Taxation and Telecommunications in Latin America.

Transcription

1 Taxation and Telecommunications in Latin America. A Report for AHCIET 12 December 2012 This Report has been prepared on the basis of the limitations set out in the engagement letter and the matters noted in the Important Notice From Deloitte on page 4. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited ( DTTL ), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of DTTL and its member firms. Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC and its registered office at 2 New Street Square, London, EC4A 3BZ, United Kingdom. Deloitte LLP is the United Kingdom member firm of DTTL Deloitte LLP

2

3 Contents Important Notice from Deloitte... 4 Executive Summary Introduction Structure of this report The economic Role of Taxation in the ICT Sector The economics of taxation The wider economic and social benefits of the ICT sector Taxation and the ICT sector ICT Taxation on Consumers Taxes on access to ICT services Taxes on ICT services Summary of impact ICT Taxation on Operators Taxes on profits Taxes on revenues and revenue-based fees One-off regulatory fees Taxes on transactions Taxes on international operations Tax policy changes and taxes misaligned to international practice Summary of impacts Deloitte LLP. 3

4 Important Notice from Deloitte This final report (the Final Report ) has been prepared by Deloitte LLP ( Deloitte ) for AHCIET in accordance with the contract with them dated 3 July 2012 ( the Contract ) and on the basis of the scope and limitations set out below. The Final Report has been prepared solely for the purposes of describing ICT-specific taxation in 11 Latin American countries and the impacts of this taxation on consumers and operators, as set out in the Contract. It should not be used for any other purpose or in any other context, and Deloitte accepts no responsibility for its use in either regard. The Final Report is provided exclusively for AHCIET s use under the terms of the Contract. No party other than AHCIET is entitled to rely on the Final Report for any purpose whatsoever and Deloitte accept no responsibility or liability or duty of care to any party other than AHCIET in respect of the Final Report or any of its contents. As set out in the Contract, the scope of our work has been limited by the time, information and explanations made available to us. The information contained in the Final Report has been obtained from AHCIET and third party sources that are clearly referenced in the appropriate sections of the Final Report. Deloitte has neither sought to corroborate this information nor to review its overall reasonableness. Further, any results from the analysis contained in the Final Report are reliant on the information available at the time of writing the Final Report and should not be relied upon in subsequent periods. Accordingly, no representation or warranty, express or implied, is given and no responsibility or liability is or will be accepted by or on behalf of Deloitte or by any of its partners, employees or agents or any other person as to the accuracy, completeness or correctness of the information contained in this document or any oral information made available and any such liability is expressly disclaimed. All copyright and other proprietary rights in the Final Report remain the property of Deloitte LLP and any rights not expressly granted in these terms or in the Contract are reserved. This Final Report and its contents do not constitute financial or other professional advice, and specific advice should be sought about your specific circumstances. In particular, the Final Report does not constitute a recommendation or endorsement by Deloitte to invest or participate in, exit, or otherwise use any of the markets or companies referred to in it. To the fullest extent possible, both Deloitte and AHCIET disclaim any liability arising out of the use (or non-use) of the Final Report and its contents, including any action or decision taken as a result of such use (or non-use) Deloitte LLP. 4

5 Executive Summary This Report describes taxation applying on consumers of ICT services and ICT operators within a sample of eleven Latin American countries ( the sample ). It also discussed the impacts of taxation in particular by considering the incidence, efficiency and equity impacts of ICT taxes. Consumption of ICT services in Latin America is subject to numerous sectorspecific taxes hitting ICT services more severely than other services Both access (devices and activation) and usage of ICT services are heavily taxed in Latin America. In addition to broad-based consumption taxes that affect all consumer purchases of goods and services (such as value added tax), in many Latin American countries ICT consumption is discriminated against by sector specific taxation. Luxury contributions as well as customs duties on ICT device imports are still in place in numerous countries. Figure 1: Key taxes on access and usage of ICT services in Latin America Tax Base Tax Type Examples Devices Sales tax Luxury contribution Customs duty 22% VAT in Uruguay 10% in Dominican Republic 20% in Brazil Activation Sales tax 18% VAT on activation in Peru, compared to standard VAT rate of 16% Services Usage Luxury contribution Sales tax 3% in Mexico 27% ICMS in Brazil, compared to standard ICMS rates of 17%, Luxury contribution Up to 5.5% in Panama Consumers in Brazil are particularly impacted by taxation on mobile, as the local equivalent of the value added tax is up to 10% higher than on other goods and services, and, as a result of how it is calculated, can represent up to 37% of a consumer telephone bill. ICT services are still classified as a luxury in Mexico, Argentina, Panama, and Dominican Republic, where consumers pay a luxury tax when purchasing ICT devices, access or services. Nine out of eleven countries in the sample still levy a customs duty on imported ICT devices, for example, levied at 16% in Argentina and 20% in Brazil. Taxes on ICT devices and services act as barriers to connectivity, especially for the poorest segments of the population The key impact of these taxes, and in particular of sector specific taxes, is to raise prices of ICT devices and usage, but other impacts are felt in terms of access, local connectivity and discrimination of ICT usage compared to other services Deloitte LLP. 5

