Taxes Hindering Global Broadband Development

by Mary Swire, Tax-News.com, Hong Kong

22 July 2010

The GSM Association (GSMA) has issued a report which reveals how mobile sector-specific taxation impacts on the development and deployment of mobile broadband in developing countries.

The report indicates how a reduction in special taxes applied to the telecommunications sectors in countries with different taxation approaches could translate into higher mobile broadband service adoption and, thereby, additional economic growth.

It points out that inconsistencies currently exist in many developing countries between the levels of taxation levied against the mobile telecommunications industry and the reliance each of these countries place on mobile broadband to achieve broadband penetration goals.

With a widespread absence of fixed infrastructure in these markets, it says that mobile broadband will become a key social and economic development lever, driving internet connectivity and bridging the existing digital divide.

The study states that at least twenty-seven countries around the globe have special taxes focused on telecommunications services. While it agrees that it is imperative that governments apply taxes to finance spending, fiscal policies that apply a special tax to the telecommunications sector cause distortions that "crowd out" private spending.

The GSMA has compiled a database of all potential levies, both generic and sector specific, that can be imposed on mobile services. Based on a comparative analysis of approaches followed by 102 countries, four alternative mobile service taxation models have been identified.

The first, followed by China, aims to reduce taxes as much as possible to stimulate wireless adoption. This approach, the report says, attempts to harmonize the objectives of a universal service with fiscal policy, recognizing that the policy emphasis should be less on collecting revenues for the state treasury than on maximizing mobile diffusion.

Secondly, for example in South Africa, there is the approach of a high value-added tax (VAT) in order to grow tax revenues, without any wireless telecommunications sector specific taxes that could potentially introduce a sector distortion, while the third policy approach, for example in Argentina, Mexico and Brazil, combines a high VAT with sector specific levies.

The final model defines wireless communications as an attractive source of tax revenues, by combining high VAT rates, high sector specific taxes and/or a fixed levy, for example in Bangladesh and Turkey. Alternative approaches to handset taxation can include import duty on handsets as a means of generating extra tax revenue – for example, VAT with low duty (as in Mexico), or VAT with high import duty (as in Argentina).

Taking Brazil, Mexico, Bangladesh, South Africa and Malaysia as generic examples, the report calculates that every USD1 reduction in taxes in the first four of those countries would generate additional gross domestic product ranging between USD1.4 to USD12.6 through enhanced broadband uptake. Despite this, however, all four countries have implemented a taxation approach that actively reduces mobile broadband penetration by putting an economic burden on the purchase of handsets and services.

A reduction in the taxation of mobile technology to the 6.1% rate levied by Malaysia, which has a relatively benign approach to such taxation, could increase wireless penetration by between 4.6% and 24% in those other four countries.

"The findings from [the] report clearly show how distortive taxation approaches in some countries can increase the total cost of mobile ownership negatively impacting development of mobile broadband," said Tom Phillips, GSMA’s Chief Government and Regulatory Affairs Officer. "This report highlights the inconsistencies between regulations aimed at developing ICT sectors and policies that single out the services they deliver as 'cash cows' upon which taxes are levied."

"It is crucial that policy makers in these countries understand the impact mobile broadband will have on wealth creation, and align their ICT development strategies to sustain its ongoing growth," he added.

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