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Taxing telecommunications in developing countries

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Abstract

Developing countries apply numerous sector-specific taxes to telecommunications. This paper explores whether there is an economic rationale for sector-specific taxes on telecommunications and, if so, what form they should take to balance the competing goals of promoting connectivity and mobilizing revenues. A survey of the literature finds that limited competition likely creates rents that could efficiently be taxed. We look at how sector-specific taxes could best be levied in addition to standard income and value-added taxes, based on capturing rents and minimizing distortions. Taxes that target possible economic rents or profits are preferable, but their administrative challenges may necessitate reliance on service excises at the cost of higher consumer prices and lower connectivity. Taxes on capital inputs and consumer access, which distort production and restrict network access, should be avoided, as should tax incentives, which are generally not needed to attract foreign capital.

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Fig. 1

Source: World Development Indicators, GSMA

Fig. 2

Source: International Telecommunications Union

Fig. 3

Source: International Telecommunications Union

Fig. 4

Source: GSMAintelligence.com

Fig. 5

Source: Agence de Régulation des Postes et Télécommunications

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Notes

  1. Spectrum fees are charges that telecom operators pay, usually to the local telecom regulatory authority, to rent segments of the electromagnetic spectrum over which to transmit signals.

  2. Subscriber identity module (SIM) cards are the integrated circuits, or smart chips, used in Global System for Mobile Communications (GSM) phones and other devices to store the owner’s identity and contact number.

  3. 2G is distinguished from third generation (3G) and later generations (4G and 5G, now prevalent in developed countries) by the speed of transmission. 2G networks generally support voice communication and texting only; 3G and later generations allow higher-volume data transmissions, thus supporting smart phones and full Internet access.

  4. Data are from the International Telecommunications Unions and GSMA databases. For detailed data on penetration rates by country, see https://www.itu.int/en/ITU-D/Statistics/Pages/default.aspx.

  5. For a review of the literature on mobile telecommunications, see Donner (2008), Aker and Mbiti (2010), Lam and Shiu (2010), Andrianaivo and Kpodar (2012), Pradhan et al. (2014) and Kumar et al. (2015). Asongu (2015) offers a preliminary study on the relationship between cell phone use and income inequality.

  6. Following the pioneering work of Hardy (1980) on the impact of fixed lines on growth, Cronin et al. (1991) find that growth is driven by investments in telecom, as well as the reverse. Röller and Waverman (2001) use a simultaneous equation model to address this problem in a fixed-line network. Waverman et al. (2005) apply a similar model, as well as an endogenous growth model, to cell phone data, ushering in a wave of studies on cell phones and growth. See also Datta and Agarwal (2004) and Lee et al. (2012).

  7. These findings are comparable to Waverman et al. (2005), taking into account the two studies’ different measures of growth in mobile penetration rates.

  8. See Röller and Waverman (2001) for telecommunications and Lee et al. (2012) for cell phones.

  9. See, for example, Economides (1996), Rouvinen (2006), Doganoglu and Grzybowski (2007), Wu and Chu (2009), and Grajek (2003).

  10. For a thorough discussion of two-sided markets, see Evans (2003) and Rochet and Tirole (2003).

  11. See https://www.vodafone.com/what-we-do/services/m-pesa.

  12. Defined as 1 gigabyte of data, 250 min of telephony, and 100 text messages.

  13. A more detailed discussion of telecom elasticities can be found in Matheson and Petit (2017).

  14. VoIP requires a broadband (3G) connection and is therefore less widespread in lower-income countries, where affordability often limits access to 2G technology. VoIP services such as Skype, Facetime, and WhatsApp are generally referred to as “over-the-top” providers.

  15. The spectrum has numerous wavelengths, each with its own technical characteristics best suited to different types of transmission. Generally, higher frequencies have clearer reception but carry over a shorter range than lower frequencies. Given current technology, wavelengths in the 800–900 megahertz range are best suited for cell phone communications, although frequencies as high as 2+ gigahertz are sometimes used. Other wavelengths are suitable for commercial radio transmission, remote control devices (for television, garage doors, etc.), satellite communications, global positioning systems, emergency vehicles communications (police, coast guards, etc.), and other communications instruments.

  16. Some countries (e.g., India) have allowed a large number of operators to use very narrow “slices” of the cell phone compatible spectrum. Although this policy increases competition, a major drawback is that each operator has very limited space to expand services.

  17. The dominant firm is often the incumbent telecom operator, which may still be partially or fully owned by the government. See GSMAIntelligence.com for data and more details.

  18. A substantial literature reviewed in Vogelsang (2003) addresses the issue of whether price regulation is necessary to ensure reasonable network access charges. Although models suggest that market forces should usually provide for reasonable charges, access charge regulation is still not uncommon in developing countries. See GSMA (2012b).

