WSPs should fear our new subsidy rules

On November 30, the commission announced that it will replace, effective January 1, 2001, the current per-minute contribution mechanism with a revenue tax mechanism. The new regime will spread the contribution burden, currently placed solely on long distance services, over the entire telecom industry; however, in doing so, it will significantly increase the burden on wireless services. Under the new regime, all telecom service providers, with revenues greater than $10 million, will be required to pay contribution. Eligible telecom service providers, including wireless service suppliers (WSPs) and satellite service providers, will pay contribution as a set percentage of their Canadian telecom service revenues net of contribution revenues received, inter-carrier payments, terminal equipment revenues, paging or retail Internet service revenues. All bundled services revenues will be considered contribution-eligible as long as any of the revenues included in a bundle are contribution-eligible. The existing contribution mechanism will remain in place on an interim basis until March 31, 2001. Contribution payments under the new model will begin to apply in April 2001. Consequently, based on the interim tax rate of 4.5%, WSP contributions will increase significantly starting in May 2001. The final 2001 contribution tax rate will be determined based on national subsidy requirement and revenue information to be filed with the commission March 31, 2001. Once the rate is finalized by mid-2001, a retroactive adjustment will be made to account for the difference between the amount of contribution collected to date and what would have been collected under the final rate. The difference will be prorated and collected over the balance of 2001, further increasing WSPs’ monthly contribution payments to account for the contribution payment shortfall over the first three months of the year. The new regime will significantly increase the contribution burden on the wireless industry. Under the current regime, wireless carriers paid roughly $15 million in contribution in 2000. In sharp contrast, they will be required to pay in the order of $200 million in 2001. Part of the motivation for replacing the regime was to help stem loses faced by long distance providers by reducing their contribution burden. Ironically, wireless carriers are now saddled with a massive increase in their burden at a time when they are incurring significant losses themselves expanding and upgrading network capacity and capabilities. The establishment of a national subsidy mechanism also shifts the contribution burden from current high-contribution-rate areas (e.g., Alberta and BC) to low-contribution-rate areas (e.g., Ontario and Quebec). This shift will further negatively impact those WSPs with all or most of their customer base in areas where the contribution burden will increase under the new regime. The new regime negatively impacts WSPs in other ways as well. The contribution-eligibility rules applicable to bundled services will discourage service bundling since wireless service bundles including Internet access would be fully taxable under the current rules. The CRTC also failed to recognize and give credit for unavoidable spectrum licence fee costs incurred by WSPs. These payments, along with other licensing conditions, compound the social obligation costs placed on WSPs. By rushing implementation, presumably to benefit IX service providers, the commission failed to provide an adequate transition period for the new regime. No time is allowed for the completion of the ongoing rate band restructuring process, introduction of the new national subsidy requirement formula (adopted in the commission’s decision) or further rate rebalancing to bring rates in high-cost areas to more consistent levels across the country. Had implementation been slated for 2002, the going-in contribution requirement could have significantly reduced and the negative impacts associated with shifting the contribution burden mitigated. As well, the CRTC failed to give the industry time to prepare for the new regime. It explicitly prohibited the inclusion of separate line item on customer bills clearly identifying the new contribution tax. Raising rates through other means in highly competitive market segments, as in the case of wireless services, to fully recover the new hidden contribution tax will likely prove to be impossible. Bernie Lefebvre is VP at Wall Communications Inc, an Ottawa-based consulting firm.

WSPs should fear our new subsidy rules

News | 12/11/2000 5:00 am EST

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