EUROSTAT
Directorate C: National Accounts, Prices and Key Indicators
Eurostat G4/NAWG/806
Task Force “Trade in Ships and Aircraft”
– Final report –
For Information
Item 8 on the agenda of the Meeting of the Working Group on National Accounts, Luxembourg, 26-27 November 2013
Summary:
Following the proposal of the Methods Group, the Intrastat/Extrastat Committee agreed in June2011 to set up the task force "Trade in ships and aircraft" in order to deal with open issues relating to the recording of transactions with ships and aircraft in the international trade in goods statistics.
The final report of the task force provides a comprehensive description of the present concept of International Trade in Goods Statistics (ITGS) concerning trade in ships and aircraft based on change of economic ownership. In particular, the task force developed practical guidelines for the identification of the economic owner of ships and aircraft.
The Members of the NAWG are invited:
1. To take note of the final report of the task force "Trade in Ships and Aircraft".
Luxembourg, 5 November 2013
TF SA 25
Task Force “Trade in Ships and Aircraft”
– Final report –
1. Background
The changes in the international recommendations constituted a challenge to the Member States concerning the recording of trade in ships and aircraft. It has posed a problem for the Member States to interpret the recording requirements, definitions and compilation recommendations relating to transactions with ships and aircraft, in particular identifying their economic owner in the manuals dealing with International Trade in Goods Statistics (ITGS), International Trade in Services Statistics (ITSS), Balance of Payment (BoP) and National accounts (NA).
1.1. Reporting requirements for ITGS
1.1.1. EU legislation
Specific movements are defined within the EU legislation as movements of goods whose characteristics are significant for the interpretation of the information. The characteristics may relate to the movement itself, the nature of the goods, the transaction which originates the movement, or the exporter or importer of the goods. The collection and processing of information relating to these goods are generally covered by special rules. The legal provisions regulating the reporting of the trade in ships and aircraft for both statistics, intra-EU trade and extra-EU trade, were harmonised by adopting the Commission Regulation (EU) No113/2010 and amending Commission Regulation (EC) No1982/2004.
The specific provisions are limited to ships considered seagoing according to CN and aircraft falling under the CN codes 880230 and 880240. The inclusion of a transaction with ships and aircraft into ITGS is based on transfer of economic ownership. Therefore reporting Member State and partner country/Member State are defined by the residence of the economic owner. Special provisions also establish rules for treatment of new ships and aircraft as well as processing of a ship and aircraft.
1.1.2. UN methodology of International Merchandise Trade Statistics
International Merchandise Trade Statistics: Concepts and Definitions 2010 (IMTS 2010) contains the new and updated international recommendations for merchandise trade statistics. IMTS 2010 provides a comprehensive methodological framework for the collection and compilation of international merchandise trade statistics in all countries, irrespective of the level of development of their statistical system.
Change of economic ownership represents an example of adding to (subtracting from) stocks of material resources of a country in comparison with the main principle: recording goods entering (imports) or leaving (exports) the economic territory of a country. IMTS 2010 recommends to use the criterion ‘change of economic ownership’ to determine whether certain goods should be recorded only in exceptional cases when the general guideline is not applicable or not sufficient, in particular ships and aircraft.
1.2. Reporting requirements for ITSS/BoP/NA
The Manual on Statistics of International Trade in Services 2010 sets out an internationally agreed framework for the compilation and reporting of statistics of international trade in services in a broad sense, which addresses the needs, including those of international trade negotiations and agreements, for more detailed, more comparable and more comprehensive statistics on this type of trade in its various forms. The manual conforms with and explicitly relates to the System of National Accounts 2008 and the sixth edition of the Balance of Payments. Both manuals, ITSS and BoP, provide a more comprehensive description of the economic ownership than the previous versions.
All three domains record imports/exports of goods and services as a transaction between resident and non-resident based, in case of goods, on the change of economic ownership. Contractual arrangements which a ship or an aircraft may be subject to, and which may be considered within ITSS are operational leasing and rental with a crew as part of transport services. On the other hand ITGS considers general change of ownership (sale/purchase transaction) and financial leasing; those transactions are included under general merchandise in BoP and NA.
