Since opening Canada’s long distance market to competition in 1992, the CRTC has held in place a system whereby long distance service providers paid a per-minute contribution (which varied by province) to subsidize local services. With precipitous drops in retail rates, competitors found that marginal costs frequently outweighed their marginal revenues for off-peak traffic. On November 30, 2000, in Decision CRTC 2000-745, the Commission determined that the market would be better served by a revenue tax to be applied across a broader range of services and service providers, most notably including cellular services companies. The new collection mechanism will be effective 1 January 2001 and will apply to companies with annual telecommunications services revenues greater than $10 million.
Background
In the proceeding leading the Decision, parties provided technology and marketing arguments questioning the sustainability of the old regime, which applied to traffic considered by the local incumbent to be long distance. This limited flexibility in defining local calling areas on the part of CLECs. From a technology perspective, telecommunications networks are no longer easily separable into local and long distance traffic segments. As a result, the ability to count and report long distance minutes is becoming increasingly difficult. In some cases, service providers may have to adopt inefficient network designs, acting as an impediment to technological advances. Other parties argued that the current per-minute mechanism could not be applied to modern converged networks, where traffic flows over packet-switched networks and cannot be measured in minutes.
After reviewing a variety of mechanisms, the Commission determined that a revenue based mechanism across a broader range of services, will be most sustainable in that it is insensitive to technology changes, removes regional differences in rates, accommodates administrative efficiency and spreads the burden of the subsidy most fairly.
Details
The new contribution imposes a 4.5% tax on total revenues from Canadian telecommunications services, less certain deductions, effective January 1, 2001. The tax applies to all telecommunications service providers, such as: ILECs, competitive IXCs, CLECs, resellers, wireless service providers, international licensees, satellite service providers, Internet service providers (if a telecommunications service is provided), payphone providers, data and private line service providers.
Deductions apply for a number of types of revenues. Retail internet and retail paging service revenues are exempt. However, any revenues generated by internet and paging service providers from the provision of any other telecommunications services will be contribution-eligible. Revenues associated with sales or rental of terminal equipment is contribution exempt. Telecommunications service providers are entitled to a deduction for contribution revenues received. If service providers bundle exempt services with contribution eligible services, the entire bundle becomes contribution eligible.
Finally, a service provider is entitled to a deduction for inter-carrier expenses incurred for those services purchased from other telecommunications service providers (for example, Centrex, private line services, settlement, switching and aggregation, transiting and unbundled local loops) to the extent that the service is used to provide contribution-eligible telecommunications services. In this way, the contribution tax applies, in effect, to the value added by the service provider. There is no deduction for contribution payments and inter-carrier expenses incurred for telecommunications services internally.
To ease the administrative burden for small carriers, the Commission will only require carriers with total Canadian services revenues in excess of $10M (before deductions) to file reports and funding to the pool.
Summary
The CRTC has clearly listened to CLECs and competitive IXCs in trying to find a mechanism to break the linkages between incumbent definitions of long distance and local services. This will lead to increased service flexibility and increases in the types of flat rate packages to be expected from national providers. For example, because the Decision eliminates traffic sensitive payments, cable companies may be expected to introduce unlimited free calling to other “on-net” telephone customers, thereby encouraging friends and families to sign-up for service en masse.
The Decision brings significant financial relief to Canada’s fragile competitive long distance industry, but it comes at the expense of the wireless industry and Bell Canada. As a result of the new national equalization pool, Bell will find itself subsidizing the rest of Canada, including its rival Telus. It is likely that the Decision will be appealed to cabinet by an interesting coalition of disgruntled new taxpayers, but it is unclear that the Cabinet will agree to intervene.