Mobile taxation: Surtaxes on international incoming traffic. Executive summary

Mobile taxation: Surtaxes on international incoming traffic Executive summary

Executive summary Market, regulatory and taxation pressures represen challenge for MNOs in Kenya and potentially const service investment. Taxation as a proportion of the cost of mobile phone ownership and use in Africa is amongst the highest in the world and has increased over the last five years. 1 This may increase barriers to entry into the mobile telephony market for poorer local consumers, reduce the usage of mobile services for existing consumers and reduce the efficiency benefits for local businesses. Against this background, four African countries are imposing a new additional telecommunication specific MNOs tax, in Kenya in the form operate of a in surtax a challenging on international investment inbound environment and a call termination ( SIIT ). market and regulatory pressures. Falling prices have led to decreasing A three out of four MNOs are receiving negative returns. Additional press The SIIT takes the form of an imposed fixed price that operators must charge for international inbound profitability that MNOs are facing include the high civil works costs sus termination, of which the government takes a set amount. The governments use a private party to measure sites in rural areas, unequal treatment compared to other industries with the number of international inbound minutes terminated by each operator and bill the operators as fuel, regulatory decisions affecting retail prices, as well as a high corp accordingly. The tax charges collected in this way are then shared with the private party that carries out the additional taxes on their revenues, turnover and inputs, including a new measuring function. SIIT prices are different from the competitive market prices for termination which Fund ( USF ). applied before the tax was introduced. In 2011, MNOs in Kenya will pay approximately K the government in taxes, regulatory and spectrum fe represents an increase of 33% compared to 2008. Imposition of the SIIT sets compulsory prices for international termination and is akin to imposed price fixing. This policy therefore appears inconsistent with the recent move towards liberalisation of telecommunication in Africa. The SIIT has had the following impact where it has been applied: Of particular concern to MNOs investment in the country s network are In Senegal, prices rose by 50%. A Mobile the Network network Operator inputs ( MNO ) required for in Senegal the operation noted of that mobile the network, and sp number of international call minutes terminated a way that on its may network discourage decreased investment, each month as fees while increase the tax with the number was in place. Also of concern to MNOs is a recent government s decision to create a U generation networks in Kenya. Despite MNOs contributing 0.5% of their In Ghana, prices rose by 58%. One MNO have reported reported revenues a lack from of transparency inbound traffic on fell the by fund 12% management in the and on th first six months after the SIIT was imposed. decisions, Another which MNO has reported generated a 35% significant decrease uncertainty international for their investme call minutes terminated on its network in the month after the imposition of SIIT compared to the month prior to its introduction. This operator The Kenyan also reported government an 18% has fall successfully in call minutes implemented in the six a taxation policy months after its introduction compared to benefits the six months of the mobile prior. telephony on the economy and on consumers. To to be delivered to consumers and to businesses, the government could c In Congo Brazzaville, the price of inbound from traffic a revised has risen approach by 111%. to mobile-specific Data from one MNO taxation showed and regulatory polic that inbound traffic fell by 36% between May 2009, when the tax was introduced, and May 2011. MNOs make a significant contribution to the government s tax receipts d In Gabon, prices rose by 82% when the SIIT economic was imposed climate in and August the challenging 2011. cost conditions and uncertainty un Kenya. Any further increases in this tax burden could have negative imp The main objective of this taxation is to raise revenues development, for governments, the financial this contribution case by taxing made users by MNOs calling to community p from abroad into the country. However, the government MNOs to transfers retain current approximately levels of 50% employment. of the revenue from the SIIT to the external call monitoring party. This leakage should be taken into account when assessing the effectiveness and net benefit of this tax. Download the full report: www.gsmworld.com/tax For more information, please contact: Davide Strusani Assistant Director, TMT Economic Consulting, Deloitte LLT Senior Vice President 1 From results in the forthcoming Deloitte/ Global Mobile Tax Review 2011

