Classification of payments to deposit insurance and financial

stability schemes

Maurice Nettley

OECD Centre for Tax Policy and Administration

17-19 May 2011

Secretariat’s questionnaire

• Provides an update on the Report of responses by Delegates to the Secretariat’s September 2010 questionnaire on classification of payments made by banks and other credit institutions to insure deposits made by customers

• Asks for comments by Delegates on the Secretariat’s proposals for taking the topic forward

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Questionnaire

• Asked Delegates to describe any schemes operating under 3 headings - similar to Swedish stability scheme - similar to financial sector interventions operating in the UK - other schemes being operated with similar aims

• Asked for each scheme whether any payments received are being classified as tax revenue or fee for a service in National Accounts or as tax revenues in OECD Revenue Statistics

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Schemes reported by Delegates (1)

• Responses now received from 22 countries

• Reported schemes provisionally allocated into one of six groups listed in Annexes A-F of the paper ( subject to comments from Delegates )

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Schemes reported by Delegates (2)

A -Stability fee schemes (7)

B -Schemes similar to UK deposit protection scheme (2)

C -Other government sector scheme (6)

D -Fund operated outside the government sector (10)

E -Non-state scheme backed by deposit takers (3)

F -Voluntary schemes (2)3 countries reporting that no schemes exist

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Classification of payments made as tax revenues or fee for service (1)

• Taxes defined as compulsory unrequited payments to government

• Taxes are unrequited in the sense that benefits provided by government to taxpayers are not normally in proportion to their payments

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Classification of payments made as tax revenues or fee for service (2)

• Under these definitions, payments made under the schemes listed in Annexes D, E and F cannot be considered as taxes

- D payments are not being made to government

- E transaction is between banks and an institution outside the government sector - F participation is voluntary

• There are a number of different practices being operated in the schemes listed in Annex A-C

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Classification of payments made as tax revenues or fee for service – Annex A

• 7 countries have Stability fee schemes

• The payments will be classified as tax revenues in the National Accounts of Austria, Germany, Hungary, Sweden and the United Kingdom.

• Of these, all except Germany want to classify as a tax in OECD Revenue Statistics

• The United States expect to classify the payments as a fee for service

•

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Classification of payments made as tax revenues or fee for service – Annex B

• 2 countries reported schemes in the category of scheme operating in the United Kingdom

• In Australia, the priority claim on assets is treated as a fee for service but any further levy to overcome the shortfall would be treated as a tax

• In the United Kingdom, the realisation of assets is treated as a capital tax in National Accounts but not in OECD Revenue Statistics

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Classification of payments made as tax revenues or fee for service – Annex C

• 6 countries reported other government sector deposit schemes

• In Canada, the payments are classified as taxes in both National Accounts and OECD Revenue Statistics

• In Denmark, the payments are not part of public administration in the National Accounts

• In Australia, Belgium, Germany, and the United States, the payments are classified as a fee for a service

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Variation in practice on classification

• Two separate issues in practice

• The interpretation of the word ‘unrequited’ in the OECD Interpretative Guide

• Not always easy to distinguish between those fees and user charges to be treated as taxes and those that are not

• When a fee is levied in connection with a service, the strength of link between the fee and the service and the link between the amount of the fee and the cost of the service may vary considerably.

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Interpretation of the term ‘unrequited’

• Tax payment is compulsory with no direct provision of a service whereas a fee is paid for a specific service

• But a payment could be regarded as a fee and not a tax even when there is no specified provision of a service for a particular entity if payments are entirely channelled back to the sector of the economy where companies are subject to the payment

• This is the case for the stability fee in some countries – as the levy is made on all firms eligible for support , it may be unrequited for an entity but for the sector as a whole it does finance a potential service

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Tax or a fee for a service (1)

• Payments by the financial institutions could be seen as a form of insurance fee with the Government acting as guarantor.

• The 2008 SNA identifies two types of guarantees – ‘standardised’ and ‘one-off’ containing characteristics consistent with payments for deposit insurance.

• For ‘standardised’ guarantees ( para 17.211 ), payments are likened to those for non-life insurance.

• For ‘one-off’ guarantees ( para 17.212 ), the text indicates that payments made should be classified as a fee for a service.

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Tax or a fee for a service (2)

• On the other hand, in cases when the payments go into a Government’s general funds, the Government can use the money as it wishes. It has to guarantee customer deposits but the size and timing of future payments is uncertain

• The level of payment is fixed by Government raising the question of the link between the level of the fee and the guaranteeing service being provided

• If participation is compulsory, a particular

institution has no choice about whether or not to pay the fee

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Discussions with the IMF and a question for Delegates

• Secretariat has had some discussions with the IMF about this topic

• The IMF are planning to update some parts of the GFS manual later this year and this exercise is expected to include some text on bank levies.

• Delegates are asked for any views on whether payments made under the types of schemes listed in Annexes A-C should be classified as tax revenues in OECD Revenue Statistics.

• It may be possible for Working Party 2 to influence IMF thinking if a consensus emerges from the views expressed by Delegates

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Other proposals for next steps

• Delegates to propose any comments and corrections to the text in Annexes A-F including proposals to switch schemes between Annexes

• Any submissions by Delegates not so far responding can be added to the summary

• Secretariat to provide a paper for the November 2011 WP2 meeting with proposals for the way forward on classification issues eventually leading to agreed changes to the text of the

OECD Interpretative Guide 16

• Thank you and any questions?

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