Tackling virtual production

Abstract

This paper is an attempt to contribute to the discussion on multinational enterprises shifting certain economic activities to special purpose entities abroad for reasons of tax optimisation. The authors argue that a transfer of production to a special purpose entity abroad permitted by tax law is not necessarily a transfer of production in an economic sense. Special purpose vehicles can be involved in production processes from a legal point of view without producing any goods or services in reality – a phenomenon the authors call ‘virtual production’. Thus, simply mirroring the legal transactions in national accounts may result in a distorted representation of economic reality. Unfortunately, the System of National Accounts in its current version as well as other existing guidelines lack clear guidance in order to distinguish virtual from real economic activity in the context of special purpose vehicles. This paper offers a proposal for improvement of existing definitions and concepts.