For Official Use STD/NA(2001)24
Organisation de Coopération et de Développement Economiques
Organisation for Economic Co-operation and Development 24-Sep-2001
_____________ English - Or. English
For Official Use
PERMITS AND INTANGIBLE ASSETS
Agenda item 2
Robin Lynch, ONS - United Kindgom
OECD MEETING OF NATIONAL ACCOUNTS EXPERTS
Château de la Muette, Paris
9-12 October 2001
Beginning at 9:30 a.m. on the first day
English - Or. English
Document complet disponible sur OLIS dans son format d'origine
Complete document available on OLIS in its original format
PERMITS AND INTANGIBLE ASSETS
1. The UK Office for National Statistics has been obliged to address national accounts classification
issues, as a result of the auctioning of licences to mobile telephone companies for the use of the
electromagnetic spectrum. The ensuing debate on how to classify the payments to allow the use of the
spectrum as rent, tax, service charges or sale of an asset has provoked world-wide discussion. As this
paper is written, there still remain a variety of views on the appropriate treatment in the national
accounts. The debate has revealed confusion regarding the nature of the national accounts’ treatment
of intangible assets and taxes.
2. This paper explores these concepts from first principles of economics, seeking to identify the
characteristics of assets and taxes, which help to determine the appropriate national accounts’
treatment in specific cases. The paper questions some of the guidance in the SNA93 and ESA95, and
as such is a contribution to a future revision, rather than solely an interpretation of existing guidance.
3. Land is classified in the SNA93 as a tangible non-produced non-financial asset – AN.21. It is difficult
to create a consistent story from opening to closing balance of the stock of land. This is due to major
land improvement schemes being classified under Gross Fixed Capital Formation as a produced asset
(AN.11). The resulting change in value to the non-produced asset of land must be artificially re-routed
in the accounts so that increase in value due to capital formation under AN.11 can be reflected in the
value of the stock of land (AN.21) through an adjustment item. This paper proposes a sub-
classification of land into two distinct asset types - a non-produced asset and a produced asset, which
will overcome this difficulty.
4. Land has two main characteristics - a physical manifestation and a space occupying property. The
physical manifestation is recognised in that it can be seen, touched, stood upon, dug into, used for crop
growing, etc. This is observed as the soil, the bedrock, the surface and its physical characteristics. The
value of this aspect of land is that it provides a service to economic activities. For example the soil in a
field used for agriculture provides an anchor for roots and a store for nutrients so that crops can grow.
The bedrock of a building site provides suitable foundations for the erection of buildings. Sand
provides a suitable material for playing in, at the seaside, or out of, on the golf course. Each of these
characteristics of land is degradable, and in order to maintain its value, can require major
improvement. Ownership rights can be established over these characteristics, separately from the
second characteristic of space occupation.
5. These physical characteristics qualify land as an economic asset. Although it once occurred as a
natural phenomenon, in developed countries most of land can be considered as a produced asset.
Agricultural land will have been cleared of stones, have drainage systems, physical boundaries,
surfaces levelled, etc. Building land will also have been drained, cleared, access created, etc. This
characteristic of land qualifies as a produced, non-financial, tangible asset. It follows that payments
which are made for use of the improved physical characteristics of the land should be classed as
rentals, payments for the flow of capital services provided by the produced capital asset.
6. We use the word “improved” here to reflect the fact that capital formation has occurred to increase the
value of the asset - it does not reflect any social judgement as to what is or is not improvement. We
may feel as members of society that an original forest is a better asset than a field of corn, but the
logging, clearing and access creation in economic and national accounts terms is taken as an
7. In the absence of maintenance and improvement, the produced part of land will suffer degradation over
time and can be exhausted. It follows that the normal theories linking services, capital consumption
and capital value can be applied. To establish the value of agricultural property of land, we can use the
standard relationship set out in the OECD manual on measuring capital stock. In an efficient market
the value of the produced asset can be determined by the net present value of the sum of future rentals
for agricultural use.