  19. Broad-based taxation implies subjecting a clearly defined base, such as labor income, capital income, or final consumption, to uniform tax rates with few exemptions for specific activities. It does not mean that the tax base should be widened to include gross transaction values, as is the case for turnover taxes and transaction taxes, since these types of taxes cascade and cause distortions.

  20. For a detailed discussion of this issue, see https://www.oecd.org/tax/beps/.

  21. Data are for 2018 and are from the International Monetary Fund revenue database.

  22. Some countries, however, set prices administratively based on various pricing algorithms (Bauer 2003).

  23. Telecom MNEs may be better able to manage risk than some developing country governments. However, risk management may include reduced investment, resulting in higher prices and/or lower service quality.

  24. Profit and gross revenue sharing are fully analogous to CIT and service excises dealt with in the following sections.

  25. For an in-depth discussion of spectrum license valuations, see Hazlett (2008), Bazelon and McHenry (2013), and Prasad (2015).

  26. For a deeper discussion of rent taxes, see Boadway and Keen (2010) and Land (2010).

  27. Mintz (2017) notes that where both a rent tax and the standard CIT are applied, their interaction can interfere with the neutrality of the rent tax with respect to investment decisions.

  28. There are several methods for doing this (Schatan, 2012), including the payment of excessive royalties for firm-specific technology, the payment of excessive management or service fees, the over-invoicing for inputs through offshore cost centers (notably capital goods), and excessive leverage (thin capitalization).

  29. In the case of Vodafone, Indian cell phone license holder Hutchison avoided US$ 2.6 billion in capital gains tax by selling its offshore subsidiary to Vodafone, rather than directly selling the license. See IMF et al. (2017).

  30. This was the rationale for the US telephone excise introduced in 1898, which persists to this day despite now universal coverage. Cremer et al. (2001) discuss how commodity taxes can enhance progressivity under certain conditions.

  31. For a given level of service prices, both types of excise take a certain percentage of gross revenues; as prices change, however, an ad valorem excise will continue to take the same percentage, while the percentage taken by the specific excise will move inversely with prices.

  32. See, for example, Hamilton (1999) and Anderson et al. (2001).

  33. See, for example, Delipalla and Keen (1992) and Carbonnier (2014).

  34. The traffic subject to these charges is generally monitored by private engineering consulting firms which promote the tax as a business strategy and are usually paid a percentage of the revenue they collect—up to 50 percent in some cases.

  35. Although assessing the size of the illegal market is challenging, GSMA (2014) estimates that in Ghana, 10 percent of international calls were re-routed through SIM boxes. Authorities have consequently deployed sophisticated means to track SIM boxes and their owners.

  36. Handsets may also be subject to elevated customs charges.

  37. Ideally, this would be accomplished by avoiding BTTs altogether, since exempting mobile money would simply lead to base shifting, but in any event the BTT rate should be kept as low as possible to minimize financial exclusion and cascading.

  38. See Council Implementing Regulation (EU) No. 1042/2013 of October 7, 2013, amending Implementing Regulation (EU) No. 282/2011, as regards the place of supply of services, as well as OECD (2017).

  39. Some countries have applied the VAT to net international revenue (i.e., access fees charged to, minus access fees paid to foreign carriers), which amounts to applying the VAT to net exports. Given the net incoming traffic to most low-income countries, removing such practices has met with fierce resistance.

  40. The application of VAT to international calls is part of a broader debate on the taxation of e-commerce (whether goods are tangible or intangible). While the basic destination principle remains, its application is subject to significant coordination issues compounded by compliance and enforcement challenges that can only be tackled through the uniform implementation of common norms. Relying on the nationality of the SIM card in the case of telecoms, simplifying registration for non-resident traders, and reverse-charging VAT are all parts of a rapidly developing arsenal of policy and administrative tools to prevent the erosion of the tax base that accompanied the development of the digital economy. For an overview of this debate, see Hellerstein (2016) and Agrawal and Fox (2016).

  41. Most World Trade Organization members have been required to phase out export processing zones.

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Acknowledgements

The authors are grateful to many colleagues and external collaborators who commented on various versions of this paper, including anonymous reviewers, Ruud de Mooij, Michael Keen, Alex Klemm, Victoria Perry, Christophe Waerzeggers, World Bank colleagues, and others. Remaining errors and omissions are the sole responsibility of the authors.

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  1. Urban Brookings Tax Policy Center, Washington, USA

    Thornton Matheson

  2. Fiscal Affairs Department (Tax Policy Division), International Monetary Fund, Washington, USA

    Patrick Petit

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Matheson, T., Petit, P. Taxing telecommunications in developing countries. Int Tax Public Finance 28, 248–280 (2021). https://doi.org/10.1007/s10797-020-09621-6

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