6 Figure 2: Key impacts of ICT consumer taxes Tax Base Tax Type Impact Devices Service Activation Sales tax Luxury contribution Customs duty Sales tax Luxury contribution Higher consumer prices for devices. Consumers purchase fewer devices; access to latest technologies and services is limited, and some consumers are prevented from accessing ICT services. High taxes relative to other goods/services may indicate government wishes to discourage consumption of ICT goods/services. Latin American consumers may have particular difficulty accessing ICT devices due to lower incomes and the high cost of ICT devices relative to income. Poor consumers within each country may be barred from device access. Limit consumer access to internet. Discrimination against imported devices leads to limited availability of high-quality imported devices and latest technologies. Higher price of service access. Lower penetration of services. Luxury taxes may indicate government wishes to discourage consumption of ICT services. Latin American consumers may have particular difficulty accessing ICT services due to lower incomes. Poor consumers within each country may be barred from service access. Service Usage Sales tax Luxury contribution Higher price of service usage. Lower penetration and usage of services. Luxury taxes may indicate government wishes to discourage consumption of ICT services. Internet usage is discouraged. Latin American consumers may have particular difficulty accessing ICT services due to lower incomes. Poor consumers within each country may be especially discouraged from service usage. Discriminatory tax policies distort consumer choices. The impact of tax on raising barriers to entry in the ICT market, with impacts on connectivity, is the most concerning. The prices of ICT devices and services remain a key barrier to access and usage; for example, monthly access charges for fixed line telephony and broadband internet are often far higher in most Latin American countries than in the US after adjusting for average income. As a result, consumers are often discouraged from consumption of ICT services altogether. Tax as a proportion of handset costs in Latin America can reach up to 60% for imported handsets. The share of tax as a proportion of mobile usage costs in most of the Latin American countries reviewed (average of 20.1% in the sample) exceeds the global average (17.9%). 1 These barriers are particularly relevant given that income inequality remains significant in the region. For example, while consumers in the United States pay approximately 3% of their income for personal computers, consumers in Chile and Argentina must pay approximately 12%, and in Peru the price of a personal computer is equal to more than a third of individual income. Latin American consumers are particularly sensitive to changes in prices of ICT devices. For instance, in Colombia, a 25% price reduction led to a nearly 30% increase in computers stock. Consumers price sensitivity also means that taxation reductions, by impacting directly service prices, would help boost both access to and usage of mobile services in Latin America. In 2008, 1 Deloitte/GSMA Global Mobile Tax Review Deloitte LLP. 6

7 the government of Ecuador removed a 15% luxury tax on mobile usage and effective call prices declined by 60% in the next four years, while minutes of use per user doubled and penetration increased from 70% to 110% over the same period. In Uruguay, when an excise tax on airtime was eliminated in 2007, call prices declined by two thirds and usage more than tripled, while mobile penetration increased from 65% at the end of 2006 to 141% in Conversely, when Panama recently introduced a luxury tax on mobile usage, mobile access and penetration declined. Taxation reductions can therefore play an important role by reducing service pricing, as even small price reductions can lead to significant increases in access and usage for those consumers with very limited usage. Recognising the positive impacts of ICT devices and services, governments across the region could consider the potential to employ tax reductions on ICT consumption to enhance penetration and usage. In addition to corporation taxes, ICT operators in Latin America are often subject to revenue taxes, regulatory fees and taxes on transactions Like ICT consumers, ICT operators pay a variety of taxes, including taxes that apply generally to companies across industries and taxes that are specific to ICT operators. Figure 3: Key taxes on ICT operators Payment type and base Profits Revenues Tax Type Corporation tax Turnover tax Examples 35% in Argentina 9.25% of SIM and handset revenues, unless handset is locally assembled, in Brazil Taxes Transactions Customs duty Up to 20% of price of imported ICT equipment in Brazil and Dominican Republic Stamp duty 1% of contract value in Argentina International operations International operations tax 5% capital exit tax in Ecuador, and withholding taxes across the region One-off licence fee Fees paid to obtain concession Regulatory fees and other payments Fixed amounts Revenues One-off spectrum fee Universal Service Obligation-USO Variable licence fee 2G, 3G, 4G spectrum rights payments determined at auction 5% in Colombia 3% of operator revenues in Ecuador Variable spectrum fee Every two years, 2% of net revenues incurred in previous year in Brazil The highest corporation tax rate in the region is 35% in Argentina, almost double that of the lowest rate, 18.5% in Chile. Brazil has the second-highest rate; operators are subject to a 15% corporation tax in addition to 10% for profits above BRL 240,000 and a 9% social contribution on net profit. In Colombia, corporation taxation is charged even when operators make no profits. 2 In 2 This type of taxation is referred to as a gravamen a la renta presuntiva Deloitte LLP. 7