8. A second characteristic that land possesses is as an occupier and delineator of space. This can give rise
to a second type of payment, which is different in nature to the rental described above. It is a payment,
which reflects the right to control access to the space occupied. It is impossible to value this aspect of
territorial control by using the net present value model linking the net present value of future rentals to
the asset value. Control of the space will last as long as there is legal title. If a unit were prepared to
pay $5 a year for right of access, then for a zero discount rate, the calculated value as the sum of the
discounted flow of services would be infinite.
9. So the payment for right of access must be a payment for permission, and the market price will be
determined by competitive market factors – can the user of the permission provide a subsequent
product at a price which the market will meet? The payments for right of access do not seem to be for
a service, as there is no economic output included in Gross Domestic Product that is required to
provide the access. This suggests that the accounting treatment is to show it as a current transfer out of
income – in fact consistent with the current SNA treatment of rent for land.
10. A third aspect of land as an asset is its value as an original non-produced asset, untouched by economic
development. It is the contention of this paper that such areas of land are relatively few in number, and
can be treated as special cases. Economic value can be recognised in them through considering their
net present value as generators of income from tourism. Again this payment is for the use of an asset
not created through the normal production process, and so again should be treated as a transfer of
11. The above proposal to identify three different characteristics of land as an asset does not consider the
measurement issues. It may be extremely difficult in practice to split the value of a golf course in the
suburbs of a major city into
a) its value as a golf course, reflecting the investment and maintenance needed to allow golf to
b) its value as a potential access, in that cars driving through it may find this a very convenient route
to the heart of the city from the suburbs and pay a toll for so doing,
c) its value originating from its natural original state of rolling hills, good natural drainage, and
12. In most cases, the main value will lie in the produced asset value. For a golf course such as Saint
Andrews in Scotland, it can be argued that the value of the golf course still reflects the naturally
occurring characteristics of the original land on the site: - short grass, rolling greens, undulating
fairways etc. Such phenomena with economic value are relatively few in number. They can be treated
as special cases by inclusion in the stock of assets of the economy valued through their use as a tourist
attraction, or their harvest in the case of natural growth forests etc. Even in the case of Saint Andrews,
work in re-shaping the greens, the tees, fertilising, building drainage systems for the fairways, the
building of access roads and ancillary buildings, drainage systems, have all been such a large and
ongoing investment over the years that their contribution to the existing asset value far outweighs the
original value of the asset as a gift from nature. It is necessary to single out national parks, original
forests and other large scale natural geographical phenomena to identify significant cases of what may
still be termed non-produced tangible economic assets.
13. This however leaves the treatment of building land in the suburbs rather uncomfortably placed. The
land can command high prices due to its proximity to the city, but the allocation of value between
access, the original state of the land, and the investment necessary to allow building to take place, is
not an easy one.
14. Land can be split into three kinds of asset
− a produced tangible asset reflecting previous fixed capital formation
− a non-produced tangible asset, reflecting value due to the original non-developed state of nature,
− a non-produced intangible asset, reflecting the space occupying characteristic which allows
revenue to be raised through access permission.
15. In the case of land and buildings, they are often treated as one asset because of measurement issues
(SNA93 7.131). Similarly, for developed land it will often be appropriate to classify it under one asset
type, and this will often be that of a produced non-financial asset reflecting where the main value of the
16. We now consider the special role that government plays in the use of permissions as a means of raising
funds. In the role of regulator, the government can apply a variety of fiscal tools to regulate social and
economic activity in national territorial space. It is responsible for the administration of the national
legal system, the national tax system and has an international role in regulating access across the
borders of the territory.
17. Government can raise revenue through fiscal authority. Through a legal framework, the government
can require citizens and businesses operating on national territory to make payments to the
government. These payments are usually not requited - no direct payment for corresponding services
rendered. They can be unrequited transfers that enable the government to implement polices of
national defence, income redistribution and social and economic development and to provide or fund
18. The existence of the territorial borders sets out the limits within which the government applies the
regulatory framework. Revenue raised by government will be mainly through taxes. Some of the
taxes will reflect permission under a regulation for an activity to take place in the territory. For
example, a person or company may pay the government money for a permission to operate a vehicle
on the public roads within the territory. The granting of a licence usually evidences such permissions.
