Taxing mobile connectivity in Latin America A review of mobile sector taxation and its impact on digital inclusion Copyright © 2017 GSM Association The GSMA represents the interests of mobile operators worldwide, uniting nearly 800 operators with more than 300 companies in the broader mobile ecosystem, including handset and device makers, software companies, equipment providers and internet companies, as well as organisations in adjacent industry sectors. The GSMA also produces industry-leading events such as Mobile World Congress, Mobile World Congress Shanghai, Mobile World Congress Americas and the Mobile 360 Series of conferences. 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Our team of analysts and experts produce regular thought-leading research reports across a range of industry topics. www.gsmaintelligence.com [email protected] Authors Xavier Pedros, Economist Mayuran Sivakumaran, Senior Economist Contents Executive summary 2 1 The mobile industry in Latin America 4 1.1 Access to mobile is having a transformative effect across society 4 1.2 The mobile industry makes a significant economic contribution 5 1.3 Taxation on mobile economy affects connectivity and development of mobile industry 7 2 Taxation on the mobile industry in Latin America 8 2.1 Overview of mobile taxes in the region 8 2.2 Sector-specific taxes are not aligned with best-practice principles of taxation 10 2.3 Sector-specific tax payments are a significant part of overall tax payments by the mobile sector 12 3 Taxes imposed on consumers and operators in Latin America 14 3.1 Consumer taxes and fees 14 3.2 Mobile operator taxes and fees 21 4 Mobile sector taxation and its impact on affordability 26 and investment 4.1 Affordability of mobile services is key to deliver greater connectivity 26 4.2 Taxes faced by consumers are a key determinant of affordability 31 4.3 Types of tax regime can affect investment and infrastructure development 35 5 Reforming taxation to enable connectivity and deliver growth 39 Methodology 46 TAXING MOBILE CONNECTIVITY IN LATIN AMERICA Executive summary Mobile connectivity is a key enabler of digital inclusion and economic and social development. The mobile industry in Latin America and the Caribbean contributed more than $260 billion to the regional economy in 2016. This represents 5% of the region’s total GDP and supports 1.7 million jobs. Although 300 million people – half the population – in the region subscribe to mobile internet, there is room for further growth: for comparison, 65% of the population in Europe and North America are connected to mobile internet. Consumers and operators in Latin America are subject to a substantial tax burden The positive contribution of the mobile sector to Sector-specific taxes and fees are often the driver the economy is well recognised. However, the tax of the high tax burden: for instance, sector-specific treatment of the sector is not always aligned with consumer taxes are imposed in 11 of the 20 studied best-practice principles of taxation, and may distort countries across the region and on average account for the continued development of the sector. Faced with one in five dollars spent on taxes. Action to reduce or considerable challenges in having to balance public eliminate such taxes could have a significant positive sector budgets, some governments in the region apply impact on markets with the highest tax burdens. For additional, sector-specific, taxes on consumers and example, we estimate that if such taxes were eliminated mobile operators. In 2016, the mobile sector in Latin in Jamaica, Brazil, Argentina and the Dominican America paid, on average, 25% of its revenues in the Republic, the tax burden would fall from 39% to 28% of form of taxes and regulatory fees. This figure was even market revenues on average for these countries. higher in Jamaica and Brazil, where tax payments exceeded 40% of mobile sector revenue. Taxes levied on mobile services exacerbate affordability issues, especially for those on lowest incomes The UN Broadband Commission recommends that Consumer taxes represent almost 20% of the total cost internet access should be available at no more than of mobile ownership, compared to about 10% in North 5% of a person’s monthly income. Our analysis shows America. In Brazil and the Dominican Republic, they that the total cost of mobile ownership (purchasing a account for more than 30%. Action on taxes would handset and accessing 1 GB of data per month) is more ease the burden on affordability: for the lowest 20% of than 5% across every income group in Latin America, earners in Nicaragua, Bolivia, Honduras and Venezuela, compared to 1% in Europe and North America. Access taxes incurred on the purchase of a medium basket is less affordable for those on lower incomes: for the of services would represent more than 5% of monthly lowest 20% of earners in Latin America, adopting even income. This is enough to breach the UN’s affordability the most basic mobile service would require 12% of recommendation – without even taking into account total monthly income. the price before tax of the device and service. 2 TAXING MOBILE CONNECTIVITY IN LATIN AMERICA In a challenging investment environment, high taxes can restrict investment in next-generation networks and coverage Investment in Latin America has surged ahead, with levies on operator revenues (typically 1–2%). However, more than 120 4G networks launched over the five as a revenue tax, USF contributions cause distortions years to 2016. This is against a challenging backdrop for in the market. Our research suggests that none of the operator revenues, with average revenue per connection collected funds had been spent by 2009 in five of the dropping 15% over this period. Further investment is seven countries for which data is available. These funds required over the coming years as operators expand 4G could have been spent more efficiently by operators coverage and prepare for the Internet of things (IoT) and on increasing coverage. 5G. Discriminatory sector-specific taxes, import duties on network equipment, excessive spectrum fees and tax Government efforts to improve digital transformation uncertainty will all reduce the likelihood of successful can help with the overall goal to increase internet investments as Latin America approaches the next wave access. However, it is important to match this of mobile technologies. ambition with appropriate tax policy to help with industry investment. For example, municipal taxes Governments have been keen to develop digital plans are applicable on the rental of mobile mast sites in and initiatives to expand infrastructure and inclusion. cities in Argentina, Brazil, Ecuador and Mexico. These Universal service funds (USFs) in particular have can only disincentivise the building of more mobile featured heavily in Latin America, many funded by infrastructure. Rebalancing sector-specific taxes and regulatory fees can promote connectivity, economic growth, investment and fiscal stability Analysis shows that that there would be considerable to a 3% usage tax (IEPS). If this were eliminated, the economic benefits from tax reform in several countries analysis shows that in the medium term, the number of in Latin America. The removal of sector-specific taxes connections would increase by 2.2 million, leading to a can result in increased demand for mobile services $4.5 billion increase in GDP and $1.1 billion increase in and more investment, but also overall growth in investment. Crucially, tax revenues would increase by government tax revenues over the medium term. $589 million as a result of the larger taxable base. For example, mobile services in Mexico are subject 3 TAXING MOBILE CONNECTIVITY IN LATIN AMERICA The mobile 1 industry in Latin America 1.1 Access to mobile is having a transformative effect across society Mobile connectivity can produce social and economic interact is being redefined as more people engage benefits by helping promote digital inclusion and with mobile services. With more than 5 billion unique supporting the delivery of essential services as well as subscribers worldwide, mobile is the most widespread meeting public policy objectives around healthcare, form of personal technology. education, financial services and gender equality. For these reasons, the mobile sector has become central Latin America has seen rapid growth in the number of to the international development agenda and will help mobile internet subscribers over recent years, reaching achieve the UN’s Sustainable Development Goals – a total of more than 300 million, an increase from less an ambitious 17-point plan introduced in September than 200 million at the start of 2012. Despite mobile 2015 to end poverty, combat climate change and fight internet penetration reaching around 50% during 2016, injustice and inequality by 2030. this is still well below penetration rates of 65% in Europe and North America.