A schema for the treatment of different combinations of the legal and economic ownership in ITGS and NA taking into account the residency of both owners, legal and economic, is presented in Annex I. The schema was accepted as a theoretical guidance on how to record the trade in ships and aircraft, after the decision on the economic owner and its residency has been taken.
2. Mandate of the Task Force
Following the proposal of the Methods Group, the Intrastat/Extrastat Committee agreed in June2011 to set up Task Force "Trade in ships and aircraft" dealing with the open issues relating to the recording of transactions with ships and aircraft in the international trade in goods statistics. The Task Force agreed:
· To elaborate a comprehensive description of the present concept of ITGS concerning trade in ships and aircraft based on change of economic ownership;
The Task Force should draft the list of transactions to be included in/ excluded from ITGS data transmitted to Eurostat. The transaction should be described in sufficient detail to allow to determine its treatment from the ITGS point of view.
· To develop recommendations for the implementation of the legislation, particularly the methods and practices concerning the use of additional sources of information;
The Task Force should develop practical guidelines on how to identify transactions not reported through the standard channels (Intrastat or customs declaration) using additional sources of information, in particular ships/aircraft registers.
· To propose modifications to the current legislation, if necessary, taking into account the constraints identified in the implementation of the regulations in force;
The Task Force was composed of five Member States (Cyprus, Denmark, Germany, Ireland and UK) and Iceland; France and Italy participated in the second and Greece in the third meeting.
3. Definition of the economic ownership
The concept of economic ownership applicable in ITGS for trade in ships and aircraft was taken from BoP and NA. The ITGS legislation defines the economic ownership as the right of a person to claim the benefits associated with the use of a ship or aircraft in the course of an economic activity by virtue of accepting the associated risks. The definition is based on the terminology which is not widely used in ITGS and therefore it is causing problems to ITGS compilers to interpret it correctly and implement it correctly and consistently.
3.1. List of indicative criteria
The Task Force decided to address the National Accounts Working Group and to request the interpretation of the definition of economic ownership. The questionnaire on ‘change of economic ownership of ships and aircraft’ was launched in January 2012. It had finally been completed by 20 Member States. The results of the questionnaire were the basis for the list of indicative criteria adopted by the Task Force as a tool for the identification of the economic owner.
The practical criteria[1] that could be checked are listed below. However to recognise the economic owner of ships and aircraft, the agreed principle is that it is the substance of the transaction that has to be considered, not the label.
The Task Force acknowledged Criterion 1 as the most important; the remaining criteria can be used as additional practical tools for assessing the substance of the transaction. As many criteria as possible, depending on the availability of information, should be evaluated. The hierarchical order is an additional instrument helping the compilers to assess the substance of the transaction.
An entity would be regarded as the economic owner (ESA2010, para. 7.17) of the ship/aircraft (even if it is not the legal owner) if:
1. the entity accepts all or most of the operating risks (losses) related to the use (operation) of the ship/aircraft and receives all or most of the economic benefits (profits) from the use (operation) of the ship/aircraft (Commission Regulation (EC) No 1982/2004, Art. 17(1)(c); Commission Regulation (EU) No 113/2010, Art. 19(1)(c).
2. the entity is responsible to provide (pay for) repair and maintenance of the ship/aircraft (ESA95, AnnexII, para. 3; ESA2010, paras. 15.09 and 15.13).
3. the entity has the option to purchase the ship/aircraft at the end of the lease period at a price that is lower than the fair value.
4. the entity leases the ship/aircraft so that the present value of the lease payments amounts to the fair value of the ship/aircraft at the inception of the lease.
5. the entity leases the ship/aircraft for the major part of its economic life.
6. the entity has the unilateral right to terminate the lease contract.
7. the entity has responsibility to replace the ship/aircraft in the event of a serious and prolonged breakdown (ESA95, Annex II, par. 3; ESA2010 par. 15.11).