If the money raised by this permission is much more than the regulatory activity in administering the
collection system and monitoring compliance, then the licence payments are considered to be taxes.
19. This ability to raise money through permission has led to consideration of the possibility that the
licences representing the permission can be considered as intangible assets - constructs of society
which in creation cause an asset of value to be brought into being. Can these permissions for regulated
activities, be considered as economic assets?
20. Peter Hill wrote an article in a recent issue of SNA News and Notes, on the subject of the treatment of
patents governing scientific inventions, and during the article said the following:
21. "An artistic original is classified as an intangible fixed asset in the 1993 SNA and recorded under
AN.112 in the asset classification. By definition, therefore, the acquisition of an original counts as
gross fixed capital formation. Notice that the copyright does not appear anywhere in the asset
classification because the copyright is not itself an asset, being only a legal instrument providing
evidence of ownership over an asset (current authors' underlining). Any payments received by the
owner of the asset i.e. the holder of the copyright - from other units who are licensed to use the asset
are conceptually equivalent to the rentals received by owners of tangible fixed assets who lease them
22. This line of reasoning highlights that the creation of a legal instrument governing the use of assets does
not imply that the instrument itself should be treated as separate asset. The value remains in the
underlying asset, and the legal instrument determines who should be considered the "owner" from a
practical point of view. If the legal instrument, to all intents and purposes, transfers ownership of the
asset to the second party, then there is a de facto sale of the underlying asset from the first party to the
second party. Alternatively, the legal instrument may only govern the use of the underlying asset by
the second party, under conditions that reveal that the first party remains the owner of the asset in
practice as well as in legal title. In this case, the payments for the use of the asset are rentals for
produced assets, and rent for non-produced assets.
23. Consider the special case of a licence, which affords a degree of exclusive access to part, or all of the
territorial space. If we accept that the licence is an economic asset, what are the implications? The
volume of the capital services provided by the licence does not degrade over the period of the licence.
Assuming a discount rate of zero, and the licence holder expecting a service worth £1,000 each year of
a five year term, the issue price will be £5,000. If the actual payment is less than this, there will be a
competition to get licences, but if it is more, there is likely to a shortage of applicants for the licences.
Where the degree of exclusivity is fixed, but the expected economic return from holding the asset is
unknown, an auction may be held as an efficient means of determining the appropriate economic value
at issue. So it can be seen that the licence is similar to a legal instrument determining access to artistic
originals under copyright.
24. major barrier to considering the licence as an asset of value at point of issue now appears. At time of
issue, the stock of real economic assets of the territory has risen by £5,000 and yet to a visitor to the
territory there is no discernible increase. It is true that one economic unit has an advantage over others
due to the possession of a licence, but in terms of the overall economy there has been no net increase in
the flow of capital services. If we accept the licence as an asset of value, but no net increase in the
overall stock of economic assets and associated services, corresponding to the creation of the licence
asset, there must be an extinguishing of asset value elsewhere in the economy. But it is difficult to
imagine what that might be? Can we imagine that the government has an intangible asset called the
right to give permissions, which has been reduced by the issuance of a licence? What value can we put
on this right, given the opportunities to issue other licences? Could we impute a reduction in the stock
of goodwill held by other companies operating in the same field? How could we impute such a
nebulous value across the range of potential competitors?
25. Using a reductio ad absurdium approach, consider the case of government issuing monopoly rights to a
firm to trade in certain goods, in a situation where a free market has existed up to this point. This
completely exclusive licence is of immense value to the holder - say for example that only one
distributor of imported cars was allowed in a country. To the holder, the permission represented by a
certificate, a warrant, a licence, is of great value and will be reflected in the valuation of the company,
through a rise in stock value and a recognition of increase in what is termed goodwill. And it is likely
that other companies in the same business will see a corresponding decrease in the goodwill
component of their market valuation.
26. he company may chose to show the licence as an asset in the accounts, and amortise the value through
the profit and loss accounts over the term of the licence. But the fundamental barrier remains for the
national accountant. The granting of permission has not increased the stock of economic assets or
increased the corresponding flow of capital services to the territory as a whole. In fact, market
economic theory suggests a decrease in economic performance may be expected due to the
monopolistic behaviour of the holder of the licence.
