EUROPEAN COMMISSION EUROSTAT Directorate D: Government Finance Statistics (GFS) and quality Unit D-1: Excessive deficit procedure and methodology Unit D-2: Excessive deficit procedure (EDP) 1 Unit D-3: Excessive deficit procedure (EDP) 2 Unit D-4: GFS. Risk and quality management

Financial Accounts Working Group

Luxembourg, 3 5 December 2014

BECH Building, Room Quetelet

Beginning at 1:00 p.m.

Part C

Item 2

Public TV and radio broadcasting follow-up

Joseph BECH Building Tel.: (+352) 4301-35622 L - 2721 Luxembourg Fax: (+352) 4301-34389

1

1. Background

This note discusses the appropriate accounting treatment of compulsory payments made, in particular by households, to finance public broadcasting authorities, under ESA 2010, with the aim to ensure a harmonized treatment across the EU Member States, as it seems that similar cases are not reflected exactly in the same way from an accounting point of view.1

The issue of TV and/or radio fees was already discussed in the FAWG meetings in January and June 2008 and in January 2009. In June 2008, Eurostat launched a "Questionnaire on the treatment of television and radio licences in national accounts", the results of which fed into a draft Eurostat paper on this issue and the FAWG was also consulted by written procedure.

However, in January 2009, the FAWG concluded that the issue would be taken up again once ESA 2010 has been introduced as ESA 2010 was expected to clarify the provision for the recording of TV and radio licence fees. As a result, the issue was temporarily shelved

This note focuses on the classification of compulsory TV and/or radio payments made by households and other entities, taking into account the provisions of ESA 2010. In addition, the classification of these payments in national accounts may give rise to possible reclassifications of public units or to the rerouting of some transactions (taxes) in case of non-government units (in particular, if privately controlled).

The key issue addressed in this note is whether TV and/or radio compulsory payments made by households (and also by other entities such as enterprises, etc.) for the right to receive public television or radio signals (channels) should be classified as taxes (unrequited payments with no counterpart), or whether they could be considered as a component of sales.2

This document does not analyse the recording of licences/permits paid by TV/radio broadcasters themselves to the government in order to be allowed to perform broadcasting activities. These licences/permits should be treated according to the principles described in chapter 15 of ESA 2010 (Contracts, leases and licences), notably under the part on Permits to undertake specific activities (ESA 2010 15.31 onwards). Some provisions are also included in the MGDD (Part VI leases, licences and concessions, notably in chapter VI.1 Overview).

A common feature is that the payments are "earmarked" for the use of public channels. However, they are levied independently of the actual consumption of public broadcasting services by the household or any other paying entity. Another common feature is that the payments are compulsory.

The classification of compulsory TV and/or radio payments for public broadcasting services may also have a decisive impact on the sector classification of the public institutional units providing these services.

1 In some EU Member States, such compulsory payments do not exist and the public broadcasting is financed

from the budget (this is the case of BG, ES, EE, LT, HU and NL). In some cases the unit responsible for public broadcasting and collecting the payments is classified in the general government sector, while in other cases is classified outside. In LU such a unit does not exist.

2 The expression "sales" or "sales of goods and services" is in this note refers either to market output (P.11)

or (partial) payments for other non-market output (P.131). Output for own final use (P.12) is no relent in the case of TV and radio fees.

2

2. Institutional settings

The replies to the questionnaire circulated in 2008 clearly showed that the institutional settings for the collection of such compulsory payments (if they exist) from households (and other entities) are quite heterogeneous across EU Member States, i.e. the TV and/or radio compulsory payments may be collected in various ways and by various entities.

Some examples of institutional arrangements are provided below.

- First, these fees may be collected by the government or directly by broadcasters, which are classified in the government sector (as budgetary, extra-budgetary or other government units).

- Second, these payments may be collected by government and then transferred to some public broadcasters currently classified outside the general government sector.

- Third, the compulsory payments are collected directly by public broadcasters classified outside the government sector.

- Finally, there may be "intermediary" entities, which are in charge of collecting these compulsory fees. These entities then transfer the collected amounts (less some fee for this service) to the government or to broadcasters, which may be classified inside or outside the government sector.

In any case, the institutional settings should not have an impact on the classification of these TV and/or radio fees in national accounts, if they have a comparable nature.

