Major Changes to the
Primary Income Account
Workshop on the Sixth Edition of the Balance of Payments and
International Investment Position Statistics Manual – BPM6
Beirut
March 24-26, 2015
Changes from BPM5
• The term “primary income” is introduced.
• A detailed breakdown of investment income is introduced.
• The employer-employee relationship is clarified to distinguish
between compensation of employees and payments for services.
• “Distributed income from quasi-corporations” as a term subsumes
distributed branch profits
• Superdividends are defined and their treatment as withdrawals of
equity extended
• Dividends are recorded at the time the shares go ex dividend
• “Reinvested earnings” is used as a term for all direct investment
enterprises, and thus includes undistributed branch profits
• If branches do not distribute profits, the retained earnings of the
branch are considered to be reinvested earnings.
Changes from BPM5
• Investment income attributable to the owners of
investment fund shares also includes reinvested earnings.
• When a chain of direct investment relationships exists, it is
clarified that reinvested earnings should be recorded
between the direct investor and directly owned direct
investment enterprises only
• Treatments of income on reverse investment and
investment between fellow enterprises are included.
• The treatment of transfer pricing is clarified
• Fees on securities lending and gold loans are clarified and
treated as interest.
• Interest income is adjusted to remove the FISIM
component.
Changes from BPM5
• Rent is identified as a component of primary income.
• Taxes and subsidies on products and production are classed
as primary income, not current transfers.
• Income on reserve assets is identified separately.
• Interest on SDR allocations and holdings are shown on a
gross basis, consistent with the corresponding positions.
• Debt instruments with both the amount to be paid at
maturity and periodic payments indexed to a foreign
currency are classified and treated as if they are
denominated in foreign currency
• The treatment of index-linked debt instruments is clarified
and modified
Main Components of Primary Income
1. Compensation of Employees
2. Investment Income
3. Other Primary Income (new category)
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Compensation of employees
• Represents remuneration in return for the labor input to the
production process
• Included:
– Wages and salaries in cash
– Wages and salaries in kind, including employee stock options (BPM6,
para 11.20).
– Employers’ social contribution
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Compensation of employees
Employer-employee relationship
• Compensation of employees only arises when a resident of one
economy is employed by an employer of another economy.
• If an employer-employee relationship does not exist, the
payment constitutes a purchase of services.
• Several factors may need to be considered to determine the
relationship (paras 11.11-11.13), e.g.:
– an employer has the right to control what shall be done by the
employee and how;
– an individual who is entitled to similar benefits as generally provided
by the enterprise, is likely to be an employee;
– Payment of social contributions by the employer likely indicates an
employer-employee relationship.
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Compensation of Employees Example
Mr. A from country A is employed for 3 months by an enterprise located in
country B. Mr. A pays and receives the following amounts:
Receipts
•
Salary from enterprise in country B: 500
•
Interest on bank deposit in country B: 50
•
Rent from an apartment owned by Mr. A in country B: 200
Payments
•
Food consumed in country B: 110
•
Property tax paid to government in country B: 40
•
Income tax paid to government in country B: 50
Please record the current account entries of country A
Classification of Investment Income
• Investment Income
– Direct Investment
– Portfolio Investment
– Other Investment
– Reserves (new)
Investment income: linked to the
financial instrument (DI, PI, OI or
Reserves)
• Structure is consistent with corresponding
financial flows and positions
• Facilitates the analysis of rates of return
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Direct Investment Income
In BPM5: (directional principle)
–
–
DI Outward income: all credit entries (even payables)
DI Inward income: all debit entries (even receivables)
In BPM6: (asset-liability principle) (BPM6 – 11.97)
(a) Direct investors’ investment in direct investment enterprises
 This category includes investment income flows (distributed earnings,
reinvested earnings, and interest) between the direct investor and its
direct investment enterprises (whether in an immediate relationship or
not).
(b) Reverse investment
 This type of relationship covers investment income flows on liabilities of
direct investors to their direct investment enterprises and on claims of
direct investment enterprises on their direct investors.
(c) Between fellow enterprises
 This covers investment income flows between all fellow enterprises that
belong to the same direct investment group.
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Portfolio investment income
Portfolio investment
• Income on equity and investment fund shares
– Dividends on equity excluding investment fund
shares
– Investment income attributable to investment
fund shareholders
• Dividends on investment fund shares
• Reinvested earnings on investment fund shares
• Interest on debt securities
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Other investment income and Reserves
Other investment
• Income on other equity
• Interest
– interest payable on SDR allocations are shown on a gross basis,
consistent with corresponding positions
• Investment income attributable to policyholders in
insurance, standardized guarantees, and pension funds
Reserve assets (new)
• Income on equity and investment fund shares
• Interest
– interest receivable on SDR holdings are shown on a gross basis,
consistent with the corresponding positions
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Investment income
• Definition:
– income accruing to an investor from the ownership of a
financial asset
– Financial derivatives and employee stock options do not
give rise to investment income
• Recording:
– Investment income should be recorded on an accrual basis
– See Example - BPM6-CG 13.64-13.65
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Main Components of Investment Income
 Investment Income
i.
ii.
iii.
iv.