8 Panama, ICT operators are subject to a supranormal corporation tax rate, paying 5% more than other companies. Taxation regimes in Brazil and Argentina are made particularly severe by turnover taxes imposed on ICT operators. These taxes amount to up to 5.2% of mobile call revenues in Argentina and 3.65% in Brazil. In addition, fees paid by mobile operators for spectrum and obligations attached to spectrum usage, an essential input for the industry, can be substantial. The Brazilian government recently received over US$ 1.4 billion from the mobile operators in spectrum auction proceeds. Taxes on ICT operators create barriers to investment in Latin America s ICT networks and risk limiting the development of broadband Investment in next generation fixed and mobile networks is paramount to the region s economic development. However, taxation applying in Latin America, including sudden legislation changes that add market uncertainty, can act as a barrier to investment. Additionally, specific taxes on operators risk being ultimately passed over to consumers through higher prices, further exacerbating the effects described above. Figure 4: Key impacts of ICT operators taxes Tax Type Corporation tax Turnover tax Impact Lower post-tax returns on investments. Lower EBITDA margin, affecting equally operators with high profits and those with low profits due to recent network investments. Operators may pass taxes onto consumers in a non-transparent way, resulting in lower market volumes and higher prices. Limited service innovation due to multiple taxation (e.g. M2M). Customs duty Duty on network equipment leads to higher cost of network investment. Duty on handsets may be passed onto consumers, raising consumer prices. Operators may subsidise handset prices, leading to higher costs for operators and lower EBITDA margins, and hence reduce investment incentives. Stamp duty International operations tax One-off licence fee One-off spectrum fee Universal Service Obligation Variable licence fee Variable spectrum fee Discourages transactions. Lower resource availability for investment in networks. Lower profits, and hence lower incentive to re-invest into the business. Higher investment risk for overseas investors. Lower investment, and discourages FDI. Added investment cost leads to lower resource availability for investment in network equipment. Distortion across industries and within ICT sector due to higher costs for mobile operators. Lower profits, and hence lower incentive to re-invest into the business. Operators suffer reduced EBITDA margins or pass taxes onto consumers. Lower market volumes and higher prices. Sector specific taxation leads to distortion across industries due to higher costs for ICT industry Deloitte LLP. 8

9 USA Chile Brazil Mexico Colombia Peru Venezuela Argentina Taxation and Telecommunications in Latin America 12 December 2012 The largest concern of operators is that taxation limits investment in the ICT sector by reducing post-tax returns on investment, and by reducing the amount of capital available to operators for investment in network roll-out and upgrades. While Latin America stands to make considerable economic and social gains from continued improvements in ICT network infrastructure and service quality, telecoms investment per capita in the region lags behind investment in the United States. Supportive taxation policies that minimise disincentives for investors have the potential to boost investment in the region. For example, Chile, where taxes on operators are among the lowest in the region, has the highest level of telecommunications investment per capita across the sample. Figure 5: Total telecoms investment per capita (USD), Source: Economist Intelligence Unit 2012 Turnover taxes applying in Argentina and Brazil have the potential to be particularly distortionary. Operators can either absorb those taxes in the form of reduced profits or them onto consumers by raising retail prices. The passing on of such costs is typically done in a non-transparent way, as the tax is not itemised on the consumer s receipt unlike consumer taxes. The alternative of operators absorbing the cost of the taxes, leading to a consistent reduction in EBITDA margins, does not appear possible as competition has driven margins down over recent years and investment requirements are substantial. At a time when competition drives margins down for operators (and ARPUs in the mobile industry have declined over time), taxes on revenue erode investment returns, risking further detriment to investment Deloitte LLP. 9

10 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Taxation and Telecommunications in Latin America 12 December 2012 Figure 6: Mobile industry ARPU in Latin America, USD Argentina Bolivia Brazil Chile Colombia Dominican Republic Ecuador Honduras Mexico Panama Paraguay Peru Venezuela Source: Wireless Intelligence ICT taxes levied on operator revenue or net worth are of concern to the wider economy, as operators may seek to decrease output and raise prices as a result. As such, these taxes risk producing lower market volumes and higher prices than revenue-equivalent taxes on profits. Turnover taxes also act as a constraint on the development of new services. For instance, in Brazil, multiple turnover taxes reduce profits and margins for operators and service providers. The Brazilian Communications Minister recently criticised the complex turnover tax system applying in Brazil as irrational, highlighting that turnover taxes are often levied more than once on the same service. Positive changes have recently been witnessed in Brazil whereby, according to legislation passed in September 2012, turnover taxation on Machine to Machine services was reduced. Another key impact of operator taxation witnessed in Latin America is the incentive created for international investors to engage in foreign direct investment. Taxes that reduce investment returns and impact international transactions risk limiting both investment and FDI s associated benefits, such as the transfer of skills from a high productivity technology based sector. Data from Mexico demonstrates that the trend of FDI inflows to the telecoms sector has declined since 2001, whilst the potential exists for policy (such as a supportive withholding tax) to impact in this area Deloitte LLP. 10

