Digital inclusion and mobile sector taxation in Honduras MARCH 2016 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN HONDURAS Important Notice from Deloitte This final report (the “Final Report”) has been Accordingly, no representation or warranty, express prepared by Deloitte LLP (“Deloitte”) for the GSMA or implied, is given and no responsibility or liability on the basis of the scope and limitations set out is or will be accepted by or on behalf of Deloitte below. or by any of its partners, employees or agents or any other person as to the accuracy, completeness The Final Report has been prepared solely for the or correctness of the information contained in this purpose of assessing the economic impacts of document or any oral information made available and mobile sector taxation in Honduras by modelling the any such liability is expressly disclaimed. potential impacts that could be realised by a change in mobile taxation under a set of agreed assumptions All copyright and other proprietary rights in the Final and scenarios. 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TMT Economic Consulting, London [email protected] www.deloitte.co.uk DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN HONDURAS CONTENTS IMPORTANT NOTICE FROM DELOITTE 2 EXECUTIVE SUMMARY 4 1 THE MOBILE SECTOR IN HONDURAS 8 1.1 Mobile services are driving connectivity in Honduras 9 1.2 Mobile services promote economic and social development 10 1.3 Connectivity in Honduras: current gaps 14 2 TAXATION ON THE MOBILE SECTOR IN HONDURAS 18 2.1 Taxes on mobile consumers in Honduras 18 2.2 Taxes on mobile operators in Honduras 19 2.3 Total taxation on the mobile industry 23 2.4 Best practice in taxation policy 24 3 ECONOMIC IMPACTS OF REFORMING MOBILE TAXATION IN HONDURAS 26 3.1 How mobile taxation in Honduras impacts the economy 26 3.2 Scenario 1: Eliminating the fee on international incoming calls 29 3.3 Scenario 2: Eliminating the mobile security tax 30 3.4 Scenario 3: Eliminating the FITT contribution 31 4 MOBILE TAXATION IN HONDURAS: POTENTIAL FOR REFORM 32 4.1 Contribution to fiscal stability 33 4.2 Options to reform mobile taxation 34 APPENDIX A METHODOLOGY 36 3 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN HONDURAS Executive Summary Mobile services are driving connectivity in Honduras and delivering significant benefits for its economy Since the launch of mobile services in 1996, the mobile sector in Honduras has grown rapidly and today there are over 5.4 million users, representing 66% of the population. The mobile industry is playing a key role in delivering connectivity to Honduran households, particularly in rural and remote areas where it is difficult and more costly to develop fixed line infrastructure. Investment in mobile infrastructure in the last years has led to 3G coverage being available to 89% of the population, although only 22% of the population is currently accessing high speed mobile broadband (3G or 4G services). The use of mobile services has the potential to deliver a wide range of benefits to Honduras through promoting digital inclusion, which enables people to benefit from the exchange of information, has the potential to improve access to education, healthcare and government services, and promotes economic growth as found in studies by the World Bank. For example, mobile money services are helping to increase financial inclusion, as recognised by the sector regulator, Conatel, while SMS services are supporting farmers to receive accurate and timely information. These impacts have the potential to support the government in achieving many of its development objectives outlined in the Plan Estratégico de Gobierno 2014-2018 (Government Strategic Plan 2014-2018). Mobile and telecommunications specific taxes increase the tax burden on mobile operators and affect affordability Mobile operators in Honduras are subject to a number of telecommunications and mobile specific taxes and • An annual numbering fee set at US$ 0.03 per regulatory fees. These include: number and an international incoming calls fee at US$ 0.03 per minute. • A mobile security tax introduced in 2011 as a temporary tax, charged at a rate of 1% of gross Mobile operators paid an estimated US$ 228 million income of mobile operators. in taxes and regulatory fees to the Honduran government, which represented 23% of their market • A municipal telecoms services selective tax that is revenue in 2014. On a similar basis, the taxes and levied on telecommunication services providers at a regulatory fees levied directly on mobile operators rate of 1.8% of gross income from airtime services. comprised 14% of market revenues. • Recurring spectrum fees, where the rate is determined In addition to the taxes and regulatory fees discussed by several technical factors related to frequency and is above, in 2013, the largest mobile operators, Tigo and adjusted annually in line with inflation. Claro, paid US$ 12.1m each in an auction for 4G spectrum. • Concession and supervisory fees at the rate of 1.5% Taxes and fees imposed on the mobile sector affect and 0.5% of gross income, including a contribution affordability of mobile services for consumers. High of 1% to the universal service fund (FITT) that was levels of income inequality and the low purchasing established by the central government in 2014. power of a large proportion of Honduran households 4 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN HONDURAS mean that affordability of mobile services is a of both basic mobile services and mobile broadband significant barrier to broader uptake across the exceeds the 5% of monthly income, an affordability population of traditional mobile services and mobile threshold established by the Broadband Commission broadband. For four-fifths of the population, the cost for Sustainable Development. By transitioning to a non-distortionary tax system, the Honduran government can promote digital inclusion, economic growth and fiscal stability The mobile-specific taxes that are levied in Honduras • Eliminating the international incoming call do not appear to fully align with many of the recognised fee. Under this scenario, over the 2016-2020 period, principles of taxation outlined by organisations such as increased demand for mobile services has the the International Monetary Fund (IMF). In particular, the potential to add a cumulative 159,000 connections, of IMF recommends that taxation should be broad-based which 115,000 are 3G connections. Through the direct and account for sector and product externalities, whilst impacts of the mobile operators and the indirect taxes such as the mobile security tax are not broad- impacts generated by the activities enabled by mobile based and may lead to inefficiently low consumption and operators, increased mobile usage could lead to investment in the mobile sector, and do not account for additional GDP growth, delivering up to an additional any positive spillover effects which may be felt within the US$ 126 million, with an additional US$ 9 million in tax wider economy. revenues in 2020 alone. Discussions with Honduran mobile operators have • Eliminating the mobile security tax. Under this indicated that the mobile industry has a role in supporting scenario, increased demand for mobile services economic development, providing government revenues has the potential to add more than 26,800 extra and therefore contributing to public services. However, connections over the period 2016-2020, of which seeking to impose a greater burden of taxation on 19,400 are expected to be 3G mobile broadband mobile, whilst potentially delivering short-term benefits to connections. This could support up to an additional government revenues, could be to the detriment of long- US$ 21 million in GDP, enabling up to an additional US$ run socioeconomic development. 1 million in tax revenues to be collected through more broad-based taxation in 2020. A number of scenarios have been analysed which examine the impact of changes to mobile specific • Eliminating the FITT contribution. Under this taxation on mobile penetration, economic growth scenario, over the 2016-2020 period, increased and tax revenues. The scenarios consider the impact demand for mobile services has the potential to add of abolishing the international incoming calls fee, the a cumulative 21,000 connections, of which 15,000 abolition of the mobile security tax and the abolition are expected to be 3G mobile broadband. Increased of the FITT contribution. Across these scenarios, the mobile usage could lead to additional GDP growth, reduction of the tax burden on mobile operators has the delivering up to an additional US$ 16.5 million in potential to reduce their cost of doing business, which GDP with up to an additional US$ 0.8 million in tax could be passed through to consumers in the form of revenues in 2020.