Goods for Processing / Toll Processing … a pragmatic approach • What is ‘toll processing’? • Why is toll processing used? • What is the problem? • How has ONS dealt with the issue? • Considerations for a longer-term solution
Mar 31, 2015
Goods for Processing / Toll Processing … a pragmatic approach
• What is ‘toll processing’?• Why is toll processing used?• What is the problem?• How has ONS dealt with the issue?• Considerations for a longer-term solution
What is ‘toll processing’?
• A form of outsourcing (also known as goods for processing)
• Usually takes place across national borders• Often undertaken within a corporate group• Involves the transfer of goods without change
of legal ownership• Involves the charging of a ‘toll’
Why do businesses use toll processing?
Why?• Economic reasons – specialisation, economies of
scale, access to global markets etc• Avoidance (or possible evasion) of tax liabilities
Where?• Toll processing is commonly found within industries
such as chemicals, pharmaceuticals, oil & gas, metals
Variations of Outsourcing (UK-HMRC definitions)• Licensed manufacturer – goods manufactured
under a long-term licence. Manufacturer buys materials on own account and bears risks of selling finished products.
• Contract manufacturer – manufacturer acts as agent, producing goods/components for the principal who guarantees to buy outputs. The agent bears risks of buying and stocking materials/components.
• Toll Manufacturer – Principal buys the materials/components although these usually pass direct
to the agent. Buying and selling risks lie with the principal.
Termed ‘stripped risk manufacturers’
What is the problem?Businesses argue that:• The transactions are the provision of services
rather than buying / selling of goods• No arm’s length transaction in goods has
taken place (as no change of ownership occurs)
• This leads to issues of statistical classification and measurement:
What is the problem? … statistical issues• Should transfer of goods be treated as a sale and
subsequent purchase, or ignored?• If treated as a sale/purchase – should values be recorded
on a net or gross basis?• If businesses cannot provide ‘gross’ data, which method(s)
of estimation should statisticians use?• Possible misalignment of inputs and outputs if different
services/goods classifications are used by respondents
No clear guidance on the recording of toll processing activity has yet been produced, though work continues
Other issues for consideration
Identifying:• Ownership/location of inventories• Location of capital expenditure• Location of labour costs• ‘Hidden’ turnover via recharging practices
within a corporate group
How has the UK Office for National Statistics (ONS) dealt with the issue?
Works on the assumptions that: • toll processing activity should be treated as
manufacturing and• associated transfers of goods should be treated as
arm’s-length transactions in goods, at full value• Adjustments should be made to statistical outputs,
where necessary, to reflect this approach
How does the ONS approach operate?
Where ONS identifies that a respondent has started to act as a toll processor, in order to ascertain the value of goods being transferred in and out, the adopted short-term solution, is:
ONS procedure – new toll processors
Approach principal, if in sampling frame, for monthly turnover and price data relating to the agent
If not possible
Ask agent to supply monthly turnover and price data.
If unavailable, request volume data, and estimate turnover data as price x volume (both collected from the agent)
If not possible
Ask agent for monthly price or turnover data to act as a proxy for factory gate prices and turnover
If not possible
ONS procedure – new toll processorsAsk agent for annual turnover data, or obtain this from annual financial statements. Alternatively, use Annual Business Survey data to calculate weights. Benchmark the imputed monthly data against this annual data
Use an auxiliary variable as a proxy for sales data, e.g. work done recorded by PRODCOM survey. A number of approaches are possible to obtain a monthly path through annually benchmarked series.
Impute agent’s weights, turnover and price data using normal imputation methods on the domestic producer prices, export and import prices
If not possible
If not possible
ONS procedure – Where a business has been a toll processor for some time
Select agent (toll processor) into the survey sample in usual way and ask principal for turnover and price data relating to the toll processing activity
If not possible
As above, but use the annual turnover as the last turnover value collected or impute a last turnover value from the turnover provided by a company with a similar size and product
Summary of ONS short-term solution
• Above procedures implemented in mid-2005 for a range of surveys
• ‘Work done’ measured by PRODCOM used as auxiliary variable to update last weight calculated for toll processors in the output price index
• Will investigate obtaining PRODCOM ‘work done’ data analysed by product type
• ONS Business Register Unit continue to classify toll processors as manufacturers
ONS’s longer-term approachFour options identified:
1. Continue indefinitely with the short-term solution
2. Remove toll processors from manufacturing and possibly services surveys
3. Investigate new estimation methods and confirm/increase accuracy of existing estimation methods. Request Eurostat to clarify toll processing reporting but continue to treat as manufacturing until further advice received
4. Campaign for amendment of UK legislation to enable ONS to obtain correct/full data from businesses.
Option 3 considered most realistic and was implemented in 2005.
Conclusion• ONS’s pragmatic approach is just one possible
approach to the toll processing issue• ONS is interested in other approaches/suggestions and
further discussions • The ONS approach has not yet fully considered all
aspects (e.g. capital expenditure, inventories etc)• Obviously, a consistent approach internationally is the
ideal and so clear international guidance on definition, treatment and measurement of toll processing activity is required