Royalty and Licencing Special Purpose Entities RL SPEs

Royalty and Licencing Special Purpose Entities (R&L SPEs) in the Netherlands Bram de Boo & Tom van Venrooij 9 th AEG Meeting 8 -10 September 2014, Washington DC

Starting point of the paper The paper is drafted on request of the ISWGNA (and not the TFGP) – Point of reference is the work done by the MUNA and HC ‐HO‐SPE Task Forces – Highlights some of the specific features encountered in the Netherlands: ‐ The Netherlands have quite a long history of establishing tax agreements with a wide range of countries. ‐ Which has led to the presence of a various kinds of SPEs.

Background 2001 national accounts revision: – All SPEs (financing, holding, R&L) classified under ‘other financial institutions’ (ESA 1995, S. 123) – Limited data sources (Bo. P Survey, small SPEs sample), this situation improved in more recent years – Practical solution for GFCF estimations 2010 national accounts revision: – Given new guidance R&L SPEs must be classified under the non‐financial corporations (S. 11) as they hold non‐ financial assets and are providing (IPP) related services. 3

Sector classification of R&L SPEs – MUNA/HC‐HO‐SPE: SPEs owning non‐financial assets should be classified under S. 11, however, ‐ Ownership is not well understood; ‐ SPE’s may own financial and non‐financial assets – Statistics Netherland uses the following two criteria: ‐ Ownership follows reported balance sheet positions (legal ownership) ‐ Primary activity follows the dominance of reported (R&L) revenues – Out of 14, 000 SPEs identified in the Netherlands, only 20 report substantive R&L imports and exports. 4

Further examination of these 20 suspects leads to the following three categories of SPEs: 1. Those reporting R&L flows but no ownership of IPPs (Google Netherlands Holding). ‐ The company balance sheets do not report IPPs or trademarks or other forms of intangible assets; ‐ R&L inflows equal outflows. 2. Those of which Income from financial assets exceed R&L receipts (Mosaic Global Netherlands); 3. Those reporting IPP ownership and R&L turnover (U 2 L). Conclusions: Suspected R&L SPEs are predominantly involved in re‐allocating R&L from on country to another (i. e. the Double Irish/Bermuda structure). 5 Sub‐licences are not reported on these entity’s balance sheets.

Solutions taken by Statistics Netherlands – Ultimately all R&L SPE suspects are classified as financial entities, i. e. their activities are considered to be similar to invoicing or holding SPEs; – A net recording is used for ‘re‐exports’ of R&L; – Output is measured by the sum of costs; – Requires in some cases a downward adjustment in reported intra‐company flows. 6

Suggested points for discussion by the EAG: – Does the AEG support the suggested classification of those SPEs mainly engaged in the re‐routing of R&L services as financial corporations? – Does the AEG support the pragmatic approach in which balance sheet information is being considered crucial in determining economic ownership of intellectual property? – Does the recording of significant receipts of royalties, however without the observation any of IPPs or brand names ownership imply that maybe the observed unit ought to be categorised as a R&L SPE? If so, what additional decision rules can be formulated to properly assist national accounts compilers? 7