11 Figure 7: Telecoms FDI inflows in Mexico Telecoms FDI (right axis, USD millions) Telecoms as percent of total FDI (left axis) 16% 14% 12% 10% 8% 6% 4% 2% 0% Source: Deloitte analysis based on OECD StatExtracts Investment may further be deterred as a result of unexpected changes in tax legislation, for example the recent introduction of luxury taxation on ICT services in Mexico and Panama. Equally, when setting one off licence fees such as spectrum fees, prices could be considered with a view of promoting service demand. High spectrum prices deter investment, and, when coupled with onerous coverage obligations, risk reducing the benefits to the economy and consumers. Latin America s tax regimes limit the social and economic benefits that the ICT sector delivers, especially through fixed and mobile broadband development and take up The ICT sector generates substantial economic and social benefits for Latin American economies. Supply-side economic benefits occur as operators and other companies in Latin America s wider ICT ecosystem generate value add and significant employment. Additional economic benefits accrue through the indirect effects of ICT on capital stock, infrastructure, information availability, and productivity. The positive growth impacts in the wider economy can exceed the direct GDP contribution of the ICT industry value chain. International evidence suggests that an increase of $1 in telecommunications output leads to an increase in US GDP by $ and that telecommunications infrastructure in the US accounted for approximately 17% of per capita GDP growth between 1971 and A Deloitte/GSMA study indicates that overall, in nine Latin American countries 5, the contribution of mobile telephony represented almost 4% of these countries GDP in 2011, having grown by over 45% compared to J.G. Sidak (2003): Is state taxation of the wireless industry counterproductive?, Criterion Economics LLC. 4 L. Röller and L. Waverman (2001): Telecommunications infrastructure and economic development: a simultaneous approach, American Economic Review 91(4): Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Panama, Peru and Uruguay 6 Deloitte/GSMA (2012): Mobile telephony and taxation in Latin America, forthcoming Deloitte LLP. 11

12 The ICT sector also plays a central role in promoting employment throughout Latin America, both directly by ICT operators and indirectly by the wider ICT ecosystem of support services. Social benefits of the ICT sector in Latin America are also substantial, as ICT drives social inclusion, digitalisation and active citizenship. Improved possibilities for health, education, dissemination of information and social cohesion are also promoted by the ICT ecosystem and new services, for examples mbanking and mpayments, can further extend these benefits. Governments apply taxation schemes on the ICT sector for a variety of purposes, including generating revenue to support general and specific government programmes, defraying the cost of regulation, and allocating scarce ICT resources among service providers. However, it is important to balance such support for expenditure against the potential for further increases in ICT penetration and service usage and the potential impacts this could have on government revenue. Recognising the positive economic and social benefits that the ICT sector brings to Latin America and the additional benefits that could be realised through increased connectivity and network enhancements, governments and regional organisations have endorsed connectivity objectives and sponsored digital inclusion plans, such as frameworks for deploying broadband networks. Through these efforts, governments aim to bridge the Digital Divide that separates low-income consumers with poor connectivity from high-income consumers with greater connectivity. Given Latin America s need for greater ICT development, tax policies that create barriers to consumption and discourage investment in the sector are inconsistent with these government objectives. If the wider economic and social benefits ( spillover effects ) that the ICT sector generates are not taken into account when setting sector specific taxation, there is a risk that policy can stagnate in a form, and at a level, where ICT usage and investment is discouraged Deloitte LLP. 12

13 Figure 8 Rationale for taxation of ICT services and implications for the ICT sector Government Rationales for Taxation Generate revenue to support government programmes through general taxes Discourage consumption of a good or service through consumer taxes Discourage production of a good or service through producer taxes Minimise tax burden on the poor and inefficiency of tax system through luxury taxes Defray cost of regulation or specific government service Implications for Taxation of ICT Sector ICT taxes lead to large tax revenue because of sector s prevalence & advanced billing systems Decreased consumption of ICT goods is an unintended consequence of consumer taxes Decreased production of ICT goods is an unintended consequence of operator taxes When ICTs were first introduced, they were considered luxuries and were subject to luxury taxes Universal service programs and ICT sector regulation are funded through ICT taxes and USO Key Economic Considerations Regarding ICT Taxes Incidence and foregone benefits due to reduced consumption and production ICT has positive economic & social benefits, so tax policy should promote consumption ICT has positive economic & social benefits, so tax policy should promote production ICT is no longer a luxury. The poor are especially harmed by reduced access to and use of ICT USO may be inefficient means of extending access to the poor, and regulatory fees burden producers. Allocate scarce resources efficiently through licensing fees Operators pay licensing fees for access to radiofrequency spectrum Licence fee payments displace investment in infrastructure and new technologies Promote local industry by discouraging imports through import duties Import duties on ICT devices and network equipment Import duties act as barrier to access for consumers and raise production costs for operators Supportive taxation policies can be an effective tool to stimulate both demand for ICT services and promote investment. As such, governments should account for the cost of foregone benefits when evaluating taxes on ICT consumers and operators, and could consider targeted tax reductions to achieve their broadband policy objectives. Positive changes have been witnessed recently on consumer taxation, whereby countries such as Ecuador and Uruguay have reduced taxes on ICT services, leading to increases in penetration and usage. In 2012, the Brazilian government has allowed a number of tax breaks on ICT devices and network investment to stimulate broadband deployment and take up Deloitte LLP. 13

