Transferring transfer prices

transfer pricingMelinda Brown, OECD Centre for Tax Policy and Administration and Ian Cremer, World Customs Organization (WCO)

International trade is one of the pillars of globalisation and one of the jobs of customs officers is to help trade contribute to socio-economic development by making sure that goods flow efficiently across borders. Ensuring that customs duties are collected in a fair, effective, and efficient manner is a major part of this task. But it is one that is complicated by certain trends shaping the international economy, including the emergence of global value chains (GVC) and the fact that a significant amount of the movement along GVC is intra-firm trade between the different parts of multinational enterprises.

It’s hard to say precisely how much of world trade occurs within multinational enterprises, since apart from the United States, countries do not collect the data needed to measure it precisely. Figures for the United States put intra-firm trade at nearly half of goods imports and nearly a third of goods exports. Partial data for 9 countries analysed in an OECD paper suggest that intra-firm exports of foreign affiliates represent 16% of total exports. Adding the exports of parent companies to their affiliates abroad suggests a figure of one third, as measured in US trade statistics.

When a firm is in effect selling something to itself, the price is called a “transfer price”. The transfer price used will have the effect of allocating profits among the different parts of the company, which in turn will determine how much tax the multinational pays and in which country. Most countries require that the transfer price is calculated based on “the arm’s-length principle”.  Broadly, this means that operations should be priced by comparing them with similar operations carried out on a commercial basis at market prices, as if the parties were independent entities – at arm’s length from one another.

This can be a lot more complicated than it sounds, and the OECD has produced Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations on the application of the arm’s length principle. Customs officials are also interested in the price of goods sold across international borders within MNEs, and the World Trade Organization’s Valuation Agreement sets out the methodology for establishing the customs value used to calculate customs duties. The Agreement provides tests for ensuring that the price is set as if the parties were not related and had been negotiated under normal business conditions.  So, while there are differences between the rules for customs valuation and transfer pricing, both aim at essentially the same goal, and therefore the information found in the transfer pricing documentation supplied by companies to tax authorities could also be useful for the customs authorities. Similarly, customs valuation information could be useful for tax authorities.

At the end of April, the World Customs Organization (WCO) announced a new instrument adopted by the Technical Committee on Customs Valuation (TCCV) that will help customs officials take into account transfer pricing information in the course of verifying that the tests set out in the WTO Valuation Agreement are met. This also helps a firm where they have already calculated the transfer price for the tax authorities, and the information provided may be helpful in demonstrating that the declared import price of a related-party transaction is not influenced by that relationship.

The TCCV instrument, which is based on a case study, can be downloaded on line. In the study, XCO, a manufacturer in country X, sells relays to its wholly-owned subsidiary, ICO, a distributor in country I. ICO imports the relays and does not purchase any products from sellers unrelated to its parent company. Likewise, XCO does not sell relays or similar goods to unrelated buyers. So how do you work out whether ICO and XCO were buying and selling at a “real” price and not one influenced by the fact that XCO and ICO are related? In the case study, the answer is found by using the company’s transfer pricing study, based on the Transactional Net Margin Method. What that means here is comparing ICO’s operating margin with those of similar, but unrelated companies doing similar business in the country.

In the case study, ICO’s operating profit margin fell within the range of those earned by the eight comparable unrelated distributors used in the transfer pricing study. ICO’s operating expenses were judged to be acceptable too, since they were paid to unrelated companies. The case study concludes then that “the relationship between the parties did not influence the price”. The conclusion notes that the use of a transfer pricing study for examining the circumstances surrounding the sale must be considered on a case-by-case basis.  The case will be published in the WCO Valuation Compendium, subject to approval by the WCO Council in July 2016.

Mr. Kunio Mikuriya, WCO Secretary-General, has congratulated the Technical Committee on the work achieved: “This new instrument is an important step for the WCO and demonstrates its relevance by providing guidance on the management of Customs valuation in an increasingly complex trade landscape, whilst maintaining consistency and strengthening co-operation with tax authorities.”

The OECD provided input to the TCCV discussions and like the WCO, is encouraging closer co-operation between customs and tax authorities. “ This will be increasingly important in a global environment” said Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration. “As a result of the OECD’s Base Erosion and Profit Shifting (BEPS) project, more and more countries are applying transfer pricing rules, and those rules are becoming stronger and more sophisticated, in particular with regards to the treatment of risks and intangibles, rather than just tangible goods”.

Companies, customs, and tax authorities all stand to gain from this in making a system that is fairer, more predictable, and more efficient.

Useful links

WCO Guide to Customs Valuation and Transfer Pricing

OECD work on transfer pricing

Customs Environment Scan Tadashi Yasui, WCO Research Paper 31, 2014

What does mainstreaming biodiversity mean?