3. Accounting references in ESA 2010 and 2008 SNA

General definition of a tax in national accounts

ESA 2010 comprises in chapter 20 the characteristics of the general government sector. In ESA2010 paragraph 20.165 a general definition of a tax is given:

"Taxes are compulsory unrequited payments, in cash or in kind, made by institutional units to general government or supranational bodies exercising their sovereign power or other powers. [...] Taxes are described as unrequited because the government provides nothing commensurate with the payment in exchange to the individual unit making the payment".

This general definition is reiterated in the definitions of the main tax categories in chapter 4, notably ESA 2010 4.14 on taxes on production and imports (D.2) and ESA 2010 4.77 on current taxes on income, wealth, etc. (D.5).

A similar definition is provided in 2008 SNA in paragraph 8.52: "Taxes are compulsory, unrequited payments, in cash or in kind, made by institutional units to government units. They are transfers because the government provides nothing directly in return to the individual unit paying the tax, although governments do provide goods and services to the community as a whole or to individual units, or groups of units, depending on their general economic and social policy"

Borderline between taxes and purchase of services

Compared to ESA95, the paragraphs 4.79 (d) and 4.80 (d), concerning in particular the definition of other current taxes (D.59), were revised in ESA 2010. ESA 2010 4.79 (d) explains the borderline between taxes and purchase of services from government3:

3 In ESA95 the borderline was described in footnote 5.

3

"The distinction between taxes and purchases of services from government is defined according to the same criteria as those used in the case of payments made by enterprises namely, if the issue of licenses involves little or no work on the part of government, the licences being granted automatically on payment of the amounts due, it is likely that they are simply a device to raise revenue, even though the government may provide some kind of certificate, or authorisation, in return; in such cases their payment is treated as taxes. If, however, the government uses the issue of licences to organise some proper regulatory function (such as checking the competence, or qualifications, of the person concerned), the payments made are treated as purchases of services from government rather than payments of taxes, unless the payments are clearly out of all proportion to the cost of providing the services."

Nonetheless, the provisions in ESA 2010 4.79 (d) do not appear relevant4 in the case of TV and/or radio fees paid in particular by households, as the government does not intend to perform any regulatory function on the payer. A TV and/or radio payment is also difficult to perceive as some kind of certification/authorisation or permission to watch the public TV or listen to the public radio.5

As regards ESA 2010 4.80, which lists the transactions not to be included under other current taxes, the paragraph does not mention television and radio licences anymore (as it was the case in ESA95). However, even the wording of ESA95 did not preclude that these payments could be considered taxes.

Concerning the treatment of television and radio licences in 2008 SNA6, the text in 2008 SNA did not change in substance compared to 1993 SNA, i.e. 2008 SNA still specifically mentions television and radio licences, in paragraph 8.64 (c), where it is says: "Payments for all other kinds of licences...television or radio licencesor fees to government ... are treated as purchases of services rendered by government". In fact 2008 SNA, similarly to 1993 SNA, clearly states that: "The boundary between taxes and purchases of services is based on the practices actually followed in the majority of countries in their own accounts."

Such a statement is however in contradiction with ESA 2010 20.164, which stresses the reporting of economic reality over the legal form as well as that recording in national accounts shall not be constrained by the designation of the transaction in the public accounts of government or in the bookkeeping of corporation. For the compilation of national accounts by the EU Member States, priority should be given to the ESA 2010 provisions and, consequently, the 2008 SNA provisions in paragraph 8.64 (c) cannot be considered as decisive in this respect.

Public broadcasting and collective services

It can be also mentioned that broadcasting, if performed by government, according to the COFOG classification, is treated as collective services, belonging under heading 08.03 Broadcasting and publishing services. Collective services are defined by ESA 2010 3.102 as following:

"Collective services are services for collective consumption that are provided simultaneously to all members of the community or all members of a particular section of the community, such as all households living in a particular region. Collective services have the following characteristics:

4 There seems to be no relevant provisions on this issue included in the MGDD.

5 The notion of a licence/permission as sales of services is mostly related to the undertaking of productive

activities, while for leisure activities, such licenses are usually treated as taxes, i.e. licences for recreational hunting, fishing, carrying weapons, owning dogs, etc. are in national accounts mostly treated as current taxes (D.5).