14 1 Introduction This Report presents the results of research undertaken on behalf of the Asociación Iberoamericana de Centros de Investigación y Empresas de Telecomunicaciones (AHCIET) on taxation and telecommunications in 11 countries in Latin America (Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Mexico, Panama, Peru and Uruguay). It describes taxation specific to the Information and Communication Technology (ICT) industries (including fixed, mobile and broadband industries) and the impact of these taxes on consumers and operators. In particular, the research presented considers: The economic role of taxation in the ICT sector; The specific taxation regimes applied to the ICT sectors in the 11 selected Latin American countries; The impact of this taxation on consumers; and The impact of this taxation on ICT operators. The results presented in this paper are based on a review of recent publications on the economic impact of the ICT sector, on data collected from telecommunications operators in Latin America, and on data related to the ICT sector in the sample countries. In parallel, Deloitte has authored a study on the economic impact of mobile telephony in Latin America on behalf of the GSM Association 7 and research and data for both studies has been collected concordantly. The operators that participated in this study are Telefónica, America Móvil, TIM and Telecom Personal. 1.1 Structure of this report This report is structured as follows: Section 2 provides an analysis of the economic role of taxation in the ICT sector, an overview of economic principles that should be taken into account when evaluating a tax regime and a discussion of the key economic and social benefits provided by ICT services. Section 3 describes ICT consumer taxation in Latin America and presents an analysis of the impacts of ICT taxation on consumers. Section 4 describes ICT operator taxation in Latin America and the impact of ICT taxes on operators and on investment in the ICT sector. 7 Deloitte/GSMA, Mobile telephony and taxation in Latin America, forthcoming Deloitte LLP. 14

15 2 The economic Role of Taxation in the ICT Sector This section presents an overview of the economic rationale for taxes on the ICT sector as well as principles of taxation that are commonly used by economists when evaluating tax policies. The concepts outlined in this section will be used in Sections 3 and 4 to evaluate the specific taxes and fees that are applied in the sample. 2.1 The economics of taxation Governments generally levy taxes and impose fees on consumers and producers for numerous economic and social reasons, as summarised in Figure 9. Figure 9: Rationales for taxation Government Rationales for Taxation Generate revenue to support government programmes Discourage consumption of a good or service Types of Taxes All taxes, but especially high-yield taxes that are easy to collect, like VAT and customs duties Taxes on consumers Examples of Taxes VAT and corporation tax to support general budget; sales tax to support specific government programmes Taxes on goods whose consumption is considered harmful, such as tobacco Discourage production of a goodor service Taxes on producers Taxes on production inputs; pollution rights Redistribution objectives and minimise the tax burden on the poor Luxury taxes Taxes on luxury cars and jewellery Defray cost of regulation or specific government service Taxes levied on consumption or production of specific goods and services Toll on roads to offset infrastructure costs Allocate scarce resources efficiently Licensing fees Licences for and taxes on natural resource extraction Promote local industry by discouraging imports Customs duties on imports; Taxes on international transactions Duties on imported goods; withholding taxes However, the overall economic impact of a specific tax or tax structure goes beyond the government s possible rationales for levying taxes and extends to those who pay the tax (directly and indirectly) and on production and consumption in the economy. When analysing the effects of taxation, three key factors should be considered: incidence, efficiency and equity, as described in Figure Deloitte LLP. 15

16 Figure 10: Main factors to consider when analysing taxation Factors Incidence: Who pays the tax? Consumers or producers? Incidence depends on the extent to which consumers and producers are sensitive to price The rich or the poor? For equity reasons, progressive taxes (where the average tax rate increases with income) usually apply Efficiency: How does the tax affect decisions about production and consumption? Taxes raise prices for consumers. Some consumers do not purchase the good and others reduce consumption Taxes raise costs for producers. Producers receive a lower return and decrease production Equity: Who benefits from the tax? Taxes can be used to redistribute wealth from richer to poorer individuals Who benefits from government services funded by the tax? Changes in consumption and production may lead to inefficient allocation of resources and welfare losses across the economy When consumption or production of a good produces positive externalities (spillover benefits), foregone benefits due to the tax system are a cost of the tax Taxation can also impact a sector s externalities, i.e. the economic and social benefits associated with the production and consumption of certain goods and services. In this report ICT taxes are analysed with reference to these externalities, particularly given the economic and social benefits provided by the ICT sector. Given that the ICT sector is subject to specific public policies aimed at developing digitalisation and social inclusion, and in particular currently relating to the development of broadband plans, the impact of taxation on these dimensions is also considered. 2.2 The wider economic and social benefits of the ICT sector ICT penetration has increased rapidly in Latin America in recent years, due to the strong growth of mobile telephony in the region, as shown in Figure 11. While fixed telephone penetration has remained stable, mobile telephony penetration has grown significantly, more than doubling in the last six years Deloitte LLP. 16

