Direct Investment Income

Pages:29-34
SUMMARY

Measurement of Direct Investment Earnings. OECD countries. Other countries. Elements of Direct Investment Income. OECD countries. Other countries. Time of Recording of Direct Investment Income. OECD countries. Other countries. Items Included in the Data on Direct Investment Income on Debt (Interest). OECD countries. Other countries.

 
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Measurement of Direct Investment Earnings

5.1 The Benchmark and the BPM5 recommend the use of the Current Operating Performance Concept (COPC) to measure direct investment earnings. According to this concept, the earnings of an enterprise consist of its income from normal operations before accounting for nonrecurring items and capital gains and losses. Operational earnings of the direct investment enterprise should be reported after provision for depreciation of capital and income and corporation tax charged on these earnings have been deducted. Direct investment earnings should not include any realized or unrealized capital gains or losses or exchange rate gains or losses made by either the direct investment enterprise or the direct investor. The earnings should also not include write- offs, such as inventory write-offs, write-offs of intangibles, write-offs of bad debts, or write-offs on expropriations without compensation. Many enterprises use the All-Inclusive Concept to measure earnings. On the basis of this concept, income is the amount remaining after all items (including capital gains and losses and write-offs) that cause any increase or decrease in the shareholders' or investors' interests during the period are taken into account. Because data for many countries are available only on an all-inclusive basis, those countries that report earnings on either an operating basis or an all-inclusive basis are recommended to collect and publish supplementary information on holding gains and losses and other extraordinary items. This practice would enhance international comparability for both the transactions data and the position data.

5.2 Table 5.1 shows the practices used in 2001 by the participating countries regarding the measurement of their inward direct investment earnings, compared with 1997, and also shows a breakdown into OECD and other IMF member countries. (Tables 21 and 22 of Appendix I give the country details for the inward FDI earnings and the outward FDI earnings, respectively.) Table 5.1 indicates that 19 countries now fully apply the COPC, an increase of 11 since 1997. Moreover, significantly more countries now apply elements of the concept. Forty-five countries make deductions for depreciation of capital and for provisions for host-country income or corporation taxes (increases of 14 and 16 countries since 1997, respectively). Relatively high numbers of countries also exclude unrealized capital gains (40) or losses (38). However, fewer countries exclude exchange rate gains or losses (30), write-offs (29), realized capital gains (28), or realized capital losses (27), although more countries now do so than in 1997. The disparity in the methodologies used for the measurement of direct investment earnings continues to be an important issue for global discrepancies, because it results in inconsistencies in the data on reinvested earnings.Page 30

Table 5.1. Measurement of Inward Direct Investment Earnings: Application of the Current Operating Performance Concept (COPC)

Earnings Include Deductions Provisions Earnings Exclude
Number of Countries Deductions for depre- ciation of capital Provisions for host country income/ corporation taxes Exchange rate gains and losses Write-offs Realized capital gains Realized capital losses Unrealized capital gains Unrealized capital losses Fully Apply the COPC
Total 2001 (61) 45 45 30 29 28 27 40 38 19
Total 1997 (61) 31 29 23 24 21 22 33 31 8
Change +14 +16 +7 +5 +7 +5 +7 +7 +11
OECD 2001 (30) 23 22 16 13 12 11 22 20 8
OECD 1997 (29) 16 15 12 11 10 10 16 15 4
Other 2001 (31) 22 23 14 16 16 16 18 18 11
Other 1997 (32) 15 14 11 13 11 12 17 16 4
OECD countries

5.3 Only eight OECD countries fully apply the COPC for their inward earnings-Australia, Finland, Ireland, Mexico, New Zealand, Sweden, the United Kingdom, and the United States. All these countries, except Mexico, which does not compile outward FDI statistics, also fully apply the COPC for their outward FDI earnings. However, there have been modest improvements across all elements of the COPC since 1997 for the inward data. In 2001, 23 OECD countries made deductions for depreciation of capital, 22 made provisions for host-country income or corporation taxes, 16 excluded exchange rate gains or losses, 13 excluded write-offs, 12 excluded realized capital gains, 11 excluded realized capital losses, 22 excluded unrealized capital gains, and 20 excluded unrealized capital losses.

Other countries

5.4 Eleven countries now fully apply the COPC for their inward earnings, including Bolivia, Colombia, Costa Rica, Ecuador, Hong Kong SAR, Kazakhstan, Kuwait, Malaysia, and Singapore-seven more than in 1997. (However, in the case of Kuwait some enterprises do not apply some aspects of the COPC.) Nine countries, including all of the above except Ecuador and Kazakhstan (which do not compile data on outward FDI income) plus Slovenia, also fully apply the COPC for their outward FDI earnings. As with the OECD countries, there have been improvements across all elements of the COPC since 1997 for the inward data. In 2001, 22 countries made deductions for depreciation of capital, 23 made provisions for host-country income or corporation taxes, 14 excluded exchange rate gains or losses, 16 excluded write- offs, 16 excluded realized capital gains, 16 excluded realized capital losses, 18 excluded unrealized capital gains, and 18 excluded unrealized capital losses.

Elements of Direct Investment Income

5.5 The elements of the FDI income component comprise (1) income on equity (dividends and distributed branch profits), (2) reinvested earnings and undistributed branch profits, and (3) income on debt (interest). Dividends comprise all dividends that, in an accounting period, are declared payable to the direct investor...

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