Figure 1 Impact of SIIT on inbound international prices and taxation pressures represent a significant s in Kenya and potentially constrain network and allenging investment environment and are subject to a number of es. Falling prices have led to decreasing ARPU levels for MNOs, and eiving negative returns. Additional pressures on investment and ing include the high civil works costs sustained by MNOs to set up atment compared to other industries with regards to input costs such ecting retail prices, as well as a high corporation tax and a range of es, turnover and inputs, including a new tax for a Universal Service Source: Deloitte analysis based on interviews with operators Kenya will pay approximately KES 41 billion to axes, regulatory and spectrum fees. This se of 33% compared to 2008. Our analysis has shown that the SIIT may create a number of unintended negative consequences for local operators, local consumers and local business in the countries where it is applied as well as in surrounding African countries. In the long term, this policy might also have negative implications for governments through impacts on economic activity, tax revenues and local employment. Our analysis has identified the investment in the country s network are custom duties applying to following key impacts and risks: r the operation of mobile network, and spectrum fees. These are set in estment, as fees increase Higher with prices the number have caused of sites a set reduction up by MNOs. in incoming call volumes: Operators have reported ecent government s decision significant to create decreases a USF in for incoming the promotion international of next calls against their forecasts as well as absolute Despite MNOs contributing decreases 0.5% in call of their volumes turnover and to revenues. the fund, Since they prices for calls into African countries from other rency on the fund management continents and are likely on the to fund s be fixed investment in the short term, operators are expecting further decreases in call significant uncertainty volumes for their as investment. operators abroad begin to react to the increased termination charges by increasing retail prices. This affects the ability of local consumers and businesses to communicate with contacts ccessfully implemented a taxation policy that has promoted the abroad. y on the economy and on consumers. To ensure that benefits continue d to businesses, the government Operators in could African consider countries the potential in the region benefits are reciprocating the higher termination prices: This bile-specific taxation and is particularly regulatory concerning policy. given that a very high proportion of outbound international calls from African countries are to other countries within Africa, estimated by operators to be 60% to 80% of the ibution to the government s tax receipts despite the current difficult total. In Congo Brazzaville, an MNO reported that operators with which they have direct enging cost conditions and uncertainty under which they operate in interconnection reacted to the SIIT by increasing the charges for termination for calls originating in this tax burden could have negative impacts on investment, product Congo Brazzaville by approximately 30%. Similarly in Senegal, an MNO reported that nine tribution made by MNOs to community projects and on the ability of operators in other African jurisdictions responded to the SIIT by increasing international termination f employment. rates from calls originating in Senegal by 23% to 80%. This may lead to higher prices for calls by local consumers to friends and family in the region and to local businesses with regional business ww.gsmworld.com/tax activities, such as sales and suppliers. ontact: mic Consulting, The price differential increases incentives for illegal traffic: The SIIT has caused a significant Gabriel disconnect Soloman between the cost and price of international call termination which presents an Senior Vice President, Public Policy opportunity for arbitrage in the affected countries 2, where illegal traffic is routed via illegal SIM boxes which channel national or international calls away from MNOs and deliver them as local calls. Operators have reported significant increases in illegal traffic since the introduction of the SIIT. This takes away revenue from operators and governments, and because illegal SIM boxes work in a way that congests a disproportionate amount of spectrum, also reduces the average quality of service for legal calls. 2 Arbitrage refers to the situation where the same good (in this case call termination in the SIIT country) can be bought at one price in one market (in this case the local termination market) and sold at a higher price in another market (in this case the international incoming call termination market).

Impacts of the SIIT can have negative economic consequences: Increased telecommunications prices increase costs for local businesses, particularly those that are service or communications specific, such as call centres. This policy also Market, risks removing regulatory the benefits and of taxation being connected pressures to the represen global information economy via undersea fibre optic cables that are now being delivered across challenge for MNOs in Kenya and potentially const Africa. An increased cost of doing business in Africa could also contribute to decreasing Africa s global competitiveness and disincentives foreign service direct investment. In turn, this would have negative implications for local governments through reductions in tax receipts. MNOs in Kenya operate in a challenging investment environment and a These key impacts and potential flow on effects market of the and introduction regulatory pressures. of the SIIT Falling are summarised prices have in led the to below decreasing A table. three out of four MNOs are receiving negative returns. Additional press profitability that MNOs are facing include the high civil works costs sus sites in rural areas, unequal treatment compared to other industries with as Implication fuel, regulatory for affected decisions parties affecting retail prices, as well as a high corp Key impact additional taxes on their revenues, turnover and inputs, including a new Local consumers Local Fund business ( USF ). Local MNOs Local government 1. Prices fixed Higher call charges Increased cost of Distortion of Reputational risk for family and friends running a business, investment In 2011, MNOs in Kenya Risk will to perception abroad where international incentives pay approximately K of willingness to Potentially receive calls are involved Distortion of abide by less remittance if Risk of the becoming government competition in taxes, regulatory international and spectrum fe family members less attractive to agreements abroad spend a higher foreign represents direct an increase of 33% compared to 2008. Risk to perception portion of income on investment, of enthusiasm for call charges particularly for international Of particular concern to MNOs investment in the country s network are Potential loss of telecommunications integration service offers such as the related network businesses inputs required for the operation Reduction of of mobile network, and sp one-net packages a way that may discourage investment, competition as fees increase with the number which allow lower cost calls when Also of concern to MNOs is a recent government s decision to create a U roaming in the region generation networks in Kenya. Despite MNOs contributing 0.5% of their 2. Reduction in Less connected - have Less integration reported in a lack of Lower transparency inbound on Less the international fund management and on th receive fewer calls the region and call volumes integration incoming calls from family and decisions, internationally which has generated significant uncertainty for their investme Lower revenue Reduction in friends abroad Decreased economic Lower economic activity, The activity Kenyan government incentives has successfully for due implemented to negative a taxation policy benefits of the mobile investment impact on business telephony on the economy and on consumers. To Reduced taxation to be delivered to consumers and to businesses, revenues the government could c from a revised approach to mobile-specific taxation and regulatory polic 3. Reciprocation of termination rates in the region 4. Increased illegal traffic Higher call costs, further decrease in contact with family and friends in reciprocating African countries Lower average call quality, increased risk of dropped calls Further increased Lower Reduced taxation cost of doing outbound call revenues business in the volumes MNOs make a significant contribution to Less the international government s tax receipts d region Lower revenue integration economic Reduced climate and the challenging cost conditions and uncertainty un Lower Reduction in Kenya. competitiveness Any further increases incentives in for this tax economic burden activity, could have negative imp development, Reduction in the financial investment contribution due made to negative by MNOs to community p demand for exports impact on business MNOs and locally to retain sold current levels of employment. goods Potential reduction Download the full report: www.gsmworld.com/tax in investment incentives For Risk more of becoming information, please contact: less attractive to Davide foreign direct Strusani Assistant investment, Director, TMT Economic Consulting, Deloitte particularly LLT for telecommunications related businesses Lower average call Reduced call quality, increased volumes risk of dropped Reduced calls revenues Further exacerbating effects described from key impacts 1,2 and 3 Distortion of investment - might have to invest in network improvements Reduced taxation revenues Less international integration Reduction in economic activity Senior Vice President