IDB-2016-logo-En Before there was the Insights blog, there were the Insights books. One of the first, on sustainable development, mentioned “a magical place, seemingly untouched for thousands of years”, on the Poland-Belarus border. Well, this “last remaining fragment of a primeval forest”, Białowieża National Park, is about to be touched, by loggers. The decision has sparked an impassioned debate, in Poland and far beyond. Forests seem to be anchored deep in the psyches of many peoples. There is even a theory that the story of the Garden of Eden refers to deforestation in the Middle East 10,000 years ago, and three millennia later, The Epic of Gilgamesh would describe how the gods curse Sumeria because the hero cut down the sacred forests.

The OECD is as Jungian as the next intergovernmental organisation, but on International Day for Biological Diversity we’re angsty about the loss of forests and other forms of life for material as well as subjective reasons. Biodiversity worldwide is in decline as the pursuit of economic growth and development leads to the conversion, and in many cases over-exploitation, of natural resources for inputs to production and consumption.

The theme of Biodiversity Day this year is “Mainstreaming biodiversity; sustaining people and their livelihoods”. According to World Bank figures, “natural capital accounts for an estimated 30% of total wealth in low income countries compared to only 2% in OECD countries”. Developing countries could learn a few (negative) lessons from what happened to the developed countries on their way to OECD status. The European Potato Famine of the 19th century killed in more or less direct proportion to the lack of diversity in the poor’s diet, with a million victims in Ireland where a third of the population relied almost exclusively on potatoes for food. The Dust Bowl that devastated the North American prairies in the 1930s was in large part due to farmers destroying the grass that held the topsoil in place.

If biodiversity is so important, and neglecting or damaging it so harmful, why don’t countries “mainstream” it?  For a start, although preserving as many species as possible goes back as far as Noah’s Ark (based on Gilgamesh), biodiversity as a scientific concept is recent, dating from a 1985 US National Research Council/National Academy of Sciences forum on biological diversity, while the term “biological diversity” itself first appeared in Raymond F. Dasmann’s 1968 book A Different Kind of Country.

Even so, most of us probably have a pretty good idea of what biodiversity means. But what about “mainstreaming”? Outside the OECD and like-minded institutions, it now has a faintly negative connotation – mainstream media, mainstream tastes for instance. There are various definitions, but they all give the idea that it involves integrating biodiversity into growth and development processes and in sector policies in a systematic way (notably in agriculture, forestry and fisheries, among others).

This is going to be extremely difficult in practice, whatever the rhetoric. One of the main reasons biodiversity isn’t adequately mainstreamed is that it has to compete with other (often more visible) national priorities for growth and development, so there is insufficient political recognition of biodiversity and the underlying ecosystem services it provides. Hopefully, the new Sustainable Development Goals (SDGs) will help to change this and raise the profile of biodiversity to a higher political level. Two of the 17 SDGs focus on biodiversity (terrestrial and marine).

The way in which the political will for change comes about reminds me of one of the grim conclusions of another Insights book, on fisheries. Fishing is a good illustration of how the unsustainable exploitation of natural resources poses a problem of political economy. The impetus for change is often a major catastrophe, such as the collapse of the industry when the fish stocks suddenly disappear. However, doing what is sustainable may mean a sudden, visible, loss for a small group of people who can organise to block change, while the benefit is much more long-term, less visible and less important on an individual basis, so there is less political pressure to implement what would be the best, long-term solution overall. An OECD contribution raised a similar point at a Convention on Biological Diversity (CBD) event in Montreal earlier this month, citing “Long timeframes for mainstreaming results to occur” as one of the challenges that also arises in the context of mainstreaming biodiversity in development co-operation.

Another lesson from fisheries is that biological systems do not behave in a linear fashion. You may think a slow decline in fish numbers gives you time to find a solution, or that stocks may recover as they did sometimes in the past, but when an ecosystem reaches a tipping point, change can then become sudden and catastrophic. And usually, that tipping point is only identifiable afterwards, it can’t be forecast.

That’s why the CBD, the organisers of today’s campaign, are so worried about the interactions of a number of complex systems. Take what they say about fishing, to stick to that example. Overfishing, pollution and unsustainable coastal development are contributing to irreversible damage to habitats, ecological functions and biodiversity, going on to say that “Climate change and ocean acidification are compounding such impacts at a time when the rising global population requires more fish as food, and as coastal areas are becoming home to a growing percentage of the world’s population”.

With respected bodies like the Paleontological Research Institute at Cornell University estimating that because of human actions, current extinction rates are up to 100 times greater than they would have been otherwise, it’s getting urgent not just to act efficiently. Clunky administrative procedures in international and national programmes are a problem, as is the fact that typical projects have a 4 or 5-year cycle rather than the 10-15 years needed to make a difference. As well as that, monitoring and evaluation of mainstreaming efforts have to be more robust than at present to allow you to know what works and what doesn’t.

