Taxing telecommunications in developing countries
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Taxing telecommunications in developing countries Thornton Matheson1 · Patrick Petit2
© Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract Developing countries apply numerous sector-specific taxes to telecommunications. This paper explores whether there is an economic rationale for sector-specific taxes on telecommunications and, if so, what form they should take to balance the competing goals of promoting connectivity and mobilizing revenues. A survey of the literature finds that limited competition likely creates rents that could efficiently be taxed. We look at how sector-specific taxes could best be levied in addition to standard income and value-added taxes, based on capturing rents and minimizing distortions. Taxes that target possible economic rents or profits are preferable, but their administrative challenges may necessitate reliance on service excises at the cost of higher consumer prices and lower connectivity. Taxes on capital inputs and consumer access, which distort production and restrict network access, should be avoided, as should tax incentives, which are generally not needed to attract foreign capital. Keywords Cell · Cellular · Phone · Telecommunications · Telecom · Tax · Rent · Regulation · Excise JEL Classification H25 · L51 · L96
1 Introduction Developing country governments tend to impose relatively heavy tax burdens on telecommunication (or “telecom”) companies, which are usually among their largest taxpayers. Telecommunications are subject not only to standard income, * Thornton Matheson [email protected] Patrick Petit [email protected] 1
Urban Brookings Tax Policy Center, Washington, USA
2
Fiscal Affairs Department (Tax Policy Division), International Monetary Fund, Washington, USA
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consumption, and trade taxes, but also to a variety of sector-specific taxes such as corporate income tax (CIT) or value-added tax (VAT) surcharges, service and handset excises, and elevated customs charges on capital equipment (Table 1). Worldwide, sector-specific taxes on telecommunications average approximately 30 percent of tax payments from the sector (GSMA 2019), but in some countries they account for more than 50 percent. In addition, there may also be substantial regulatory charges, such as operator license and spectrum fees.1 Altogether, taxes and regulatory charges on the telecom sector can yield more than one percent of gross domestic product (GDP). Developing country governments target telecommunications for sector-specific taxation for three main reasons. First, strong demand for telecom services has led to rapid sectoral growth and burgeoning revenues (Fig. 1). Second, competition is constrained due to economies of scale and the limited number of spectrum licenses available in any given market, which increase the likelihood that telecom operators earn economic profits or “rents.” Third, developing country governments tend to have relatively weak tax administrations and therefore to rely on taxes on large, form
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