6 And in the Government Finance Statistics Manual (GFSM 2014) paragraph 5.81.

4

(a) they can be delivered simultaneously to every member of the community or to particular sections of the community, such as those in a particular region or locality; (b) the use of such services is usually passive and does not require the agreement or active participation of all the individuals concerned; (c) the provision of a collective service to one individual does not reduce the amount available to other in the same community or section of the community."

Re-routing

Neither ESA 2010 nor 2008 SNA specifically mention a case of rerouting taxes if collected by a non-government unit. However, some provisions as regards the re-routing of taxes, can be found in the Government Finance Statistic Manual (GFSM 2014)7 published by the IMF.

In particular the paragraph 5.38, which says: "When taxes are collected by an institutional unit other than a government unit, the tax is always reassigned to the government unit that permitted the nongovernment unit to act as a collecting agent. For example, a public corporation may act as an agent to collect a specific tax on behalf of government. In this case, the taxes collected by the public corporations should be recorded as transactions in financial assets and liabilities for the collecting agent, and the full amount collected should be recorded as tax revenue receivable by the government unit. Amounts retained by the collecting unit as a collection charge should be recorded as a payment for a service receivable from the collecting unit."

This statement in GFSM 2014 is consistent with the definition of taxes in ESA 2010 2.165, as both emphasise the sovereign power8 of the general government needed to charge taxes.

4. Classification of the TV and/or radio payments in national accounts

The main question is whether to classify the revenue coming from public TV and/or radio fees in national accounts as taxes or sales. Governments may impose such payments or give the public broadcasting authority the right to levy them, inter alia because it may wish to have specific programmes on public TV or public radio in the framework of public policy objectives.

To decide on the classification of these fees as taxes or sales, the following elements should be considered and taken into account:

a. Households (and other entities) usually have to make these payments when they have a radio or a TV set, or any appliance that is capable of receiving electronic signals such as a notebook, a computer or a smartphone, etc. even if they do not watch or listen to or intend to watch/listen to the public channels.

b. Following the above, in some cases the payments have to be made even if the household does not own a TV set or a radio. As a result, under these circumstances almost everybody has to pay the fee, irrespective of whether one wishes to receive the service.

c. Consumers cannot opt out from paying compulsory fees. They are obliged to pay even if they exclusively watch commercial TVs or listen to commercial radios.

7 Government Finance Statistics Manual 2014 (IMF).

8 Or sovereign-like power in the unique case of the EU institutions for the first and second own resource taxes

and for the taxes and social contributions levied on EU employees.

5

d. The payments are in most cases imposed by a law, although government may delegate the power to collect these payments to other units. However, this does not change the compulsory nature of these payments.

e. As regards the public channels, consumers cannot make the choice on the basis of the prices charged. The payment is uniform and does not distinguish whether one

watches or listens to one or more public channels. This is in contrast to commercial TV broadcasters, who typically charge the fee according to a number of channels.

f. The competition (if any) between public9 and commercial TV/radio broadcasters is heavily

affected by the fact that the latter are financed only by voluntary payments (advertisements, subscriptions, other sales).

It is also important to examine how the TV and/or radio payment is determined:

g. If the government (or another body controlled by government) determines the fee, then this could be an indication that there is a weak or non-existent link between the fee paid and the service provided and the price is not charged in connection to the actual level of the use (consumption) of the service.

h. In the case above, the price is usually not determined by the costs incurred or with an aim to make a profit, but set at some acceptable level for all households as the public broadcasting service is provided within the objectives of government policy.

i. However, if the fee is determined by an independent private body, this might be an indication that a stronger link between the fees paid and the provision of broadcasting services may exist and that the price (the fee) might take into account the financial situation of the broadcasting entity in order to cover the production costs.

Another consideration may be:

j. Whether the fee is based on or charged together with another service provided by a public institutional unit, such as the provision of electricity (payments are included automatically together with an electricity bill), inclusions in tax (or similar) declarations provided to government, etc.

If the payment of TV and/or radio fees is imposed by government and a link between the fee and some volume of broadcasting services cannot be established, then the TV and/or radio fees have the character of a compulsory payment.

In this respect, it needs to be kept in mind that the public broadcasting is by nature a collective service and that thus, by definition, there is no link between the individual household's payment and the service to that household. This leads to the conclusion that the payment is not only compulsory but also unrequited and that hence it should be considered as a tax.

