The regulation of telecommunications services will be affected by the taxation of such services, whether at the federal, state or local level. The taxation of telecommunications services, the amount of taxes, and the determination of any exemptions, will depend on the particular tax laws in each country. Taxes collected from telecommunications operators and service providers are important sources of revenue to many governments, and are used for a variety of purposes, including financing the cost of regulating the sector, and helping fund universal service programs, emergency services, and services for disabled persons. However, excessive taxation of the telecommunications industry can retard competition, and discourage technological development and investment in the sector. Given the importance of the telecommunications sector, the development of adequate telecommunications infrastructure and the costs associated with such development, investment in the sector is critical. One of the main considerations for attracting investment in telecommunications infrastructure and services are the additional costs associated with the taxes levied by individual governments. Many countries, for example, offer incentives to attract foreign direct investment in the form of tax concessions, holidays and credits, export subsidies, import entitlements and accelerated depreciation.1 Some governments have created “tax-free” zones to attract investors in the telecommunications sector. Panama, for example, created a tax-free environment in the Howard Special Economic Area and the “City of Knowledge Tecnopark” as an incentive for companies to establish businesses.2
The effect of taxation on the “digital divide”, particularly in developing countries, is evident in a new study recently released by the GSM Association on the impact of taxation on mobile-phone adoption.3 The study shows that developing countries with high mobile taxes have fewer mobile telephones per person than countries with low taxes (see Figure 3-C below). The growth and demand for mobile services make taxation of handsets attractive in many countries, particularly in developing nations where taxes of mobile phones are often a main source of revenue.4 The burden of mobile phone taxes can be quite high. For example, in many countries, a value-added tax is charged, in addition to customs duties on imported handsets. Syria imposes an import duty of 45.6%, Ghana 33%, Uganda 27%, and Bangladesh USD 5 per handset. In addition, subscribers may be taxed when they sign up for services and when they make calls. For example, Turkey imposes a subscription tax of USD 24, Bangladesh USD 14, and Pakistan and Senegal USD 8. The study does not make any specific recommendations, but the research shows that eliminating all import duties and sales taxes on low-cost handsets (below USD 30) could lead to 930 million additional sales by 2010. The study also predicts that a reduction of one percentage point in sales taxes on mobile services could result in a 2% increase in mobile penetration between 2006 and 2010 in a typical developing country.5
Figure 3-C: Mobile Phone Taxes and Penetration Rate
The advance of new technologies in the telecommunications sector is also likely to impact the way countries impose telecommunications taxes. For example, as regulators define VoIP services, they must also consider the tax implications of the regulatory classification of VoIP, which could affect whether VoIP services are subject to federal, state or local taxes, whether interconnection fees apply, and whether VoIP providers are subject to universal service contributions.6
ENDNOTES
1 Asian Development Outlook 2004, Part 3: Foreign Direct Investment in Developing Asia, at 213.
2 See Business Panama at http://www.businesspanama.com/investing/opportunities/telecommunication.php.
3 Tax and the Digital Divide: How new approaches to mobile taxation can connect the unconnected, GSM Association Mobile Tax Report, 2005, [hereinafter Tax and the Digital Divide] available athttp://www.gsmworld.com/TAX/.
4 Making the Connection, The Economist, 29 September 2005.
5 Tax and the Digital Divide, at 4.
6 James E. Nason, Can You Hear Me Now? Dialing UP Taxes on VoIP, Deloitte, 2004.