same principle for the distribution of dividends should be used. For the most part, it is the direct investor’s percentage holding of shares on issue (or equivalent) that determines the ratio under which reinvested earnings are deemed distributed, not the level of voting power.

← 10.  Adjustments for the change in pension entitlements relating to the pension scheme of that corporation is included in the calculation of distributable income of corporations in the national accounts. As employers’ social contributions are made for the benefit of their employees, their value is recorded as one of the components of remuneration of employees together with wages and salaries in cash and in kind and, therefore, the actual contributions of the corporation and quasi-corporation will be reflected in the operating expenses reported by companies. In the case of defined contribution employer pension schemes, the actual amounts payable by employers reflect the amount of the social contribution, and no adjustment is needed. For defined benefit pension schemes, including unfunded pension schemes, the amount of employers’ social contributions should be determined on the basis of actuarial calculations that yield contributions required to secure the de facto entitlements to the social benefits; this amount may differ from the actual contribution of the company and, so, needs to be adjusted. Therefore, the need for this adjustment depends on the type of pension scheme, and its size depends on the actuarial calculations. For practical reasons, the Benchmark Definition does not recommend including any adjustments for pension entitlements in the calculation of FDI income.

← 11.  The recording is identical in the balance of payments.