Digital Inclusion & Mobile Sector Taxation in EAC

1. Digital Inclusion & Mobile Sector Taxation in EAC Shola Sanni, Policy Manager, Africa - GSMA EACO Annual Assemblies, 20-24 June 2016, Kigali, Rwanda

2. Outline • Mobile Taxes on operators in Tanzania • Other Tax Issues of Concern in Tanzania • Impact of Taxation on Tanzania Mobile Sector • Recommended Alternatives for Tanzania • Mobile Sector Taxation in Kenya • Case Studies in Kenya • Telecom Sector Taxation in Rwanda • Telecom Taxes on Consumers in Rwanda • Mobile Taxes on Operators in Rwanda • Impact of Taxation on Rwanda Mobile Sector • Recommendations for Rwanda • Impact of Balanced Taxation • Principles of Taxation Best Practice • Conclusion • About the GSMA • GSMA: Snapshot of Our Programmes • Introduction • Mobile Contributions to Africa’s Digital Economy • The Mobile Sector in Africa • Taxation on Mobile: the Issues • Taxation on Mobile: Implications for Digital Inclusion • Overview of EAC • Implications of Mobile Taxation for Digital Inclusion • Overview of the EAC • Perspective on Taxation in EAC • Mobile Sector Taxation in Tanzania • Mobile Taxes on Consumers in Tanzania

3. About the GSMA

4. GSMA: Snapshot of Our Programmes

5. Introduction

6. Mobile Contributions to Africa’s Digital Economy • Social • 5.2 million jobs supported by mobile ecosystem in Africa by end 2014 • Mid-2015: About 513 million people digitally included across Africa with mobile subscription; 142m MBB subs • Economic • Operators’ investments up to $78bn between 2015-20 • Well over $15bn raised in general taxes, not counting spectrum & license fees

7. The Mobile Sector in Africa • Year 2020 Forecasts • Africa to reach 659 million unique subs and 1.3bn connections • Broadband connections to rise from 142m in 2015 to 370m • Additional 1.9m jobs to be supported by mobile ecosystem, bringing total to 7.1m • Mobile sector contribution to GDP to rise to 8% and hit $166bn • Current Realities • Slowing subscriber growth – underscores existence of significant barriers to uptake & inclusion • Africa mobile penetration will remain lower than global average by 2020 • Costs & affordability challenges, insufficient coverage and (digital) illiteracy remain impediments to sector growth • Taxes on operators & consumers affect affordability of mobile services and incentives to invest

8. Taxation on Mobile: The Issues • High burden of taxation on mobile: an average of 29% of sector revenues in 30 markets studied by GSMA & Deloitte – GSMA Digital Inclusion & Mobile Sector Taxation Report 2016 • Sector-specific taxes on mobile creating high tax burden comparative to other sectors – an estimated of 35% of the taxes and fee payments paid by the mobile sector are mobile-specific in the 30 markets studied • Positive externalities not properly accounted for in mobile taxation policy – in some countries, taxes on mobile almost as high as “sin taxes” imposed on goods &services deemed harmful to society – e.g. tobacco & alcohol • The short term fiscal gain from additional taxes will be outweighed by the longer term socio-economic negative impact on the sector and ultimately reduction in government revenues’ (e.g. mobile payment tax on withdrawals in Tanzania) • Sector shows upward trend in taxation on mobile – faster increase than general tax burden • Complex tax and regulatory systems for mobile which create a lack of transparency & discourage investment – e.g. multiple & duplicated taxes 1% increase in the rate of tax on capital leads to 4% decrease in level of foreign direct investment (FDI)

9. Taxation on Mobile: Implications for Digital Inclusion • Trend shows consumer face higher taxation on mobile than for goods & services in many developing countries. • Total Cost of Mobile Ownership (TCMO) is negatively impacted by specific taxation on mobile, whether charged directly on consumers (e.g. tax on devices) or pass-through of operator taxes on consumers. • Taxes applied directly on mobile consumers represents 20% of TCMO in 110 countries surveyed by GSMA/Deloitte in 2015. • In 26 of surveyed countries, taxes & fees per mobile connection up to US$35.6 on average per year. High tax cost per connection hinders adoption of new technologies and discourages uptake amongst the unconnected

