Rethinking mobile taxation to improve connectivity

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Authors Xavier Pedros, Economist Mayuran Sivakumaran, Senior Economist RETHINKING MOBILE TAXATION TO IMPROVE CONNECTIVITY

Contents

Summary 5

1 Taxation in mobile markets 10

2 payments made by mobile operators and consumers 14

3 Trends in consumer tax rates 19 3.1 Mobile-specific taxation on usage 23 3.2 Mobile-specific taxation on devices 25 3.3 Mobile-specific taxation on activation 27

4 Trends in operator tax rates 29 4.1 Mobile-specific taxation on activation 30 4.2 Universal service fund contributions 32

5 The impacts of sector-specific taxation 33 5.1 The impact of sector-specific taxation on affordability 33 5.1.1 Lack of affordability of mobile services is a connectivity barrier 33 5.1.2 Reducing sector-specific can drive more connectivity 39 5.2 The impact of sector-specific taxation on investment 43 5.2.1 Investment improves outcomes for mobile customers 43 5.2.2 Other tax factors can reduce investment levels 46 5.3 The impact of sector-specific taxation on the wider economy 47

Appendix 1 Countries included in analysis 54

Appendix 2 Estimation of total mobile tax and fee payments 56

Appendix 3 TCMO analysis 59

Appendix 4 USF rates 63 RETHINKING MOBILE TAXATION TO IMPROVE CONNECTIVITY

SUB-SAHARAN AFRICA MIDDLE EAST & NORTH AFRICA

GENERAL SECTOR-SPECIFIC GENERAL SECTOR-SPECIFIC Average tax payments as a percentage of 15% 10% 14% 10% (2017) TOTAL 26% TOTAL 24%

Percentage of countries with sector-specific 63% 56% tax (2017) �� �� Number of sector-specific increases or introductions 41 24 2011 to 2017

37% 1 GB of data

as a proportion UN AFFORDABILITY UN AFFORDABILITY of income, all TARGET 2025 5% TARGET 2025 earners (2017) 2% 2%

27% Taxes as a proportion of TCMO UN TCMO UN income, 20% AFFORDABILITY AFFORDABILITY lowest earners TARGET 2025 TARGET 2025 3% (2017) 2% 2%

2 RETHINKING MOBILE TAXATION TO IMPROVE CONNECTIVITY

ASIA PACIFIC LATIN AMERICA EUROPE

Average tax payments as a percentage of revenue (2017)

GENERAL SECTOR-SPECIFIC GENERAL SECTOR-SPECIFIC GENERAL SECTOR-SPECIFIC 14% 10% 14% 4% 17% 4%

TOTAL 24% TOTAL 18% TOTAL 21%

Percentage of countries with sector-specific tax (2017)

33% 57% 17%

Number� of sector-specific increases� or introductions� 2011 to 2017 � ���� 24 15 15

1 GB of data as a proportion of income, all earners (2017)

6% UN AFFORDABILITY UN AFFORDABILITY UN AFFORDABILITY TARGET 2025 5% TARGET 2025 TARGET 2025 2% 2% 1% 2%

Taxes as a proportion of income, 20% lowest earners (2017)

TCMO UN TCMO UN 4% TCMO UN AFFORDABILITY AFFORDABILITY AFFORDABILITY TARGET 2025 3% TARGET 2025 TARGET 2025 2% 2% 2% 0.7%

3 RETHINKING MOBILE TAXATION TO IMPROVE CONNECTIVITY

4 RETHINKING MOBILE TAXATION TO IMPROVE CONNECTIVITY Summary

Mobile is the main gateway to the internet for Mobile consumers and operators are subject to consumers in many parts of the world today, a substantial tax burden, increasingly driven by particularly in developing countries. Despite this, sector‑specific taxes governments in many of these countries are increasingly imposing – in addition to general taxes – In 2017, mobile taxes on consumers and industry sector-specific taxes on consumers of mobile services accounted for, on average, 22% of market revenue.1 and devices and on mobile operators. This poses a Almost a third of these payments are taxes specific significant risk to the growth of the services among to the mobile sector, which are levied on mobile citizens, limiting the widely acknowledged social and operators and consumers in addition to other, economic benefits associated with mobile technology. economy-wide, general taxes.