17 Taxation and Telecommunications in Latin America 12 December 2012 Figure 11: Average ICT penetration in sample Latin American countries Average fixed (wired) Internet subscriptions per 100 inhabitants Average fixed telephone lines per 100 inhabitants Average mobile cellular telephone subscriptions per 100 inhabitants Source: ITU s World Telecommunication/ICT Indicators Database The availability of affordable handsets and the pace of market competition resulting in price reductions have allowed a greater proportion of the Latin American population, including the poorer segments, to gain access to those ICT services that were previously precluded to them. In addition, availability of internet services and increasingly broadband services (both fixed and mobile) are expanding. The combination of ICT services and the wider ecosystem of supporting services they stimulate, generate numerous economic benefits in Latin America. These include benefits to the supply-side of the economy, e.g. GDP growth and employment creation, as well effects to the demand side of the economy through improving workers productivity. In addition, a number of social benefits, from social and digital inclusion to social services promoting cohesion, are also created. Benefits to the supply-side of the economy Supply-side benefits to the economy occur through the activities of ICT operators (e.g. fixed and mobile telecom operators) as well as through the wider ICT ecosystem in each Latin American country. This wide ICT ecosystem includes the network operators, a host of providers of other support and commercial services, and formal and informal sale points, as shown in Figure Countries included are Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Mexico, Panama, Peru and Uruguay Deloitte LLP. 17

18 Figure 12: The ICT ecosystem in Latin America Airtime and device dealers: Wholesalers Operator-exclusive retailers Non-exclusive retail points such as supermarkets, technology stores Network equipment suppliers: Suppliers with local offices in Latin America Local subcontractors working on installation and maintenance Network operators: Fixed Mobile Converged Other suppliers of capital items: Computer equipment Motor vehicles Furniture and other office equipment Device importers, assemblers, dealers: International device manufacturers with offices in Latin America Importers Where applicable, local manufacturers Other service providers: Value-added services Content providers Suppliers of support services: Legal services Advertising Accounting services Other support services In addition to the GDP generated by consumer payments for ICT devices and services, ICT network operations generate expenditure within each Latin American economy, as operators investments to increase their networks (often investing in roads and electricity lines that benefit rural communities) and payments for supplies such as network equipment and devices and for support services generate GDP throughout the ecosystem. These activities create value-add, contributing to a country s GDP throughout the ecosystem. While all economic activities contribute to GDP through their value chains, economic theory also suggests several additional, indirect roles of ICT which help promote GDP growth: capital stock, infrastructure, and information availability. Capital stock is a central factor in economic growth theory as capital is a key input to production. As ICT devices and network equipment are a form of capital stock, an increase in ICT availability contributes to the economy s aggregate output. Furthermore, ICT contributes to GDP because of its role as an infrastructure provider. Telecommunications infrastructure plays a central role in promoting trade, and thus in raising GDP. Economic development literature gives particular attention to the role of infrastructure development, including telecommunications infrastructure development, in facilitating trade both within the domestic market and between international markets. Telecommunications facilitate trade by 2012 Deloitte LLP. 18

19 enhancing communication, which reduces transaction costs. 9 The World Bank highlights these trade facilitation aspects by arguing that ICT acts as a substitute for transportation in countries with limited transportation networks or high transportation costs. 10 A study on the impact of telecommunications on growth found that across 21 OECD countries from 1970 to 1990, about a third of per capita GDP growth was due to telecommunications infrastructure investments. Indeed, the study found that this impact exceeded the positive growth impact of investments in other sectors. 11 Finally, economists regard information availability as a critical factor for efficient market functioning. Economic theories state that markets function efficiently and economic welfare is maximised when all economic actors have necessary and complete information. Because ICT enables the spread of information, it promotes market functioning, potentially increasing GDP. These positive growth impacts can exceed the direct GDP contribution of the ICT industry value chain. For example, the US Bureau of Economic Analysis estimates that an increase in telecommunications output of $1 leads to an increase in US GDP by $2.51, more than twice the direct impact of the output. 12 Indeed, estimates for the US show that growth in telecommunications infrastructure caused an estimated 17% of per capita US GDP growth between 1971 and A recent Deloitte/GSMA study indicated that overall, in nine Latin American countries, the contribution of mobile telephony represented almost 4% of these countries GDP in 2011, having grown by over 45% in the last four years. 14 Employment creation Jobs are created directly by the ICT operators, through production, trade, and sales of ICT devices and services. 9 C. Milner, O. Morrissey, and E. Zgovu (2005): Trade facilitation in developing countries, Centre for Research in Economic Development and International Trade. 10 World Bank ICT Policy Division (2008): The role of mobile phones in sustainable rural poverty reduction, page L. Roller and L. Waverman (2001): Telecommunications infrastructure and economic development: a simultaneous approach, American Economic Review 96, J.G. Sidak (2003): Is state taxation of the wireless industry counterproductive?, Criterion Economics LLC. 13 L. Röller and L. Waverman (2001): Telecommunications infrastructure and economic development: a simultaneous approach, American Economic Review 91(4): Deloitte/GSMA, Mobile telephony and taxation in Latin America, forthcoming. Countries included are Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Panama, Peru and Uruguay Deloitte LLP. 19