10. Taxation on Mobile: Implications for Digital Inclusion See more in GSMA Digital Inclusion & Mobile Sector Taxation Report 2015

11. Taxation on Mobile: Implications for Digital Inclusion (cont.d) • Sector-specific taxes and fees are not equitable as the impact falls disproportionately on lower income and rural consumers. • The poorest consumers, for whom digital access could deliver the greatest benefits, are often the most negatively affected by higher taxation. • Mobile taxes and fees alone comprise 6% of the average annual income for the poorest 20% of the population across the sample of 25 developing countries for which tax and income distribution data is available • Sector-specific taxes and fees comprise 2.3% of income for the same sample Taxation has an important impact on the affordability of mobile services, particularly for those in the “bottom of the pyramid”

12. Overview of EAC • 5 member States; population 153 million • As at YE2014 ˃4 in 10 people owned mobile phone • 3G services available in all 5 countries, 4G in only 4 • Nearly 17 million 4G connections projected by 2020 • Smartphone adoption to grow from 11% in 2014 to about 50% by 2020 • Main barriers to growth: access & affordability

13. Perspective on Taxation in EAC * * Total tax and fee payments as percentage of market revenues, 2014 * * * *

14. Mobile Sector Taxation in Tanzania • Mobile one of the most heavily taxed sectors in Tanzania: operators subject to 10 different taxes, plus regulatory fees and charges • Operators in Tanzania contribute over 11% of total tax revenues generated in Tanzania – over USD 510 million in 2014. • Consumers are subject to taxes on subscription, devices and usage – making total cost of mobile ownership (35%) comparatively high & raising the barriers to affordability • Taxes account for about 35% of cost of mobile ownership by consumers in Tanzania – on same scale as “sin taxes” imposed on services recognised to create negative social & environmental impacts (tobacco 32%, alcohol 27%, petrol 35%) High levels of mobile-specific taxation risk reducing mobile services uptake, investment & economic growth in Tanzania

15. Mobile Taxes on Consumers in Tanzania • Airtime excise of about 17% charged on calls, SMS & data in addition to 18% VAT • Monthly tax of TZS1000 in addition to VAT (being considered for re-introduction) • 10% excise tax on Mobile Money transfer fees, in addition to VAT Consumer are subjected to multiple taxes which creates barrier to affordability

16. Mobile Taxes on Operators in Tanzania Operators in Tanzania paid over USD 510 Million in taxes in the 2014/15 financial year • Corporate tax at 30% of annual profits • VAT & customs duties • Local operating levy of 0.3% of annual revenues (before tax) • Universal Service Obligation of 0.3% of annual revenues • Surcharge of 48% on international incoming call revenues Mobile-specific taxes limit digital inclusion, economic growth & investments

17. Other Tax Issues of Concern in Tanzania Availability of alternative dispute resolution mechanisms: Tax policy should incorporate avenues for mediation or arbitration, as litigated tax disputes are often protracted and create significant legal costs. International cooperation on tax administration: Local tax authorities have opportunity to increase leveraging of support & capabilities available through collaboration with international tax organisations & initiatives e.g. African Tax Administration Forum, Tax Inspectors Without Borders, the OECD, UN.

18. Impact of Taxation on Tanzania Mobile Sector • Airtime excise: Reduces digital inclusion & places larger burden on the poor, potentially excluding them from benefits of internet access • SIM card tax: Re-introduction could discourage uptake of mobile services, limiting digital inclusion • Mobile Money tax: Distortionary & regressive as it makes MM service costly and inaccessible to the poor; also discourages innovation in mobile applications • Network equipment customs duties: Removal of exemption could increase equipment costs by up to 25%, disincentivising investment and making infrastructure rollout in rural areas economically unviable • SIIT: Distortive & increases cost of trade for Tanzania businesses; discourages FDI and tax administrative model results in revenue leakage for Tanzania • Multiplicity of taxes creates additional compliance costs for operators – filing returns, attending audits & investigations,, consultancy and legal fees, etc • Inefficiencies created by multiple taxes limit mobile sector growth and realisation of positive externalities, creating risk of loss of potential revenues in future