Figure 1 Consumers and operators are paying taxes in excess of 30% of market revenue in many countries General and sector-specific taxes and fees as a proportion of market revenue (2017)

Latin America 14% 4% 18%

Ecuador 16% 14% 30% LATAM 26% 13% 40%

Europe 17% 4% 21%

United Kingdom 15% 1% 16% EUROPE Denmark 22% 1% 22%

Asia Pacific 14% 10% 24%

Sri Lanka 12% 24% 35% APAC India 34% 11% 45% Middle East & North Africa 14% 10% 24%

Jordan 14% 20% 33% MENA Tunisia 24% 10% 34%

Sub-Saharan Africa 15% 10% 26%

DR Congo 33% SSA 15% 17%

Guinea 30% 31% 61%

General taxes and fees Sector-specific taxes and fees

Source: GSMA Intelligence

1 Based on our survey of mobile operators in 86 countries worldwide.

5 RETHINKING MOBILE TAXATION TO IMPROVE CONNECTIVITY

This varies significantly across regions: markets in Sector-specific taxes reduce affordability and Sub‑Saharan Africa are subject to some of the highest investment overall tax burdens, with markets there paying on average 10% of revenue as sector-specific taxes; this Affordable mobile internet access is important for can, however, be as high as 31% in Guinea. consumers and society, given its power to transform societies and modernise economies. Mobile internet In 2017, almost 1.5 billion consumers in 60 countries improves communication and access to information, were subject to sector-specific taxes when buying boosts productivity and makes markets more efficient. mobile services or devices, with a third of these in Keeping mobile internet affordable allows more people Africa and the Middle East. to start realising these benefits, and allows existing users to consume more data – with more advanced, • The number of countries where consumers pay data-intensive technologies delivering even greater sector-specific levies almost doubled between benefits. 2011 and 2017. There have been around 120 sector- specific tax-rate rises or new levies introduced The UN’s Broadband Commission recently established during this period. the “1 for 2” affordability target. This requires that 1 GB of data should cost less than 2% of monthly income • Half of the 120 sector-specific tax increases were per capita, to ensure that, by 2025, the remaining sector-specific taxes on usage, concentrated in 55% of the global population that is offline becomes Africa and the Middle East. connected. Many countries will struggle to accomplish this target: the purchase of 1 GB of data currently represents 5–37% of income in Sub-Saharan Africa, MENA, Asia-Pacific and Latin America – clearly unaffordable levels that are between 2× and 18× the threshold that the UN aims to achieve by 2025.

Figure 2 Mobile internet remains unaffordable for many users across the world Total cost of mobile ownership as a proportion of income, all earners (2017)

37%

20% Proportion of income Proportion

15%

10%

5% 6% 5% 5% UN 2025 AFFORDABILITY THRESHOLD FOR 1 GB OF DATA 2% HIGH – 5 GB MEDIUM – 1 GB, 250 MIN., 100 SMS – 500 MB LOW – 100 MB BASIC 0% 1% 1% Sub-Saharan Africa MENA Asia-Pacific Latin America Europe North America

Source: GSMA Intelligence

6 RETHINKING MOBILE TAXATION TO IMPROVE CONNECTIVITY

These affordability problems are in part explained over 2% of income) already make services unaffordable by consumers bearing an increasing tax burden. for the 1.2 billion people that represent the bottom 20% Consumer taxes were 19% of the total cost of mobile of the income pyramid – this is before even taking into ownership (TCMO) in 2017, which represents an account the actual price of the service and devices. increase since 2011 – partly driven by the numerous sector-specific tax increases. In several markets (for Reducing the cost of mobile ownership is important for example, Turkey, Congo and ) taxes account governments, as lower consumer costs are associated for more than a third of TCMO for consumers. All of with higher levels of mobile connectivity. In particular, them have sector-specific taxes in place. where the burden of tax is lower for consumers, the cost of mobile ownership is lower. For countries where Affordability can be improved by alleviating the tax taxes account for more than 3.5% of consumers’ burden faced by consumers. In Africa, Latin America, the incomes, reducing taxes could be an important Middle East and Asia-Pacific, consumer taxes alone (at strategy to improve mobile connectivity.