Dividends
Reinvested Earnings
Interest
Income attributable to policyholders in
insurance, standardized guarantees, and
pensions funds
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Dividends
• Dividends are recorded at the time the shares go
ex dividend (see example in BPM6-CG-Example
13.2)
• Exceptional payments that are made out of
accumulated reserves or sales of assets,
‘superdividends’, are considered withdrawals of
equity, not primary income.
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Example
Country A residents received $40,000 in dividends from share investments in
Country B, after the Country B government had deducted $5,000 in withholding taxes.
Of the $40,000, $20,000 was used to purchase additional shares in companies of
Country B, while the remaining $20,000 was deposited with Country A commercial
banks.
Transaction
Credit
Primary income – Investment Income
Portfolio investment
Income on equity
Dividends
45,000
Secondary income
Financial corps/Nonfin corps/Households…
Other current transfers
Current taxes on income, wealth, etc.
Debit
NAFA
5,000
Portfolio Investment – Assets
Equity and inv. Fund shares
Other sectors
20,000
Other Investment - Assets
C&D - DTC
20,000
NIL
Reinvested Earnings: Direct Investment
• Reinvested earnings is used as a term for all direct
investment enterprises, so includes undistributed branch
profits
– If branches do not distribute profits, the retained earnings of the
branch are considered to be reinvested earnings.
• Reinvested earnings of a direct investment enterprise are
linked to the concept of operational earnings generated
from production; and do not include any realized or
unrealized holding gains or losses
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Reinvested Earnings: Direct Investment
• When a chain of direct investments exists:
– Reinvested earnings should be recorded between the direct investor
and directly owned direct investment enterprise, only (para 11.47)
• Reverse investment
– Recording of income is on a gross basis (para 11.99)
– There are no reinvested earnings on reverse equity because the 10%
threshold has not been met
• Fellows
– There are no reinvested earnings on equity between fellow
enterprises because the 10% threshold has not been met
• The treatment of transfer pricing on direct investment income is
clarified (para 11.101)
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Reinvested Earnings: Investment Funds
•
•
Investment income attributed to the owners of
investment fund shares also includes reinvested
earnings (para 11.37)
Earnings from investment funds can be viewed as
being passed on to their shareholders as they
are earned in the form of investment income on
their equity (para 11.38)
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Interest:
Arrears
• In BPM6, new treatment of arrears on debt repayments and interest—
accruals should continue to be shown in the same instrument until liability
is extinguished (para 11.71).
• Example: Country A failed to meet interest payments of 300 due to the
U.S. Export-Import on amounts borrowed in the past for the purchase of
Boeing jets.
Transaction
Credit
Debit
NAFA
NIL
Primary Income
Investment income
Other investment
Interest
300
Other investment liabilities
Loans
General government
Memorandum item:
Accumulation of arrears
300
300
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Interest
•
Fees on securities lending and gold loans
are classified as interest (para 11.67)
–
•
Because they are payments for putting a financial instrument at
the disposal of another institutional unit
Interest income is adjusted to remove the
FISIM component
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Income Attributable to Policyholders in
Insurance, Guarantees, and Pensions Funds
• Technical reserves and entitlements represent a liability of the
insurer, issuer of standardized guarantees, and pension fund
and corresponding asset of the policyholders and
beneficiaries (para 11.79)
• In practice, investment income attributed to policyholders is
retained by the insurance corporations, guarantors, and
pension funds
• It is therefore treated as being paid back by the policyholders
in the form of premium supplements that are additional to
actual premiums payable under the terms of the insurance
and pension policies (para 11.83)
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Other Primary Income
a. Rent
b. Taxes on products and production
c. Subsidies
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Rent
• Income for putting natural resources at the disposal of
another institutional unit
– Use of land
– Extracting mineral deposits and other subsoil assets
– Fishing, forestry, and grazing rights
• Usually entity using the natural resources are resident => no
BoP
• However, if the user is a nonresident then a cross-border
transaction on rent arises. For example, a forestry or fishing
operation that pays for temporary access to natural growing
fish or timber in another economic territory gives rise to rent
in the international accounts (para 11.86).
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Rent
• The terms under which rent is payable are expressed
in a resource lease.
– A resource lease is an agreement whereby the legal owner
of a natural resource that has an infinite life makes it
available to a lessee in return for a regular payment
recorded as rent.
• Outright ownership of the resource gives rise to a
notional direct investment enterprise that owns the
resource.
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Taxes and subsidies on products and
production
• Classified as primary income, not secondary
income (para 11.91)
• Usually small, except perhaps in economic
unions
• Not included: taxes on income and wealth,
which are recorded in secondary income
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