The SDGs’ targets for life below water and life on land are ambitious but achievable, and they’re certainly far more attractive than the alternative presented in Gilgamesh, where the Annunaki, the seven judges of hell, raise their torches, lighting the land with their livid flame. Don’t say you weren’t warned.

Useful links

The CBD, like the UN climate change convention, has a Conference of the Parties, COP. CBD’s COP 13 in Cancun, Mexico in December this year, will also be focusing on mainstreaming biodiversity as its overarching theme.

OECD work on mainstreaming biodiversity and development

Summary Record of the OECD workshop on Biodiversity and Development: Mainstreaming and Managing for Results, 18 February, 2015

Excerpts from the mainstreaming sections in ‘biodiversity’ chapters of the OECD Environmental Performance Reviews.

Biodiversity and development co-operation OECD Development Co-operation Working Papers

Economics and policies for biodiversity: OECD’s response

What is blocking business investment and productivity growth? A fresh focus on the problems of fragmentation in the world economy

2016-BFO-cover-350Adrian Blundell-Wignall Director of the OECD Directorate for Financial and Enterprise Affairs, gives a preview of what’s in the OECD Business and Finance Outlook scheduled for release on 9 June 2016

More than seven years after the global financial crisis reached its trough the world economy is still sputtering. Banking systems in advanced economies have been strengthened and recapitalised, regulatory reforms of financial systems are well into their implementation stage and monetary policy remains highly supportive. But the global environment has not been supportive as emerging market economies, notably China, have struggled with the reversal of the commodity “supercycle” that sustained the earlier boom and related excess capacity.  One important result has been a failure of the business sector in advanced economies to respond with new investment and restructuring needed to generate jobs and the productivity growth that can support rising incomes and employment. These are essential components of the inclusive growth we need to address challenges like climate change and rising wealth inequality.

So what is blocking business investment and productivity growth? There are many contributors which we can summarise here as “fragmentation”: the heterogeneous policies, rules, laws and industry practices that create perverse incentives and block business efficiency and productivity growth. This is the theme of the OECD Business and Finance Outlook to be released on 9 June 2016.

Fragmentation manifests itself at all levels of the global economy, from the global macro-economy and economic systems to sectoral and micro-economic issues to legal ones. This Outlook surveys a range of cases where fragmentation creates problems and suggests priorities and directions for changes that will encourage inclusive growth.

The Outlook surveys important aspects of the broad global picture: the outlook for financial markets and influences on productivity, based on a detailed examination of the performance of 11 000 of the world’s largest listed companies. The observations point to the need to rely less on monetary easing and more on structural policy initiatives to stimulate investment and productivity growth and to encourage faster diffusion of productivity advances when they occur. Issues relating to the design of one such initiative, fiscal support for business research and development, are also covered in detail.

The Outlook also goes into greater depth to examine narrower issues where the devil is often in the details.  Stock exchanges are important elements of the infrastructure for funding business investment since they not only facilitate raising new capital but add to the attractiveness of such funding by providing it with liquidity. The Outlook examines the fragmentation that has arisen from the proliferation of trading venues and issues related to ensuring fairness. It points to regulatory initiatives needed to maintain a level playing field among investors.

The emerging renewable power sector is reviewed, focusing on challenges to mobilising finance for the large expansion of the sector that will be needed as the world phases out fossil fuel-generated electricity. Many of the issues that must be addressed relate more to the framework conditions surrounding the power sector than to financial engineering. If these issues are resolved, ample capital is likely to be forthcoming to finance the needed investments. One chapter focuses on differences in life expectancy around retirement age across different socioeconomic groups and the issues they raise for the insurance industry and pension funds as well as for public policy. Rules governing access to pensions and retirement saving must be designed carefully to avoid discriminating against lower socioeconomic groups.

The Outlook also examines areas in which variations in laws and legal regimes across countries unnecessarily fragment the economic environment by treating similar activities differently. One of these is foreign bribery, where enforcement across jurisdictions covers a very wide range which creates very different economic incentives to resort to bribery. The other is investment treaties, which must be interpreted by arbitration tribunals. These tribunals effectively establish rules that modify corporate law and governance arrangements and create different classes of shareholders with different sets of rights. The current interpretation of many treaties allows covered shareholders to recover losses resulting from company damages incurred by host government actions. This in turn creates incentives that may affect companies, shareholders, creditors and capital markets, and suggests a need for consideration of how claims for such losses should be treated as a more general policy matter.

The chapters are supported by company and market data not seen before, shedding light on some of the current great policy puzzles in the world economy.

Useful links

Business-Finance-Outlook-20126-callout-350The launch of the 2016 OECD Business and Finance Outlook takes place at 9.30am CET on 9 June 2016. Register to participate or watch the live webcast www.oecd.org/daf/oecd-business-finance-outlook.htm

The 2016 OECD Forum on 31 May – 1 June, is entitled “Productive economies, Inclusive societies”. The Forum is organised around the three cross-cutting themes of OECD Week: inclusive growth and productivity, innovation and the digital economy, and international collaboration for implementing international agreements and standards. Register now, it’s free!

