Changes to Mobile Sector Taxation Could Help Ecuador Increase its GDP and Connect its Digitally Excluded Faster
13 November 2018, Quito, Ecuador: Tax reforms in the mobile sector in Ecuador would significantly benefit the wider economy and promote social inclusion, according to a new report released by the GSMA. The EY-authored study, ‘Reforming mobile sector taxation in Ecuador: Unlocking economic and social benefits through tax reform in the mobile sector’, forecasts that tax reforms would boost mobile penetration in Ecuador, leading to an increase in employment, and generating higher GDP and tax revenue for the government in the medium term.
“Mobile services will play an increasingly important role in supporting Ecuador’s development, offering substantial benefits for individuals and society in areas such as financial services, health, education and entrepreneurship.,” said Lucas Gallitto, Public Policy Director Latam, GSMA. “Tax reform is the key to unlocking investment in Ecuador’s mobile networks and improving the affordability of mobile services for consumers. By accelerating the take-up of higher quality mobile broadband services we expect to see a growth in productivity across the economy, and hence an increase in GDP, household incomes, employment and industry investment.”
GSMA research shows that the mobile market in Ecuador has grown significantly over the past decade and makes an important contribution to the economy. With a population of 16.6 million, the number of mobile subscribers has grown substantially, from 6.8 million in 2008 to 11.5 million in 2018. However, the report concludes that there is still broad scope for Ecuador to increase mobile penetration, particularly through policy reform on mobile sector taxation.
A third of the population remains unconnected to a mobile network and almost 40 per cent of existing subscribers – more than 4.1 million individuals – are not connected to mobile broadband services. At present, Ecuador lags behind a number of regional peers in Latin America in terms of unique subscriber penetration and download speeds. Significant investment in mobile networks is required to improve the quality of data services and expand 4G network coverage, which would in turn help drive consumer take-up of mobile broadband services.
Benefits of Tax Reform in the Mobile Sector
Taxes on the mobile sector in Ecuador are disproportionately high compared to other countries in Latin America. In 2017, the mobile industry’s total tax contribution was estimated at $622 million, representing 30 per cent of the total market revenue. Ecuador has the highest mobile-specific tax burden in the region (at 14 per cent of total mobile sector revenue), compared to the mobile-specific tax burden in Argentina (10 per cent), Brazil (7 per cent), Colombia (4 per cent) and Uruguay (1 per cent).
The report identifies three options for tax reform on the mobile sector and their related economic benefits:
1. A reduction in recurring spectrum fees by 50 per cent would help reduce operators’ costs, with the majority of this reduction being passed onto consumers in the form of lower prices. A proportion of the tax saving would be reinvested by operators into expanding and upgrading their networks. GDP would grow by $308 million and annual tax receipts would be $39 million higher per annum by 2023 – a cumulative fiscal gain of $82 million over five years.
2. A reduction in market concentration fee by 50 per cent would also lower costs for mobile operators and incentivise increased investment. This tax is unique to Ecuador. With this change, GDP would grow by $139 million and annual tax receipts would be $14 million higher per annum by 2023, a cumulative fiscal gain of $19 million over five years.
3. The removal of the special consumption tax on mobile services provided to companies (ICE), which is charged at a rate of 15 per cent. Elimination of this tax would reduce the operational costs of any business that purchases mobile services. GDP would grow by $152 million and annual tax receipts would be $22 million higher per annum by 2023, a cumulative fiscal gain of $51 million over five years.
All reforms are expected to be self-financing in terms of their impact on government revenues in the medium term and should generate significant tax revenues by 2023.
Supporting Ecuador’s National Development Strategy
Facilitating the growth of the mobile sector aligns with the government’s broader economic and social objectives for Ecuador’s economy, which are set out in its National Development Plan for 2017-21. This includes achieving sustainable economic growth, increasing private sector investment and enhancing the role of the knowledge economy.
Gallitto added, “Now that a clear national development strategy is in place, the time is right for Ecuador to consider a more efficient way of taxing mobile services. These essential reforms will allow Ecuador to spur the growth of its digital economy and achieve the targets its set for economic growth.”