27. This example suggests that the national accountant must seek another way to record the payments.
28. What is a tax? The definition is given in the SNA93 7.48:
"Taxes are compulsory unrequited payments, in cash or kind, by institutional units to government
units. They are described as unrequited because the government provides nothing in return to the
individual making the payment, although governments may use the funds raised in taxes to provide
goods or services to other units, either individually or collectively, or to the community as a whole"
29. Note that this does not stop the taxpayer benefiting from the use to which the tax is put. The
government may "promise" that money raised from road fund licences will be used to build new roads,
but their right to divert the money elsewhere demonstrates the unrequited nature of the payment.
30. If we consider current SNA guidance that fees paid for items such as a hunting licence should be
recorded as a tax, it is interesting to consider how the taxpayer views the transaction. If asked, the
hunter may feel that he has received a service for his money - the right to hunt under certain
conditions. This will feel like a service to the hunter - he or she will feel that the tax payment is
requited, and that a service fee is paid. This demonstrates that the definition of tax in the SNA93 can
be expanded as follows.
31. "Taxes are compulsory unrequited payments, in cash or kind, by institutional units to government
units. They are described as unrequited because the government provides nothing in return apart
from permission to the individual making the payment, although governments may use the funds
raised in taxes to provide goods or services to other units, either individually or collectively, or to the
community as a whole"
32. This statement is important as much for what it does not say, as for what it does. For example, it does
not say that taxes have to be determined in a special way to qualify as a tax. Auctioning permission in
order to determine a value that the market can bear, does not debar classifying the ensuing revenue
raised as a tax. The placing of a tax on a sub-set of society - say all Scotsmen living in England, makes
it an exclusive (and unfair) earner of revenue, but it remains a tax.
33. The use of the word compulsory can give rise to misunderstandings in considering how to classify
revenue payments to government. Taxes are administered by law, but taxes on product are only
compulsory in as far as a member of society chooses. For example, a person may choose to smoke and
so pay the tax on cigarettes. The payment of the tax is only compulsory if the consumer decides to buy
the product - they may choose not to and in that sense the tax is not a compulsory one. This is different
from a poll tax, where the very existence of a person creates the tax liability. Avoiding this tax would
require some very hard choices, and it may be reasonably called compulsory.
34. When licences are issued to allow units to undertake various activities, the licence payments are
classed as taxes when the payments are out of all proportion to the administrative and regulatory
functions needed to operate the tax. In theory, the payments for the service should be charged as such,
and only the excess should be classified as a tax, but this is difficult in practice and so the whole
payments are classed as taxes when the tax element is large compared to the service component.
35. The concept lying behind this is that as non-market government output is measured as the sum of the
inputs, then the value added due to the regulatory procedures will be appropriately included in
government output due to the wages and salaries paid to the workers administering the licence. This
does however raise the issue of how to treat charges for using roads and bridges, now that the capital
asset boundary for government has been enlarged to include these. If government charges a toll to use
a road or a bridge, and this toll is guaranteed to be used solely to maintain the existing capital asset,
cannot this charge be set against the capital consumption of the asset, which is already included in the
measurement of government output? In this case, the toll should not be considered as a tax, but rather
a service charge for using a government road.
36. The previous paragraph has been written rather reluctantly, as a government statistician's life can
sometime seem the rather thankless task of preventing another Ministry of Finance inspired idea to re-
label a tax as a service charge. In many democratic societies, governments wish to portray themselves
as a low tax regime. They can refer to "tax burden", the sum of all taxes administered as an
appropriate reference. This can be achieved by lowering taxes, or by increasing government revenue
through other ways such as selling of assets or administering more service fees.
37. An example is the set of recent schemes to raise revenue through a series of licences giving a form of
exclusive permission. It has been suggested that these payments are not taxes, but rather payments for
the right to carry out an activity. It is argued that these rights, embodied in the form of a licence, can
be considered constructs of society, intangible non-produced economic assets, with a finite life.