Figure 3 How consumer taxes increase the cost of mobile ownership and restrict mobile internet penetration Total cost of mobile ownership for 1 GB (as a proportion of income) and mobile internet penetration (2017)

100%

90%

80%

70%

Mobile internet penetration Mobile internet 60%

50%

INCREASING 40% CONSUMER TAXES

MOZAMBIQUE 30% NEPAL CÔTE SUDAN D’IVOIRE MAURITANIA SIERRA LEONE 20% CONGO ZIMBABWE ETHIOPIA UGANDA AFGHANISTAN MALAWI BURKINA FASO GUINEA MADAGASCAR CHAD DEMOCRATIC 10% REPUBLIC NIGER OF CONGO

0% 0% 20% 40% 60% 80% 100% 120% TCMO, 1 GB basket, share of income

Taxes are 0–0.5% of income Taxes are 0.5–1.5% of income Taxes are 1.5–3.5% of income Taxes are more than 3.5% of income Source: GSMA Intelligence

Investment is also hindered by sector-specific taxation mobile . Markets where consumer taxes as operators’ cash flows are reduced, making them were changed four times or more over the period more reliant on capital markets to invest. High tax 2011–2017 (for instance, Bangladesh, Brazil and Egypt) burdens on the mobile sector affect the case for have an infrastructure rating2 that is on average investment as consumers reduce their use of mobile in 17 points lower than markets where consumer taxes high-tax markets. were not changed. High tax levels and uncertainty can create poor environments for operators considering There is also a relationship between consumer tax investments in the deployment of new technologies volatility, which creates uncertainty, and the state of and networks, including 4G and 5G.

2 As measured in the GSMA Mobile Connectivity Index 2017. The infrastructure enabler score measures the availability of high-performance mobile internet coverage.

7 RETHINKING MOBILE TAXATION TO IMPROVE CONNECTIVITY

Figure 4 Markets with higher tax uncertainty score lower on infrastructure provision 2017 Infrastructure score from the GSMA Mobile Connectivity Index according to number of consumer tax changes (2011–2017) 60 50 58 56 40 46 30 41 20 10 0 Index Mobile Connectivity Score: Infrastructure Countries with Countries with Countries with Countries with no tax change 1 tax change 2 or 3 tax changes 4 or more tax changes

Source: GSMA Intelligence

Rebalancing sector-specific taxes and Reductions in sector-specific taxes can increase the regulatory fees can promote connectivity, affordability of mobile services and boost demand, economic growth, investment and fiscal which adds value to the economy through the knock- stability on impact on other industries and the increased productivity of workers with mobile connections. Sector-specific taxes do not take into account the The wider mobile industry is able to support more wider economic benefits of mobile. A strategy of tax jobs and increase investment in infrastructure, which revenue maximisation will result in countries missing has a further positive impact on the economy. GSMA out on the benefits of mobile to consumers and the studies find that demand can be stimulated to the global economy. In addition, since mobile enables point that government tax also increase in e-government services, it has a large part to play in the medium term. helping tax administrations become more efficient.

Table 1 Modelled impact of selected tax reforms after five years

ARGENTINA TUNISIA Eliminating on Removal of telecoms levy Eliminating duties mobile services (4.2%) on voice and SMS (25%) on network equipment

GDP impact + $1,830 million + $878 million + $161 million

Tax revenue impact + $980 million + $165 million + $42 million

Source: Reforming mobile sector , GSMA, EY, 2017; Reforming mobile sector taxation in Tunisia, GSMA, EY, 2018; Reforming mobile sector , GSMA, EY, 2018.

8 RETHINKING MOBILE TAXATION TO IMPROVE CONNECTIVITY

Governments across the world have recognised reforming sector-specific taxation and fees should be the importance of policies that support the ICT considered by governments, to align mobile taxation sector, resulting in digital agendas that set ambitious with that applied to other sectors and with the best connectivity objectives, often relying on mobile practices recommended by international organisations networks to fulfil them. A number of principles for such as the World Bank and IMF.