19. Recommended Alternatives for Tanzania • Other Alternatives • Reinstate custom duty exemption to reduce network equipment cost by 15% & promote rural rollout • Rebalance taxes across the economy – towards products/services with negative externalities

20. Mobile Sector Taxation in Kenya • 25.5% of mobile operator revenues paid to government in taxes & fees • 25.2% of total cost of mobile usage made up of consumer taxes • Taxes account for about 20.5% of cost of mobile ownership by consumers in Kenya • Proposals to extend current excise duty tax to other mobile services to generate more revenue will discourage uptake of telecom services in Kenya • Need for reduction of current excise duty in interest of digital inclusion

21. Case Studies in Kenya Removal of 16% VAT on handsets Introduction of 10% MM Tax • Introduction of 10% tax on mobile payments & other financial transactions in 2012 saw 5% drop in transactions in the following 3 months • Tax on m-Pesa regarded regressive, negatively impacting rural users with no real alternatives for accessing financial services • Tax on MM limits affordability of the service and creates risk of financial exclusion for low income earners • Creates risk of slowing down growth in the service and wider mobile sector • In 2009, 16% VAT on mobile handsets was removed, contributing to over 200% increase in handset sales thereafter • Above increase led to rise in penetration from 50% to 70% - exceeding Africa average of 63% • VAT exemption helped increase access to wide range of mobile services – usage increased by 113% • Mobile-related employment grew nearly 67% while sector contribution to the economy increased by 250% in that period

22. Telecom Sector Taxation in Rwanda • The Rwandan telecom sector has shown strong growth since 2008 • GDP has sustained growth of between 7% and 8% annually since 2008 • Rwanda is rapidly catching up with other markets in Africa, with increased penetration in the internet and mobile sectors. i.e mobile, fixed & internet with penetration rates of 77%, 0.5% & 34% respectively (Source: BuddeComm based on various sources) • Mobile one is the most heavily taxed sectors in Rwanda: operators subject to 10 different taxes, plus regulatory fees and charges

23. Telecom Taxes on Consumers in Rwanda Taxes account for about 28% of the costs of mobile ownership in Rwanda Excise duty of 10% is charged on sale of Airtime, in addition to 18% VAT Consumer taxes create barrier to affordability

24. Mobile Taxes on Operators in Rwanda • Corporate tax at 30% of annual profits • VAT & customs duties • 3% of MFS revenue • 3% of Mobile and B2B Revenue net of Toll Charges • 0.10$ per minute; operators also pay a percentage on all international calls terminating on local networks • 0.02$ for calls from the EAC (Kenya, Sudan , Uganda) Mobile-specific taxes limit digital inclusion and economic growth

25. Impact of Taxation on Rwanda Mobile Sector • Airtime excise: Reduces digital inclusion & places larger burden on the poor, potentially excluding them from benefits of internet access • Network equipment customs duties: Removal of exemption could increase equipment costs by up to 25%, disincentivising investment and making infrastructure rollout in rural areas economically unviable • Multiplicity of taxes creates additional compliance costs for operators – filing returns, attending audits & investigations,, consultancy and legal fees, etc. • Inefficiencies created by multiple taxes limit mobile sector growth and realisation of positive externalities, creating risk of loss of potential revenues in future

26. Recommendations for Rwanda • Reduce specific taxation of mobile sector to promote investment & higher consumption • Reduce complexity & uncertainty of taxation systems to improve transparency and remove perception of risk to investment • Take into account effective growth of new services (such as mobile data) in applying taxation • Reduce taxation on consumer access – reflect developmental goals of digital inclusion in taxation policy for mobile

27. Impact of Balanced Taxation

28. Principles of Taxation Best Practice

29. Conclusion Alignment of the main taxes on the mobile sector with the principles of taxation Majority of mobile-specific taxes on operators and consumers do not align with taxation best practice principles Need for tax reforms to avoid distortion and eliminate risk of inhibiting sector growth and losing revenues in the long run

30. Thank you for your kind attention ssanni@gsma.com +254700655859; +2348032007272