20 Figure 13: Total direct employment by mobile operators in Latin American countries, ,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - Source: Deloitte/GSMA, Mobile telephony and taxation in Latin America, forthcoming. Additional jobs are created throughout the ICT ecosystem. For example, many international providers recognise the importance of the Latin American market and have established offices and operations in the region, e.g. network equipment providers such as Ericsson, Huawei, NSN and Alcatel Lucent, and handset producers such as Nokia, Samsung, HTC and LG have local offices in Latin America. In addition to direct local employment, these companies also contribute to increase skills and abilities of local workers through knowledge transfers from the headquarters and through training, which create positive spillovers in the local economy. New services, especially in relation to applications ( apps ) generated by broadband and by smartphones are also contributing to the creation of local app developers, who provide app services for local communities. The economic interactions between players within and outside the ICT ecosystem generate further employment across the economy, e.g. due to employees of the ICT ecosystem spending their earnings in the wider economy. ICT generates also a number of positive indirect effects to employment. While the effect of ICT services on workers productivity is discussed below, ICT technologies create jobs by giving entrepreneurs better access to markets and giving job-seekers better access to employment opportunities. Empirical evidence demonstrates the magnitude of ICT employment impacts in the US: broadband penetration increased overall employment, with a one percentage point increase in broadband penetration leading to employment increases of 0.2 to 0.3 percent per year, or about 300,000 jobs annually in the US. This positive effect was observed for both manufacturing and service industries R. Crandall, W. Lehr, and R. Litan (2008): The effects of broadband deployment on output and employment: A crosssectional analysis of U.S. data, The Brookings Institution Deloitte LLP. 20

21 Furthermore, the increasing importance of ICT in global economies means that individuals need to have access to ICT tools and services in order to participate in the digital economy. 16 A recent study demonstrates the importance of internet in overall economies across the G-20, with internet economies estimated to contribute as much as 12.4% of GDP in As the internet and other ICT-based technologies become a more important part of the economy, those without access to ICT or without ICT skills will become marginalised from jobs in a greater portion of the economy. The internet economy has also resulted important for job creation; for example, in Germany, over 80% of companies that used the internet to sell goods and services increased employment over the last three years, whereas only 50% of companies without web increased employment over the same period. 18 Productivity increases Finally, ICT is widely seen as having a key role in increasing economic growth through enhancements to the productivity of both labour and capital. 19 Figure 14: Productivity benefits of ICT Information flows Enhanced speed and quality of information flows result in reduced transaction costs to businesses, entrepreneurs, and customers. Labour enhancement Financial capital access Innovation and entrepreneurship Improved human resource qualification and specialisation. Enhanced access to financial capital with services such as mobile banking. Greater innovation and adoption of new organisational models and business processes. Facilitation of entrepreneurship and business expansion. Access to new markets. Productivity of labour and capital is enhanced A study on the impact of information networks in 93 countries on business transaction costs, information dissemination, and organisational efficiency found that information networks improve productive efficiency of resource use globally and especially in low-income countries, therefore enhancing production. The study of productivity drivers found that globally, fixed line penetration was the second most important contributor to productivity after income levels, and mobile telecommunications and internet services also reduce productive inefficiency. 20 This study was 16 Thomas Friedman (2006): The World is Flat. 17 BCG (2012): The internet economy in the G-20, page BCG (2012): The internet economy in the G-20, page OECD (2003): Seizing the benefits of ICT in a digital economy, page H.G. Thompson and C. Garbacz (2007): Mobile, fixed line and Internet service effects on global productive efficiency, Information Economics and Policy 19, p The study used data from 1995 to 2003 when mobile and internet penetration in Latin America were low and did not identify an impact of expansion of these services on efficiency Deloitte LLP. 21

22 repeated using a sample of 21 Latin American countries and found that inefficiency decreased as a result of greater fixed line penetration. 21 Social benefits of ICT In addition to the economic benefits of ICT, the ICT sector delivers numerous social benefits, which have grown significantly in Latin America in recent years as mobile technologies have extended the reach of communications to underdeveloped areas. Looking forward, further social impacts will be driven by availability of broadband services, largely via the mobile technology. The increased availability of smartphones and tablets allows services such as m-health and m-education to be provided in rural and remote areas, with significant spillovers to societies and economies. The key social benefits generated by the ICT sector are summarised in Figure 15. Figure 15: Social benefits of ICT Improved possibilities for education Enhanced technical literacy. Improved education possibilities, such as through access to information and resources over the internet, as well as educational software and applications for computers and mobile phones. Access to relevant information through communication between individuals or through software and applications that disseminate information. Mobile phones are used to disseminate health-related information such as vaccine schedules. Dissemination of useful information ICT technologies enable dissemination of locally-generated information and can be valuable in preserving and promoting local cultures. Improved quality and reach of public services, and increased government efficiency, transparency and accountability. Aiding in disaster relief through communication of risks and enabling location of individuals and resources. Social cohesion Promoting social capital and social cohesion through increased linkages. Increased equity and integration of marginalised groups. As ICT dependence increases globally and within countries, those without access are increasingly marginalised and excluded. Government objectives Given the substantial economic and social benefits delivered by the ICT sector, Latin American governments have enshrined promotion of ICT in national policy and through international organisations. For example, the Inter-American Telecommunication Commission (CITEL) brings together government and private sector stakeholders to coordinate efforts to bridge the global Digital Divide that separates countries with high digital connectivity from countries with low connectivity and to combat internal Digital Divides that separate poor and wealthy consumers within countries. At the World Summit on the Information Society in 2005, government leaders 21 H.G. Thompson and C. Garbacz (2007): Mobile, fixed line and Internet service effects on global productive efficiency, Information Economics and Policy 19, p Deloitte LLP. 22