and taxation pressures represent a significant s in Kenya and potentially Key impact constrain network and Kenya will pay approximately KES 41 billion to axes, regulatory and spectrum fees. This se of 33% compared to 2008. To avoid these negative effects on local operators, local consumers and local businesses, the governments of the remaining SIIT countries could consider undertaking a comprehensive review of whether the benefits of this taxation exceed the potential negative impacts outlined above and returning to a process where prices for international termination services are allowed to be set through the interaction of operators in a competitive market. investment in the country s network are custom duties applying to r the operation of mobile network, and spectrum fees. These are set in Download the full report: www.gsmworld.com/tax estment, as fees increase with the number of sites set up by MNOs. ecent government s decision to create a USF for the promotion of next Despite MNOs contributing 0.5% of their turnover to the fund, they rency on the fund management and on the fund s investment significant uncertainty for their investment. ccessfully implemented a taxation policy that has promoted the y on the economy and on consumers. To ensure that benefits continue d to businesses, the government could consider the potential benefits bile-specific taxation and regulatory policy. ibution to the government s tax receipts despite the current difficult enging cost conditions and uncertainty under which they operate in this tax burden could have negative impacts on investment, product tribution made by MNOs to community projects and on the ability of f employment. ww.gsmworld.com/tax Implication for affected parties Local consumers Local business Local MNOs Local government earlier than otherwise allenging investment environment and are subject to a number of would have es. Falling prices have led to decreasing ARPU levels for MNOs, and eiving negative returns. The SIIT Additional potentially pressures generates on investment a number of and negative effects for local consumers, local businesses, MNOs and ing include the high governments. civil works costs In particular, sustained the by SIIT MNOs may to affect set up a significant proportion of intra-african traffic and risks a atment compared to domino other industries effect African with regards countries. to input This costs effect, such combined with an increased flow of illegal traffic, may further ecting retail prices, reduce as well demand as a high and corporation service quality tax and and a range lead to of increasing prices and the cost of doing business in the es, turnover and inputs, affected including countries. a new In the tax medium for a Universal term, the Service flow on impacts could damage employment opportunities, social cohesion, investment (particularly in communication- based business), international competitiveness, terms of trade and government tax revenues. ontact: mic Consulting, Senior Vice President, Public Policy

Market, regulatory and taxation pressures represen challenge for MNOs in Kenya and potentially const service investment. MNOs in Kenya operate in a challenging investment environment and a market and regulatory pressures. Falling prices have led to decreasing A three out of four MNOs are receiving negative returns. Additional press profitability that MNOs are facing include the high civil works costs sus sites in rural areas, unequal treatment compared to other industries with as fuel, regulatory decisions affecting retail prices, as well as a high corp additional taxes on their revenues, turnover and inputs, including a new Fund ( USF ). In 2011, MNOs in Kenya will pay approximately K the government in taxes, regulatory and spectrum fe represents an increase of 33% compared to 2008. Of particular concern to MNOs investment in the country s network are the network inputs required for the operation of mobile network, and sp a way that may discourage investment, as fees increase with the number Also of concern to MNOs is a recent government s decision to create a U generation networks in Kenya. Despite MNOs contributing 0.5% of their have reported a lack of transparency on the fund management and on th decisions, which has generated significant uncertainty for their investme The Kenyan government has successfully implemented a taxation policy benefits of the mobile telephony on the economy and on consumers. To to be delivered to consumers and to businesses, the government could c from a revised approach to mobile-specific taxation and regulatory polic MNOs make a significant contribution to the government s tax receipts economic climate and the challenging cost conditions and uncertainty u Kenya. Any further increases in this tax burden could have negative imp development, the financial contribution made by MNOs to community p MNOs to retain current levels of employment. Download the full report: www.gsmworld.com/tax For more information, please contact: For more information, please contact: Davide Strusani Assistant Director, TMT Economic Consulting, Deloitte LLT Senior Vice Presiden Davide Strusani Assistant Director, TMT Economic Consulting, Deloitte LLP Gabriel Solomon Head of Regulatory Policy gsolomon@gsm.org