There’s an algorithm for that. Or there soon will be

OECD Forum 2016Marina Bradbury, OECD Public Affairs and Communications Directorate and one of the organisers of this year’s OECD Forum

Would you like a machine to decide on your medical treatment, whether you could insure your house, if you should be hired, or what news stories you read? It may be happening to you already. Every time you go online to make a purchase, search for a restaurant, access your bank account or simply interact with your mobile device, you are creating a digital trail of data that is being tracked and stored. This “big data” is fodder for machine learning algorithms that will for example suggest what to buy.

Traditionally in computer science, algorithms are a set of rules written by programmers. Machine learning algorithms are different: they can improve the software in which they are embedded without human intervention. The more data they receive, the higher their ability to “understand” and predict patterns, including patterns in human behaviour. They are another step along the road to creating artificial intelligence (AI), even if we don’t know where this road is leading. As Stephen Hawking and his colleagues writing in The Independent, claimed “Success in creating AI would be the biggest event in human history” before going on to say, “Unfortunately, it might also be the last, unless we learn how to avoid the risks.”

We are living in an algorithmic society, and many argue that this is a positive thing. On an economic level, machine learning algorithms could help stimulate innovation and productivity growth. According to OECD research, big data used to feed machine learning algorithms can boost industries including advertising, health care, utilities, logistics, transport and public administration. When it comes to our day-to-day lives, algorithms can save us time and effort, for example online search tools, Internet shopping and smartphone apps leveraging “beacon” technology to provide timely recommendations based upon our whereabouts. Computer scientist Pedro Domingos even predicts that in five years’ time, digital personal assistants will be more important than smart phones, with their capacity to aggregate information from various apps to predict our needs before we even know them.

However, the large-scale use of algorithms can also be threatening to us as citizens. For example, if algorithms allow companies to predict our purchases before we even make them, what implications does this have for our personal choices and privacy? Critics point towards the dangers of allowing companies to exploit vast amounts of personal data and restrict individual liberties.

Take the realm of insurance, loans and legal advice. Nowadays, our credit rating or health insurance record is often assessed by a machine, not a person, whilst virtual legal assistants are becoming increasingly common. On the one hand, this can be advantageous to companies, enabling higher levels of efficiency, and in turn more accessible prices. The legal industry is undergoing a veritable transformation thanks to algorithmic technology, with quantitative legal prediction (QLP) being a prime example. Making information-based predictions is at the heart of the legal profession. In addition, legal cases often require the analysis of large-scale data or document sets, which can pose a challenge to the cognitive limitations of humans. Since algorithms are able to make predictions based on “big data” with increasing accuracy, QLP is arguably set to play an increasing role.

On the other hand, when it comes to ordinary customers looking for legal support or a loan, automated systems may not be helpful. Critics warn that even if an algorithm is designed to be neutral, bias can creep in. This can be due to unconscious bias of computer programmers. With machine learning algorithms, this is also due to the fact that they are fed by data. Even if they absorb this data in a completely rational way, they will still reproduce forms of discrimination that already exist in society. For example, if you are looking for a bank loan, you might be offered a higher or lower rate depending on your postal address, name, age or gender.

In the same way, whilst “talent analytics” is being used in HR to help build fairer recruitment practices, these new technologies do not offer a quick fix. For example, studies have found that women or people with “foreign” sounding names receive different kinds of job advertisements than white males. Nevertheless, global companies such as Google and McKinsey are already developing “talent algorithms” to recruit the best staff and assess performance. Moreover, some argue that companies that fail to move in this new direction may lose out later on.  Overall, it seems that algorithms could have a positive impact on the future of recruitment, but only when used judiciously as part of a wider process towards inclusiveness.

The healthcare industry is another key area in which the paradigm of the algorithmic society is played out. For example, a recent study in the US revealed how machine learning can offer a faster and less resource intensive method of detecting cancer, with machines automatically extracting crucial meaning from plaintext reports. Arguably, if machines can be used to review and analyse data, this frees up humans’ time to provide better clinical care. However, the ethical sensitivities of using algorithms to make critical health decisions must be addressed when developing innovative new models.

Trading algorithms are transforming the financial world as we know it. Algorithmic trading has given rise to companies such as Quantopian, which invites “talented people everywhere” to create their own algorithms for free, and pays those for the ones that perform best, and Rizm, which lets those new to trading test and even trade using their own algorithms. However, the field is not without dangers: just one typo could lead to significant financial losses in a short amount of time. The ethics of algorithmic trading are also questioned by critics. With computer-driven or “quantitative” hedge funds enjoying success despite volatile markets, their business models will not escape scrutiny as algorithms continue to permeate our economic systems.

