GNI adjusted after improved data on multinational corporations

© ANP / Berlinda van Dam
On 23 September 2022, Statistics Netherlands (CBS) published the results of research that made it possible to split the income and expenditure of non-financial corporations (NFCs) into those of Dutch-owned and those of foreign-owned enterprises. The new insights have led to adjustments in the retained earnings of foreign-owned subsidiaries in the Netherlands. As a result, gross national income (GNI) and the current account balance, among others, have been adjusted for the period 1995-2021. Gross domestic product (GDP) has remained unaffected.

Along with GDP, GNI is one of the most widely used macroeconomic variables in the national accounts system. GDP refers to all earnings from the production of goods and services within Dutch borders. GNI refers to the aggregate income of all Dutch residents (both enterprises and individuals). This could also be income that was earned outside the country. Conversely, the income of foreign-owned companies located in the Netherlands does not count towards Dutch GNI. GNI also serves as the principal basis for contributions to the European Union.

Gross national income (GNI)
JaarGNI old series (bn euros)GNI after adjustment on 23 Sep. 2022 (bn euros)

Background of adjustments: the role of multinationals in the national accounts

Enterprises have become increasingly international, with offices located all over the world. Due to ongoing globalisation, recording of all those activities in statistics (including the national accounts) has presented an increasing challenge. Dutch-owned multinationals also earn part of their profits abroad and vice versa, foreign-owned multinationals earn some of their money in the Netherlands. These profit flows to and from foreign countries thus have a large impact on Dutch GNI.
To date, multinationals had not been distinguished separately in the national accounts system. Based on additional research and a new method of combining existing information, this is now possible for the non-financial corporation (NFC) sector, which comprises most of the multinationals. This provides greater insight into the structure and functioning of the Dutch economy and the structural surplus in our current account.

With these new insights into (combined) data on multinational corporations, it has proved possible to examine whether the retained earnings of such enterprises were thus far estimated correctly in the national accounts. Retained earnings are profits of foreign subsidiaries that are not paid out (as dividends) but are used to strengthen the firm’s equity capital or to finance investments, for instance.

In accordance with the European framework for national accounts compilation, these so-called ‘reinvested earnings on foreign direct investment’ are attributed to the parent enterprise, thus to the GNI of the country where the parent enterprise is located. However, determining the amount of retained earnings is a complex statistical process; after all, no actual and directly measurable transaction takes place.
Research has shown that the retained earnings of Dutch-owned subsidiaries abroad had been quite accurately estimated, but that the retained earnings of foreign-owned subsidiaries in the Netherlands had thus far been underestimated.

This underestimation was partly caused by a number of enterprises in the Netherlands being registered incorrectly as purely Dutch-owned, whereas in actual fact they were owned by a foreign parent enterprise. Therefore, the retained earnings of those enterprises needed to be attributed to a foreign country in retrospect, resulting in a lower GNI.
In addition, the research showed that data on retained earnings as found in the accounts of Dutch-owned subsidiaries require more preparation before they can comply with the European directives and definitions. An example is how to treat R&D expenditure; according to corporate accounting rules, this often needs to be booked as current expenditure. However, according to the prevailing international requirements for compiling the national accounts, R&D expenditure should be classified as investment. Consequently, the R&D expenditure may not be deducted from corporate earnings.

Other examples from this research concern the treatment of exceptional gains and losses in the accounts, which, statistically, should usually not play a role in profits, as well as the statistical requirement that transactions be valued in conformity with market conditions, even if they are intra-group transactions. This may deviate from the figures presented in the corporate accounts. On balance, such factors also result in higher retained earnings of foreign-owned subsidiaries in the Netherlands, thus in a lower GNI.

Impact on the current account balance and other indicators

Since retained earnings must be deducted from GNI, higher retained earnings attributed to foreign parents result in the aforementioned downward revision of GNI.

Adjustment of retained earnings at Dutch-controlled and foreign-controlled multinational subsidiaries
Dutch-controlled multinational subsidiaries abroadForeign-controlled multinational subsidiaries in the NetherlandsTotal GNI adjustment
million eurosmillion euros

The adjustment in retained earnings feeds through into equally large downward revisions to property income, primary income and the current account balance. It also leads to adjustment of disposable income and savings. By definition, corporate savings equals disposable income. Due to the lower savings, net lending/net borrowing (the balance of receivables and payables) has been revised downwards by an equal amount.

The three-year average current account balance is one of the indicators of the European Commission's Macroeconomic Scoreboard. The Commission uses -4 percent of GDP as the lower limit and +6 percent of GDP as the upper limit for this indicator. In each of the last ten years, the moving average of this balance as a percentage of GDP has been above or well above +8 percent, reaching 8.4 percent of GDP in 2021. Even with the new insights, the current account balance remains above the European Commission's range, but closer to it at 6.4 percent of GDP.

All StatLine tables on the national accounts were updated with the new figures as of 23 September 2022. Not only figures on income and expenditure of NFCs, but also those of financial institutions have been adjusted, as some multinationals have a corporate structure consisting of one or more non-financial operating companies and a financial holding company at the top of the Dutch corporate structure. This financial holding company is classified as a financial institution according to international guidelines.
On 23 September 2022, the amended national accounts tables (adjustment for retained earnings, i.e. resources and expenditures, for the non-financial companies and special purpose entities) were published on StatLine. In a customised table, CBS also published a breakdown of the non-financial corporations (NFCs) into Dutch-owned and foreign-owned multinationals.
A further breakdown of the NFCs will be published on StatLine as of 9 February 2023.