38. The first argument to be considered is the following. If the units themselves class the licences as assets
and enter them in their capital account, amortising the value though the profit and loss account until the
end of the licence, doesn't this suggest that there must be an economic asset. The asset originally
belonged to the government, which then sold it to the company? But what is this underlying asset?
There is no doubt that the ability to raise taxes is "worth something" to the government, but it cannot
be classed as an economic asset. It is simply the granting of permission associated with many other
revenue raising devices such as hunting licences. To attempt to extend the boundary of what an
economic asset is, to include government’s right to raise taxes through a series of permissions or
licences, is one step beyond useful economic theory.
39. So although companies may consider a licence or a monopolistic right as an attribute which can add
value to their company, it cannot be considered as an economic asset as there is no underlying capital
value. The owning of a licence can affect the goodwill contribution to the market value of the
company, but may not directly increase the stock of capital assets. This is different from the case of
copyrights, where there is always an underlying capital asset, and the copyright represents ownership
of the underlying asset.
40. It is proposed that the ability of governments to give permission for units to undertake special
activities, under law, is not an asset. Then it follows that payments for licences no matter how
exclusive, cannot be considered as payments for the acquisition of an economic asset, as government
stock of economic capital does not reduce as a result of the sale - permission is not an asset.
41. What if the licences are transferable - does this alter the classification of the original payment? The
answer to this must be no - the essence of the original transaction is that government is using its
regulatory function to raise revenue by giving permission on issuing the licence. The whole value of
the licence is assumed to be represented by the initial or recurring payments.
42. If this is not the case, and instead of using a market rate determinant such as an auction to determine
what the market can bear, the government sets the level by decree, then there is a good chance that the
market may be prepared to pay more for the permission. This case is well described in SNA93, when
describing the treatment of transfer of leases. Selling the lease on to a third party recognises value
separate from the payment at issue - similarly, in the case of the transfer of an exclusive licence, value
is recognised at this point and the transaction is recorded as the sale of an intangible non-produced
asset. So there is no need to record the original licence payment at point of issue as for the sale of an
asset in order to handle the consequent transfers as sales of assets in line with existing SNA 93
43. If it were accepted that all licences can never in themselves be an asset but simply represent the legal
basis by which to determine who acts as the effective owner of the underlying asset, then it can be
argued that when licences such as those for fishing rights are transferred after issue, the extra value
realised should be imputed as a payment to government with a corresponding subsidy flowing to the
original holder of the licence. This would reflect reality in that as government is no longer receiving
the revenue that the market is prepared to pay for the possession of the licence, it is effectively giving
up this revenue, in the form of a subsidy to the original owner of the licence. However, such
imputations in the national accounts must be introduced very carefully to prevent a whole new non-
cash economy being described in the national accounts, which does not reflect real transactions.
44. Casino licenses, taxi licences and a host of other revenue earners cannot be classified as sale of an
asset at point of issue by the government. If taken to the extreme, governments could significantly
increase the stock of assets of a country by the issuing of licences (bits of paper) to cover all of
commercial activity. This would be equivalent to granting monopoly production and trading rights
over a wide range of goods and services, and thereby increasing the capital stock of all non-financial
assets of the economy "at a stroke". This would be attractive to governments wishing to bolster the
recorded assets of an economy, and at the same time reducing the tax burden through the re-labelling
of taxes as sale of an asset. But it makes no economic sense to record an increase in the stock of real
assets of an economy through issue of a piece of paper – a permit.
This paper has no simple single conclusion – it raises too many unanswered questions over a range of
national accounts concepts. But in the case of issuing licences to regulate economic activity in an
economy, the following may be stated:
There are two separate cases: whether there is an underlying asset or not.
1. There is an underlying economic asset
Where a licence is issued by government governing the use of an underlying asset, then the terms of the
licence should be examined to determine whether effective ownership remains with government, or passes
to the licence holder
• When ownership stays with government, payments are rentals/rent for use of the underlying asset
• When ownership passes to the licence holder, payments are for the sale of the underlying asset
2. There is no underlying asset
• The payments are a tax.
In none of these cases is it necessary to recognise value in a new intangible non-produced asset in the form
of the licence governing the arrangement.