Finally, algorithms that drive search engines can influence the information we receive, impacting upon our outlook on the world and even our well-being. Take the phenomenon of “filter bubbles”. This relates to the way algorithm-based search tools are likely to show us information based upon our past behaviour, meaning it is unlikely to challenge our existing views of spark serendipitous connections. More worrying still, Facebook conducted an experiment in 2014 to test the reaction of users to negative or positive content. The results revealed that those shown more negative comments posted more negative comments, and vice versa. However, the way the experiment was conducted was criticised for its lack of transparency.

The paradigm of the algorithmic society is very much bound up in the unknown. In many ways, this is exciting, capturing how data is becoming the raw material of our era, a source of many possibilities for innovation and even the means to address social problems. Yet it can also be a threat. As Pedro Domingos puts it, “You can’t control what you don’t understand, and that’s why you need to understand machine learning”. The challenge will be to ensure that we live in a society which reaps the benefits that algorithms can bring, whilst ensuring that their implications are understood by all.

Useful links

OECD Policy Brief on the future of work: Automation and independent work in a digital economy

The 2016 OECD Forum on 31 May – 1 June, is entitled “Productive economies, Inclusive societies”. The Forum is organised around the three cross-cutting themes of OECD Week: inclusive growth and productivity, innovation and the digital economy, and international collaboration for implementing international agreements and standards. Register now, it’s free!

Gender Equality and the Sustainable Development Goals

NAECMonika Queisser, Senior Counsellor, OECD Directorate for Employment, Labour and Social Affairs

The push for policies to improve gender equality at the global level is getting new impetus through the Sustainable Development Goals. SDG No. 5 is devoted to gender equality and aims to “achieve gender equality and empower all women and girls”. The goal’s detailed targets refer to a range of challenges, such as discrimination of women, violence against women, reproductive health, ownership rights and technology. Global progress in reaching these targets has been uneven. Despite impressive progress in enrolling girls in primary education, for example, gender equality in many other domains is still in far reach in the developing world.

This does not mean, however, that advanced economies can lean back and close the file. No single OECD country can claim to have achieved full gender equality.  Women are now as well or even better educated than men in most countries and their participation in the labour market has increased, but they still spend fewer hours in paid work per week than their partners. And even the most advanced countries, such as the Nordics, where women are well integrated in the labour markets, are faced with stubbornly high gender wage gaps and a continued lack of women in senior management positions, for example.

The consensus is growing that traditional gender stereotypes and roles are standing in the way of further progress in closing the gender gaps. In literally all countries for which data exist women do more unpaid work than men. As a result they have less time for paid work and fewer opportunities to develop their careers. Policy makers are thus starting to focus more on a better sharing of caring responsibilities and domestic work. This new policy direction is also reflected in one of the targets under SDG 5 which calls upon governments to “recognize and value unpaid care and domestic work through the provision of public services, infrastructure and social protection policies and the promotion of shared responsibility within the household and the family as nationally appropriate.”

New evidence from the OECD shows that countries with the smallest gender gaps in caring responsibilities also have the smallest gender gaps in employment rates. On average, female partners spend twice as much time in unpaid work at home than their partners. Couples where women participate more in the labour market, also appear to have a better gender balance in their cooking, caring and cleaning chores. But sadly this is not due to men doing more at home. The reason is that partnered women and dual-earner couples overall do less unpaid work.

Parenthood marks a turning point in the way couples share household and caring tasks.  When a child arrives couples often revert to more traditional gender roles. Mothers may spend more time with their children than fathers, but fathers spend a larger proportion of their childcare time with “quality” interactive activities such as reading, playing and talking with the child than mothers.

The reasons why women do more unpaid work are manifold; some women prefer fewer hours in paid work or to not work in a paid job at all, particularly when they have young children. But many other women would like to be in paid work and/or work more hours. But they struggle to reconcile work and family life due to constraints such as limited access to affordable and good quality child care or flexible working hours. OECD analysis has also revealed several other factors that may influence the sharing of unpaid work among partners, such as family size, education and/or the relative earnings potential of partners. Gender inequality in the public sphere, societal attitudes, and policies, in particular parental leave arrangements, are also associated with different levels of sharing across countries.

In 2014, G20 leaders adopted a common goal of reducing the gender gap in labour force participation by 25% by 2025. Better sharing of unpaid and paid work will be an important element of any strategy to reach this ambitious target. But change will not happen if gender equality is only pushed by women and for women. Men need to be champions as well if barriers and gender stereotypes are to be broken down. And there is a lot in it for men too. They will be able to spend more time with their family without harming their careers, if this becomes more of a shared norm. There will be more freedom to choose one’s role in society and less pressure for men to be the sole or main breadwinner of the family. Having more income from women’s work will provide greater financial security for their households and reduce overall income inequality. Men, like women, will benefit equally from broader effects of more gender equality, such as stronger economic growth, higher productivity, and improved sustainability of social protection systems. And children will not only be happier to spend more time with both of their parents, but as they grow up, they will find it normal for fathers to spend more time at home and mothers to spend more time at work. More gender equality is thus a win-win proposition, everyone has to gain from it.

