According to the GSMA – the mobile world ecosystem association – sector-specific taxes directly impact the price of telecommunications services, and therefore become significant barriers to the adoption of mobile technology in the lower income strata, increasing the digital divide.
Commenting on the current debate on the Special Project of Citizens Safety Fund in El Salvador, Director of the GSMA Latin America Sebastian Cabello said:
“The GSMA is concerned about the imposition of a new tax defined as ‘a special contribution for Citizens Safety and Coexistence’. This will affect the acquisition and/or use of all forms of telecommunications services and the transfer of any technological device, terminal and accessory that enable telecommunication services. Mobile services contribute to positive economic growth, equity and social welfare for citizens. This tax imposition on ICT services’ users in El Salvador will directly impact the most vulnerable sectors, specifically those which use prepaid mobile services. It is also an added obstacle to digital inclusion, the growth of the mobile sector, and therefore the wider economy and digital future of El Salvador. The most important thing is that the growth rate of ICT inclusion in the country would slow down, making a larger gap in connectivity, a detriment to a more equitable society”.
“El Salvador could be left behind in the globalization of services in the Latin American region. According to GSMA Intelligence’s estimates, El Salvador currently has 9.2 million mobile connections, which represents 4.3 million unique mobile users; equivalent to 68% of its population. Today, two million people (nearly half of the users of mobile services in El Salvador) are also users of internet services –a 45% increase from two years ago. This transformation was made possible through mobile, as mobile internet connections are 7 times more than fixed internet connections. The country is still however among the lowest in internet penetration in the region, down from its neighbours Honduras, Nicaragua, Guatemala and Costa Rica. It is therefore critical that the public sector continue to generate the necessary incentives for companies to sustain investment in new generation networks, allowing the continued growth of services and promotion of connectivity for all citizens”.
“Mobile promotes genuine growth for the Latin American economy and boosts productivity and the development of the digital economy. According to the Economy of Latin America Mobile 2014 study, in 2013 the contribution of the mobile ecosystem to regional GDP reached USD 242,000 million (4.1% of GDP) and is expected to continue growing to 4.5% in 2020. This contribution is fuelled by investments made mainly by mobile operators – which contributed USD 22,000 million in 2013 – representing an accumulated investment of USD 96,000 million in the period 2008-2013. It is estimated that in the next seven years, these companies will invest over USD 193,000 million in Latin America. It should be highlighted that nearly one million Latin Americans are currently directly employed in the mobile industry, and an additional 1.2 million indirectly. Finally, this report notes that in 2013 the mobile ecosystem contributed USD 41,000 million to the public sector in taxes, not counting those expenditures for new spectrum licenses (USD 800 million in 2013 and USD 5,000 million in 2014)”.
The middle- and low-income sectors benefited the most from the growth of mobile internet connections. This can be seen in the data from the Corporación Andina de Fomento (CAF), which showed us that by 2012, 60% of Latin Americans in the three poorest income brackets used mobile services (almost 10 % more than in 2010). The role of mobile in reducing the gap in internet affordability has been crucial. PhD Raul Katz points out that this effect is the result of the continued reduction of rates every year, the flexibility in package prices, and the growth of smartphone penetration. Evidently, the tax proposed in Parliament will raise prices for services and equipment that enable efficient internet access and use, clearly affecting lower income households, and making it harder to access these technologies and services.
“Universal internet access makes countries more equitable in terms of income distribution. According to a study by the Peruvian telecommunications regulator OSIPTEL, the increase in internet access indicators could help reduce the inequity of spending among households. The report notes that the spending of a low-income family in Peru without internet is 73 soles per month, but if the same family had access to the internet, there could be an increase to 205 soles per month. This is a result of increased access to information and greater coordination within the modern sectors of the economy”.
The GSMA has an extensive international experience, and with the prestigious Deloitte have published the “Digital Inclusion and Mobile Industry Taxation 2015” report. As an outcome of this study, we believe it is important to consider the following aspects in the implementation of specific mobile service charges:
- Specific taxes and high regulatory fees have a direct impact on the price of the service and impact enrolment, especially in the lower income strata. According to the OECD, specific taxes are not justified if tax services with positive externalities as telecommunications have. The OECD further argues that the demand for services is affected by these taxes, distorting market functions.
- Many countries have adopted tax cuts as an incentive to subscribe to new services. We found several examples of tax reductions for mobile services in Latin America. According to a study by Deloitte, in 2007 and 2008 the Ecuador and Uruguay governments eliminated mobile specific service taxes, and in the following years observed an increase in the penetration and use of these services. In 2014, Brazil decided to reduce taxes on machine-to-machine (M2M) services to boost enrolment and growth.
- Sector-specific taxes tend to be counterproductive even to public funding. If consumption of mobile services slows, related tax revenues will also be affected. On the contrary, a decrease in the tax base usually promotes higher consumption, which naturally has a positive impact on revenues in the short and medium term.
The Director of the GSMA’s regional office added: “In El Salvador, for many years there was a tax on incoming international calls, which greatly affected the industry and clearly did not produce the expected results. Fortunately, this decision was revised and the tax was declared unconstitutional. Recently, the Constitutional Court of Guatemala declared a law unconstitutional which applied a tax on individual telephone lines and another on each concentrated call lines”.
It is important to remember the valuable words of the outgoing Secretary General of International Telecommunication Union (ITU), Phd Hamadoun Toure:
“It is encouraging to see that more and more tax administration agencies recognize that ICT services are different from other services due to its ability to stimulate economic growth and social development […] Governments that have pledged to follow better regulatory practices for ICTs are now reducing and even eliminating some sector-specific taxes. The ITU encourages all governments to do the same”.