23 agreed to ten targets, such as connecting villages, schools, governments with ICTs and ensuring that more than half the world s inhabitants have access to ICTs. Such internal divides are exacerbated by income inequality within Latin American countries, as poorer consumers may be excluded from consuming ICT services. In addition, this Digital Divide threatens to perpetrate income inequality by excluding poorer consumers from the productivity benefits of ICT services. The Gini coefficient is a frequently used measure of income dispersion; higher scores indicate greater income inequality. With coefficients as high as 57, Latin American countries are among the most unequal in the world. Figure 16: Gini coefficient of income inequality in Latin America and in selected European countries Source: World Bank and CIA World Factbook (most recent year available for each country) While notable increases in the penetration of ICT services in Latin America 22 have occurred, in a number of countries the Digital Divide continues to affect ICT access and usage, whereby segments of the population living in rural areas and with lower incomes cannot afford access to ICT services. This issue becomes particularly acute as availability of broadband, and mobile broadband in particular, could contribute to generate economic growth and employment in these underdeveloped areas. As the wider social and economic benefits of ICT positively impact incomes, productivity and social inclusion, lack of access to ICT services generates a wider set of negative economic and social consequences. 2.3 Taxation and the ICT sector While taxation is an essential source of government revenue, the ICT sector has often been subject to higher taxation than other sectors in the economy, for both consumers and operators. As 22 National governments have widely adopted plans for reducing the Digital Divide, such as the Argentinean government s National Telecommunications Plan, which has the goal of extending broadband to the whole country and reaching 10 million homes by Additionally, in November 2011, the communications ministers of UNASUR countries signed an agreement to build a fibre-optic ring linking South American countries Deloitte LLP. 23

24 discussed above, the spillover effects of such discriminatory taxation requires careful consideration. Figure 17: Rationales for and implications of ICT taxation Government Rationales for Taxation Generate revenue to support government programmes through general taxes Discourage consumption of a good or service through consumer taxes Discourage production of a good or service through producer taxes Redistribution objectives and minimise the tax burden on the poor Defray cost of regulation or specific government service Allocate scarce resources efficiently through licensing fees Promote local industry by discouraging imports through import duties Implications for Taxation of ICT Sector ICT taxes lead to large tax revenue because of sector s prevalence & advanced billing systems Decreased consumption of ICT goods is an unintended consequence of consumer taxes Decreased production of ICT goods is an unintended consequence of operator taxes When ICTs were first introduced, they were considered luxuries and were subject to luxury taxes Universal service programs and ICT sector regulation are funded through ICT taxes and USO Operators pay licensing fees for access to radiofrequency spectrum Import duties on ICT devices and network equipment Key Economic Considerations Regarding ICT Taxes Incidence and foregone benefits due to reduced consumption and production ICT has positive economic & social benefits, so tax policy should promote consumption ICT has positive economic & social benefits, so tax policy should promote production ICT is no longer a luxury. The poor are especially harmed by reduced access to and use of ICT USO may be inefficient means of extending access to the poor, and regulatory fees burden producers. Licence fees displace investment in infrastructure and new technologies and may affect retail prices Import duties act as barrier to access for consumers and raise production costs for operators Incidence, efficiency and equity of ICT taxes need to be analysed in the context of the wider welfare losses these create through potentially decreased access to and usage of ICT. The overall effect of ICT taxes on the wider economy, i.e. the effect that is not specific to either ICT consumers or producers, also needs to be taken into account when evaluating the costs and benefits of ICT taxation. Governments should account for the cost of foregone benefits when evaluating taxes on ICT consumers and operators. Indeed, due to the numerous spillover effects of the ICT sector on the wider economy, policies which encourage the sector and minimise disincentives to consumption of ICT services appear important. This structure is applied in the remainder of this report. Section 3 first describes in detail ICT consumer taxes in Latin America and then explores how taxation of the ICT sector leads to reduced access to and usage of ICT goods and services by consumers. Section 4, after describing taxation on ICT operators, discusses how taxation of ICT operators leads to sub-optimal production of ICT goods and services and investment in the ICT sector Deloitte LLP. 24