Useful links

OECD work on gender equality

Women Deliver (WD) 4th Global Conference, 16-19 May, Copenhagen. The WD gender equality site is here

A dash of data: Spotlight on Canadian households

Matthew Dequeljoe, OECD Statistics Directorate

Economic growth (GDP) always gets a lot of attention, but when it comes to determining how people are doing it’s interesting to look at other indicators that focus more on the actual material conditions of households. This blog looks at a number of alternative indicators to see how households in Canada are faring.

GDP and Household Income

Neither real GDP per capita, which adjusts economic growth for price changes and the size of the population, nor real household disposable income per capita kept pace with the population growth in Q4 2015. The Canadian population grew 0.4% in the fourth quarter of 2015, outpacing real GDP and real disposable income growth which were both positive but relatively modest (increasing 0.2% and 0.3%, respectively). As a consequence, real GDP per capita decreased 0.2% (the index fell from 103.8 in Q3 2015 to 103.6 in Q4 2015), while the decrease in real household disposable income per capita, by 0.1%, was slightly less (with the index moving from 112.8 in Q3 2015 to 112.7 in Q4 2015).

Quarterly developments may be volatile. Chart 1 provides a longer-term perspective and shows how much GDP and household income have increased since the first quarter of 2007, just before the start of the economic crisis. Over this period, real disposable income per capita has increased substantially more than real GDP per capita (12.7 percent versus 3.6 percent, respectively).

Canada-chart1

In nominal terms (i.e. not adjusted for price changes) household disposable income increased in Q4 2015 compared with the previous quarter driven by increases in primary income, as compensation of employees and, to a lesser extent, income from self-employment rose. These gains were slightly offset by an increase in taxes, resulting in a drop in net cash transfers to households (i.e. benefits received minus taxes and social contributions paid) (Chart 2).

Chart 2 also shows that net cash transfers to households rose during the economic crisis  and sustained households’ disposable income levels. The increase starting in Q1 2008 to its peak in Q1 2010 corresponded to the time when real household disposable income began to diverge from Canada’s overall economic growth trend as seen in Chart 1.

Canada-chart2

Confidence, Consumption, and Savings

Household disposable income is a meaningful way to assess material living standards, but to get a fuller picture of household economic well-being it is interesting to also look at households’ consumption behaviour. Chart 3 shows that the index of consumer confidence in Canada has still not recovered its pre-crisis level.  It decreased by 0.1 percentage points and stood at 99.3 in the fourth quarter of 2015. The index of real household consumption expenditure dropped from 111.2 in Q3 2015, its highest value since 2007Q1, to 111.0 indicating that households on average have slightly decreased their purchases of goods and services (Chart 4).

Canada-chart3

Canada-chart4

The households’ savings rate (Chart 5), which corresponds to the share  that households are saving out of current income, remained stable in Q4 2015 at 8.1%, 2.5 percentage points higher than its lowest point reached in Q4 2007 at 5.7%. The savings rate increased during the depth of the recession, in part reflecting households’ responses to deteriorations in financial markets and an increased level of uncertainty over future income.

Canada-chart5Note: It is necessary to adjust household income for the difference between pension contributions paid and pension benefits received (called adjustment for the change in pension entitlements) to appropriately calculate the change in net worth of households, since pensions are considered a financial asset of households.

Debt and net worth

The households’ indebtedness ratio (i.e. the total outstanding debt of households as a percentage of their disposable income) is a measure of (changes in) financial vulnerabilities of the household sector  and its evolution over time allows for an assessment of households’ debt sustainability. In Q4 2015, household indebtedness in Canada (Chart 6) increased to 166.2% of disposable income, its highest level since 1990. As mortgage debt makes up the largest component of household debt in Canada, Chart 6 shows that Canadian households have continued to increase their borrowings to finance house purchases, in the face of low interest rates and high house prices.

Canada-chart6

A growing debt ratio is often interpreted as a sign of increasing financial vulnerability. However, when assessing vulnerabilities, one should also look at the availability of assets, preferably taking into account both financial assets (saving deposits, shares, etc.) and non-financial assets (for households, predominantly dwellings). Because information on households’ non-financial assets is generally not available on a quarterly basis, financial net worth (i.e. the excess of financial assets over financial liabilities) is used as an indicator of the financial vulnerability of households.

In Q4 2015, households’ financial net worth (Chart 7) in Canada was 343.8% of disposable income, rebounding 6.3 percentage points from Q3 2015. Holding gains on equity and investment fund shares helped boost households’ financial assets supported by a depreciating Canadian dollar that increased the value of foreign-denominated assets. Other factors included increased acquisitions of insurance and pension assets.