Table 2 Best-practice principles of taxation applied to the mobile sector

Taxes should be as Taxes and fees on the sector beyond general taxes distort markets and affect levels of broad based as prices and investment. Reducing these sector-specific taxes leads to increases in the possible adoption and use of mobile services. By extending the user and tax base, reductions in taxation have a positive impact on government revenues in the medium to long term. Phased reductions of sector-specific taxes and fees represent an effective way for governments to signal their support for the digital connectivity agenda and to benefit from economic growth resulting from the reductions, while limiting significant negative impact on public finances in the short term.

Tax systems should be Uncertainty over future taxation reduces investment as the risk of future tax rises simple and certain is priced into investment decisions. In addition, numerous sector-specific fees levied on different tax bases raise compliance costs for mobile operators and the tax administration. Governments should seek to limit unpredictable tax and fee changes, and streamline their levies of taxes and fees.

Taxes should One of the surest ways to lower the take-up of mobile services is to tax access to not undermine the market. Removing these taxes has the potential to increase the taxable base affordability and for the government. access to services • Luxury taxes on handsets and SIM cards, and other activation or connection charges create a direct barrier for consumers to connect and access mobile broadband, especially in developing markets and for the poorest. To enable more users to gain access to the mobile market, governments should choose to address affordability barriers caused by taxes on devices and connections. • Like any other tax that targets access, import duties applied to handsets restrict access to mobile services. Governments should align their tax policies with the WTO´s Information Technology Agreement, aimed at eliminating import duties on technology products.

Taxes should not Taxes on revenues are particularly distortive as they continue at the same level undermine investment regardless of whether the operator makes a profit or loss, or whether it is investing in new innovative networks. Moreover, when used to set up or replenish universal service funds (USFs), the frequent delays or lack of disbursement of collected levies wastes operators’ financial resources.

Spectrum should be The approach to awarding spectrum needs to balance ex-ante and ex‑post fees effectively priced in a transparent way to ensure operators do not pay twice for access to the to facilitate better same resource as this would discourage investment. By adopting a long-term quality and more perspective, setting modest reserve prices and prioritising spectrum allocation, affordable services governments and regulators can support operators in the delivery of high-quality and affordable mobile services to consumers.

Source: GSMA

9 RETHINKING MOBILE TAXATION TO IMPROVE CONNECTIVITY Taxation in 1 mobile markets

Consumers and operators are subject to mobile sector-specific taxes

Many countries impose sector-specific taxes on mobile Consumers of mobile services are taxed when buying services and devices, which consumers and operators a mobile device, activating a service and using their pay on top of general taxes. Higher taxes are typically mobile phones. imposed to discourage economic activities with a negative impact on society, such as pollution. However, • Devices are subject to general taxes such as the mobile industry induces positive economic and social value-added tax (VAT) and customs duties. Some benefits, such as the well-acknowledged productivity markets have also introduced additional sector- and economic growth that arises from the use of specific taxes such as excise taxes on the handset mobile technology.3 The introduction of these additional value or higher VAT rates for more expensive taxes may represent a constraint to many countries in handsets considered luxury goods. achieving the full benefits of mobile technology. • In some countries, on activation of their mobile services, consumers also pay general taxes such as Governments in both developed and developing VAT on the sale of a SIM card, and sector-specific markets have resorted to creating sector-specific taxes such as activation fees on SIM cards or taxes on mobile services and devices as a means connection charges. to obtain additional revenue. In developing and emerging markets, this is particularly related to the • Finally, the usage of mobile services is subject to high incidence of activity in the informal economy, general taxes, such as VAT and a General Service which makes it difficult to tax consumption of goods Tax (GST), and in some countries sector-specific and services, personal income and the activity of taxes, excise taxes or higher VAT rates. small firms. Meanwhile, the use of mobile services and Operators also face various taxes on the provision of mobile operators’ are characterised by mobile services. Aside from general taxes, such as transparent billing systems that make the industry's corporation tax, operators contribute to public funding economic activity easie