8. the ship/aircraft is leased by the entity from a purely financial intermediary, even if called an aircraft or ship leasing company (ESA95, Annex II, par. 4; ESA2010, paras. 15.15 and 15.19).
9. the entity uses ships/aircraft in its main activity.
3.2. Business accounts (IAS17)
The Task Force accepted that the International Accounting Standards[2] No 17 (IAS17) is also as a tool enabling the identification of the economic owner in case of a leasing arrangement. IAS17 defines criteria which look at the substance of the leasing contract and which are very similar to those included in ESA. When a compiler is confident that the business accounts of a company are in line with the substance of IAS17, the intention of an entity to include/exclude ship/aircraft as an asset in/from its balance sheet indicates that there is a change of economic ownership.
3.3. Decision tree – the way to facilitate the decision making process
A decision tree was proposed as a tool to enable to making decisions on the treatment of the ships/aircraft transactions and thus to facilitate the compilation process. As the terminology used in the respective industries differs, individual decision trees for ships (see Annex II A and aircraft (see Annex IIB) were developed. The decision tree guides the compiler(s) through the actual transaction or case; and gives direction on the investigations and decisions to be made. Moreover the decision trees provide an overview on how the different transactions are handled from ITGS and ITSS perspectives. Should Member States decide to use the decision trees, the trees may need to be adapted for national requirements.
As the contract labels/standards are used in the decisive boxes the substance of the transaction should be examined and verified when contacting companies. Either the list of criteria as agreed by the Task Force or IAS17 as described above can be used to validate the transaction.
3.4. Treatment of specific transactions
3.4.1. Interlinked transactions
A company may enter into a series of structured transactions (arrangements) with a party or several parties (related or unrelated) that may involve also the legal form of a lease. The form of each arrangement and its terms and conditions can vary significantly. If the linkage of the transactions was identified (e.g. in some cases they were negotiated together) then, the overall economic effect should be considered for recording the series of interlinked transactions (e.g. sale-lease-back). Only the transfer of economic ownership between the initial and final economic owner shall be reported in ITGS.
3.4.2. Sale and lease-back
A sale and lease-back transaction involves the sale of a ship/aircraft and the leasing back of the same ship/aircraft. If the lease-back results in the financial leasing in the sense of NA, no transaction will be recorded in ITGS and ITSS. However the lease-back resulting in the operational leasing as defined by NA will be recorded in ITGS (after the examination of the substance of transaction) as sale of ship/aircraft and in ITSS as operational leasing services.
3.4.3. New ship/aircraft
The ITGS legislation also specifically refers to new ships/aircraft which should be recorded in the Member State of construction on dispatch. Therefore the Task Force concluded that, when recording a new ship/aircraft, a transaction between the manufacturer and the first economic owner shall be reported. The time of delivery may indicate when the transfer of economic ownership occurred.
3.4.4. Processing activities
Trade in ships and aircraft covers also the processing activities. The Task Force resolved that the standard ITGS rules for processing under contract should be applied in case of manufacturing of a new ship/aircraft if the unfinished ship/aircraft is subject of processing operations in the different Member States/countries.
If the finished ship/aircraft (used or new one) undergoes the processing to be "really improved"/enhanced the transaction between processor and economic owner shall be reported.
It is important to distinguish processing and maintenance/repairs as the treatment in ITGS/ITSS will be different. Only a real improvement of the ship/aircraft should be recorded as processing in ITGS. Therefore it was accepted to use the capitalisations of the ship/aircraft enhancement as an indication for the processing. The NA rules for gross fixed capital formation should be applied. If a rise in value of the ship/aircraft is recorded as an increase in the assets in the balance sheet then the operation should be reported in ITGS as processing.
3.4.5. Flagging out/in of ships
Each ship has to sail under the flag of a country. Some countries manage a so called "open register of ships" where the ships can be registered without the establishment of an entity in that country; the entity is thus not treated from the NA point of view as a resident in that country and the registration should therefore not be a transaction in ITGS. The Task Force agreed not to record any transaction if there is no economic substance connected with the registration of a ship according to the economic ownership criteria. However flagging out/in of ship can be a trigger for further investigation.