Canada-chart7 

Unemployment

The unemployment rate and the labour underutilisation rate (Chart 8) also provide indications of other potential vulnerabilities of the household sector. More generally, unemployment has a major impact on people’s well-being. In Q4 2015, the unemployment rate remained stable at 7%, approximately the same rate as in the previous quarter. The unemployment rate has been trending up in recent quarters. In Q4 2015, it was 1.1 percentage points higher than its low point of 5.9% in Q4 2007, but still 0.4 percentage points below the peak of 8.6% in the third quarter of 2009. The labour underutilisation rate was 13.8% in Q4 2015, slightly up from the third quarter and still two percentage points above pre-crisis levels in Q4 2007. The labour underutilisation rate is about twice the size of the unemployment rate.

Canada-chart8

One should keep in mind that households’ income, consumption and savings may differ considerably across various groups of households; the same holds for households’ indebtedness and (financial) wealth. The OECD is working on these distributional aspects and preliminary results can be consulted here and here.

Overall, the fourth quarter of 2015 saw a slight drop for Canadian households’ material well-being with a contraction of income and consumption per capita alongside declining consumer confidence. Moreover, the upward trend in the household debt-to-income ratio remains a source of concern for financial stability. Notwithstanding developments in Q4 2015, taking a longer term perspective shows that income and consumption levels as well as financial net worth have recovered from the economic crisis and surpassed their pre-crisis levels. To fully grasp people’s overall well-being, one should go beyond material conditions, and look at a range of other dimensions of what shapes people’s lives

Useful links

For many years, OECD has been focusing on people’s well-being and societal progress. To learn more on OECD’s work on measuring well-being, visit the Better Life Initiative.

Interested in how households are doing in other OECD countries? Visit our households’ economic well-being dashboard.

Where’s the corporate responsibility for blood antiquities?

Syrian-antiquities
Alabaster ‘Eye Idols’, Eye Temple (Tell Brak), 3200 BC, 4 x 2.6 x 0.5 cm. © Directorate-General of Antiquities and Museums, Damascus. Courtesy of ICOM Red List

Annis Turner, an independent expert specialising in the trafficking of cultural objects with a focus on the Middle East and South Asia, who has formerly worked at the Art Loss Register

A combination of political pressure, supply chain transparency regulations and consumer demand has caused an explosion of ethical supply chain initiatives over the last 15 years for everything from palm oil and coffee, gold and diamonds to cotton, clothing and shoes.  Until very recently the antiquities market has been largely left out of these discussions. With recent accounts hitting the headlines of the systemised looting of archaeological sites and museums throughout Iraq and Syria, and the threat of the looted artifacts appearing on the art market, people are slowly starting to take notice. Then why is there still a visible lack of pressure on collectors, dealers and auction houses within this market to prove that the acquisition and sale of their antiquities is responsible as we expect for almost everything else?

Looting antiquities and the limitations of existing counter-measures

The current antiquities trade is a murky business consisting of the movement of licitly and illicitly obtained objects. The conflict in Syria and Iraq has, quite rightly, earned a lot of political and media attention recently. However, the issue is not unique to these two countries. Not only are lootings concurrently taking place during the internal conflicts of Yemen, Mali, Libya and Afghanistan, but the pillaging of cultural heritage has been occurring worldwide for centuries. In the past fifty years alone, items have been looted from Egypt, Greece, Peru, India, Ethiopia and Cambodia, to name just a few. Beyond thousands of years’ worth of history being lost, citizens are also being deprived of their cultural heritage, and in the case of past and current conflicts, the money earned from this destruction enables terrorist organisations to continue their campaigns of murder, kidnappings and terror.

Despite a multitude of international treaties aimed at stopping the looting and trade of cultural objects, illicit antiquities are still emerging on the art market with few signs of this flow being stemmed. There have been various reports by archaeologists of recently acquired small, portable objects originating from Syria and Iraq ending up in London antique dealerships. The dealers claim they originate from Jordan or India, while the archaeologists say otherwise. And a simple search for “cylinder seals” (small engraved cylinders used in ancient times in the Near East) on eBay results in 5 items with origins from modern day Syria or Iraq. It is not certain that they have been looted, just that their provenance is unknown. How would any buyer know whether their acquisition was legal or whether its sale benefited ISIL and helped fund their war? eBay and other sites should do the due diligence needed to let us know.

The existing approach of relying only on government enforcement by way of international treaties and import controls is failing. Without improvements to border controls, customs enforcement capacity and the implementation of existing legislation, the effect of these treaties will remain moral rather than material. It is time that the antiquities trade shifted towards a more complementary approach that has been emerging in the last fifteen years calling on the private sector to check their supply chains and publicly report on their ethics.

