4 considerations when taxing telecoms

Increasingly, Caribbean countries are taxing telecoms and ICT. This post examines some of the pros and cons of that approach.
Across the Caribbean, many countries have implemented some kind of tax specific to telecoms. The latest countries where it has been proposed are Barbados and Antigua and Barbuda. In most instances, the tax is levied on a specific service, such as mobile/cellular calls, either where none previously existed, or at a higher rate than what might be the norm, such as that established as Value Added Tax (VAT), or General Consumption Tax (GCT).

However, while increasingly Caribbean governments are levying taxes on telecoms services, other countries, such as the United States of America (US) are planning to eliminate those that have been implemented.  Yesterday, 11 February, the US Congress passed the Permanent Internet Tax Freedom Act (PITFA), which would prohibit states or localities from taxing Internet access, along with banning multiple or discriminatory taxes on electronic commerce (Source: US Congress).

In both the US and Caribbean scenarios there are benefits and challenges, depending on which side of the fence you sit. Below are four things to think about when telecoms (and/or ICT) services are being taxed, or taxes are being proposed.

1.  Telecoms recognised as a critical driver of economic growth and job creation

Most countries, including those in the Caribbean, have acknowledged the importance of telecoms and ICT as drivers for economic growth and job creation.  It is even part of the reason why the US is seeking to pass the PITFA.

Unlike what obtained in the past, where the public service and government-owned firms were key job creators, absorbing hundreds or even thousands of individuals, most countries have had to streamline their the size of their public sector, and rely to a considerable extent on the private sector to drive growth and create jobs. In this new dispensation, the government’s role is to create the enabling environment for the private sector to foster that growth, and telecoms and ICT are critical components in the ecosystem.

2.  A tax on telecoms can be a critical revenue earner for governments

In recent years, telecoms, especially mobile/cellular and Internet service, have become extremely popular, with strong growth in their subscriber base and increased use of their services across a broad spectrum of activities. However, worldwide, many countries have been experiencing a significant shortfall in government revenues from traditional channels. In response to this, especially in the longstanding context of slow economic growth, countries are trying to ferret out revenues from non-traditional channels, one of which is telecoms and ICT.

In the debate in the US on the PITFA, states that would be adversely affected, such as Illinois, indicated that should the law become effective, it would lose as much as USD 390 million in revenue annually (Source: Ars Technica). In the Caribbean, the sums involved might not be as large, but a tax on telecoms could be a significant contributor to a government’s coffers, to help it to cover its expenses and to provide the much-needed facilities and services to its citizens.

3.  Telecoms services are still costly in the region

Although take-up of mobile/cellular service in particular is high in the Caribbean, and that for Internet service has been growing, from our efforts to monitor the spend and affordability of telecoms services, through our annual Snapshots, the prices for telecoms service is still relatively high in the region.

In our price reviews, we exclude GCT and VAT, and so focus on what the telco charges. Hence when those taxes are added, the cost for services become even more onerous, and could be linked to the declining average revenue per user, which many firms have been reporting.

4.  Taxes can limit investment in the sector

Whilst it goes without saying that government generate much needed revenues from taxes, most tax payers see them not only as a financial burden, but also as a punitive measure to try to avoid, or at the very least, minimise. In the majority of Caribbean countries, investment in telecoms and ICT is privately driven, with firms hoping to make a decent return on their investment. When the tax burden is increased on their customers, their customers’ behaviour/use of their services tend to change – to minimise the impact – especially since prepaid services are preferred. The result is that the firms not only experience lower revenues and profits, but frequently they have to revisit their business model and consider the overall/long-term viability of their investment.

 

Image credit:  401(K) 2012 (flickr)

______________

2 Comments

  • Hi again. Thanks for that warning note. I’m not aware of that happening in the EU but this tactic is similar to that I’ve just posted on another section of Pulse regarding the creeping use of international ICT intermediaries as tax collectors

  • In fact, the derivative tax benefits ( ie the tax collected from, say, employees of Telecoms, Goods and Services Tax from devices which people have to buy to use Telecom services, and other indirect taxes arising from Telecoms etc ) are much more valuable and substantial than the direct corporate taxes under discussion.

    As a recent article in The Economist pointed out, corporate taxes are a poor way to raise revenue. In corporate tax, the burden is ultimately borne by the people ( investors, workers, consumers, etc ). Therefore, a more efficient and effective approach is to tax them ( the people ) more reasonably but directly.

    Corporate taxation rules stem from the old age of manufacturing and blue-collar operations. Applying the same principles in the age of e-commerce and intangible intellectual property is wholly counter-productive.

Comments are closed.