As a result, in case of compulsory and unrequited nature of the TV and/or radio payments, they should be treated in national accounts as a tax (D.59 if paid households, D.29e in other cases). In case that these payments are collected by a non-government entity, they would have to be re-routed via government accounts as only the government units can charge taxes.10

In rare cases where a direct link between the payment for the licence and this consumption of public broadcasting output can be established, the payments may be considered sales.

9 Some public broadcasters are not allowed to raise funds by advertisements.

10 In addition to the provisions in ESA2010 20.165 as stated above and GFSM 2014, ESA 2010 paragraph 20.165

sets out special conditions for such compulsory unrequited payments to be considered mutually agreed and thus be considered as a transaction: that they are levied by general governments using their sovereign powers.

6

Most probably they would be classified as partial payments for non-market output (P.131), as the price apparently does not satisfy the basic conditions for considering the price as economically significant (see ESA 2010 3.19), discarding the classification of such fees as market output (P.11).

5. Classification of the possible subsequent government payments to broadcasters

As mentioned before, in some countries the government makes certain payments to broadcasters in order to provide general financial support for their activities, to cover the deficit of the broadcaster, or to transfer what was collected from households/enterprises, possibly together with some additional financial support. The analysis and the subsequent classification of these transactions do not involve any specific issues and the rules are in principle the same as for any other government payments made to public corporations or non-profit institutions (the basic options here are: subsidies, current or capital transfers, loans, etc. depending on the nature of the transaction11) and they have to be considered in line with ESA 2010 provisions and the MGDD.

However, another situation arises when the TV and/or radio fee needs to be re-routed through the government accounts, as the fee is considered to be a tax in national accounts. Under this circumstance, it is suggested to record these TV and/or radio payments as a tax (D.59/D.29) from households or enterprises received by the government sector, while the matching transaction would be a current transfer payable (D.7) from government to the broadcaster. In order to have a full reconciliation of the non-financial and the financial transactions, the provisions given by the GFSM 2014 paragraph 5.38 (see above) should be considered, i.e., in addition, the recording of other accounts receivable/payable (F.8) by government and the broadcaster may be implemented.

6. Implications for the classification of public broadcasting companies

The decision whether these fees are taxes or sales, significantly affects the nominator of the ESA 2010 market/non-market test (50% criterion sales to production costs ratio). More concretely, payments recorded as taxes will not enter in the calculation of the 50% ratio, leading to a lower result of the ratio. This will obviously not be the case if the payments are considered as sales.

Revenue of TV and/or radio broadcasters usually includes advertisement receipts, proceeds from TV and/or radio fees and other subsidies or transfers. It may well happen that the reclassification of television and/or radio fees as a tax (with a subsequent current transfer from government), would change the sales to production costs ratio of a public broadcaster (50% rule is not relevant for private entities). This, in turn, may lead to the reclassification of the entity inside the general government sector and, in this case, the re-routing of taxes would no longer be an issue.

11

If the public broadcasting service is treated as a sale of service to the government, it should be recorded in government accounts as intermediate consumption.

7

7. Conclusions

In the light of ESA 2010, the note reviewed the recording of TV and/or radio fees paid in particular by households in order to support financing of public broadcasting, with the aim to improve harmonised treatment and ensure a proper comparable impact on the tax burden ratio across EU Member States.

TV and/or radio fees paid by households (and other entities) are usually imposed by government and are thus compulsory. At the same time, if there is no clear link between the broadcasting services provided and the fee charged (i.e. they can be considered as an unrequited payment), which is usually the case, such payments should be treated as a tax in national accounts.

If government delegates the administration of such TV and/or radio taxes on non-government units (delegated authority of the government), the recording in national accounts will involve the re-routing of taxes via government accounts or possibly a reclassification of the whole unit (if controlled by government).

Only if a payment of public TV and/or radio fee could be deemed as a deliberate consumer decision and the link between fees and services could be established, then revenue from such a fee could be treated as sales.

For the classification of a public broadcasting company, the ESA 2010 market/non-market test (50% criterion) shall be applied.

The FAWG members are asked: - To provide comments on the considerations and conclusions of the note.

Eurostat Unit D1