Corporate responsibilities – International standards for responsible business already apply to the antiquities market

International, government-backed standards adopted by the UN as well as the OECD already outline a clear responsibility for companies in all sectors of the economy to undertake due diligence in their supply chains, in order to prevent human rights, labour and environmental impacts, as well as bribery, illicit trade and a multitude of other issues. The OECD even has detailed due diligence provisions for corporate supply chains on minerals and precious metals from conflict areas ensuring companies procure their supplies responsibly and avoid contributing to conflict and human rights abuses. Yet, despite the significant pressure on electronics companies and jewelers to address the issue of blood diamonds or conflict minerals in their global supply chains, the escalating lootings of antiquities has so far seen minimal pressure on the companies in the antiquities market to check theirs.

A patchwork of private sector responses and tools to address these issues surrounding the illicit antiquities trade has emerged over the last 20 years. The Art Loss Register together with Interpol provide databases of lost and stolen art. Searching these databases is often one of the sole measures of due diligence that dealers and auction houses undertake to prove an object has been lawfully obtained. Yet all this means is that the object was never registered on the database as lost or stolen. What about all the objects that haven’t been, or simply could never be, registered? If an object has been pillaged from an archaeological site in Syria or hacked off a temple in Cambodia, there will have been no opportunity for it to be documented and listed. In spite of the successes in thwarting art theft, a database search is, quite frankly not sufficient for antiquities.

A significant concern of the illicit antiquities trade is the multifaceted movement of the objects. The global supply chains of antiquities are very complex structures where it is normal for objects to move between 3 or 4 countries before finding a final destination. The transport and warehousing of art, auction houses and dealers are all part of this chain. They claim that information on the chain of custody, export certificates and documents declaring legal title of objects are often non-existent, and even when they are, they are likely to be forged. However, the concept of due diligence is not simply about ticking documents off a list, but about understanding risk – in this case the risk of obtaining looted objects – and applying more scrutiny to inspect and understand the likelihood of this risk associated with an object or supplier.  The International Council of Museums (ICOM) publishes “Red Lists” that offer detailed descriptions of objects from countries that may be or have been at risk of looting, so that art market professionals, museums, and customs and law enforcement officials can better identify endangered antiquities and archaeological material. Whether the art market actually uses this resource is unknown, since there there is zero transparency and zero due diligence reporting on such matters.

Under international standards set by the UN and OECD, all entities in the antiquities supply chain have their own responsibility to look at the chain and ensure responsible sources. Companies should observe international standards of due diligence, using resources like the ICOM Red Lists to detect and prevent buying looted objects. They should then report on their due diligence efforts, outlining at risk transactions and describing the enhanced measures taken to assure the provenance is legitimate, or in cases where objects were not accepted, report any suspicious transactions. This should then be made available to the public assuring them of the market’s responsible practices in turn diminishing the adopted secrecy surrounding the antiquities trade.

Accountability for offenders?

Dealers associations and auction houses often have their own code of ethics to prevent the sale of illicitly obtained objects. However, there is no public reporting on how the codes are implemented or enforced and with illicit material still appearing on the market, it is clear they are either ineffective or not always followed. If a stakeholder needs to raise an issue about an abuse of ethics, or if an object is suspected of having been looted, there are currently no public mechanisms available other than to report such issues to law enforcement agencies. Once reported however, it is very rare to bring a successful legal case unless there are clear, demonstrated links to money laundering, terrorist financing or tax evasion. And with regards to the repatriation of looted objects to their countries of origin, these are few and far between. At a UNESCO conference in March on the movement of cultural property, Qahtan Al Abeed, the director of the Basra Museum stated that Iraq is still waiting for the return of over one thousand looted objects from Europe and the US.

An integral part of the OECD Guidelines for Multinational Enterprises is that they oblige countries to set up a grievance mechanism – the so-called “National Contact Points” (NCPs) – to help resolve complaints received from any interested party about specific instances of alleged non-observance by enterprises. The NCP’s could provide a unique mechanism to hold the art market to account for the acquisition practices and the human rights abuses and other impacts arising from the illicit trade in antiquities. They could even provide a platform to assist in repatriation cases. All this would shed a new light on the supply chain, forcing the art market to be more transparent and thereby act with an increased level of responsibility. This is a necessary measure in an industry where there is absolutely no public reporting on sourcing practices by the overwhelming majority of companies in the antiquities supply chain, which in turn, allows the antiquities market to remain opaque.

It is time this changed, once and for all. The antiquities trade should adhere to international standards on supply chain responsibility and take proactive measures to set up an industry-wide program to certify and publish their due diligence and acquisition practices. Only when there is no place for illicit objects on the antiquities market will there be any hope of the prevention of future lootings.

Useful links

10th Forum on responsible mineral supply chains, 10-12 May 2016, OECD,Paris

4th Global Forum on Responsible Business Conduct 8-9 June, OECD, Paris

Articles on due diligence on OECD Insights