New GSMA report analyzes how reforming mobile sector taxation can promote investment and drive digital inclusion in Colombia

November 15, 2016

With Realigned Tax Structure, Colombian Government Can Boost Mobile Connectivity, Increase Productivity, and Generate Economic Growth and Employment.

Bogota : Excessive tax burdens on the mobile sector create an affordability barrier for Colombians wanting to use mobile services, according to a new GSMA study developed by Deloitte. The new report, ‘Digital Inclusion and Mobile Sector Taxation in Colombia: Reforming Sector-Specific Taxes and Regulatory Fees to Drive Affordability and Investment’, noted that sector-specific taxation represented 37 per cent of mobile services’ total tax payments in Colombia during 2014; with the exception of the Dominica Republic, no other country in Latin America has a higher proportion of mobile-specific taxes1 . The report identifies a number of barriers to connectivity and wider digital inclusion, and sets out a series of options for reforming mobile sector taxation to achieve the ambitious goals of the national ‘Vive Digital’ strategy.

“By contributing US$5.7 billion to the country’s economy, almost two per cent of GDP, mobile plays a major role in the country’s development,” said Sebastián Cabello, Head of GSMA Latin America. “But a tax reform is essential in enabling the mobile industry to develop and fully deliver the benefits of digital inclusion to those Colombians still unconnected, while increasing productivity and generating employment.”

Affordability is a key challenge for the unconnected, especially for the poorest segments of the population; 49 per cent of non-users list affordability as a barrier to mobile adoption. The study’s findings underscore affordability barrier in the country and suggests that mobile taxation contributes to this barrier:

  • Traditional voice and SMS services represent 3.1 per cent of average annual income per capita, which is 47 per cent higher than the Latin American average.

  • For the poorest 20 per cent of Colombians, mobile broadband costs represent 19 per cent of their income, which is nearly four times the 5 per cent affordability threshold suggested by the Broadband Commission and ITU.

  • A basic smartphone represents six per cent of annual income for the poorest quintile, going up to approximately 24 per cent for a premium smartphone. Import duties and VAT in Colombia account for approximately 20 per cent of the cost of a handset.

In addition to general taxation, the Colombian mobile sector is subject to a number of sector-specific taxes and regulatory fees levied both on mobile consumers and operators, notably the Consumption Tax (consumers of mobile voice services in Colombia are subject to an additional four per cent tax on top of general VAT of 16 per cent) and a FONTIC (fund for information and communication technologies) contribution of 2.2 per cent of operators’ revenue. Mobile operators also face other regulatory fees, such as the regulatory commission fee and recurring annual spectrum fees.

Mobile operators paid over US$1.36 billion in taxes and regulatory fees to the government in 2014, representing over 26 per cent of their revenues. In addition, through payments made to secure spectrum, mobile operators further contributed US$400 million in the last three years alone. It is estimated that the mobile sector’s share of tax payments is over 1.3 times its share of GDP, making the sector a more than proportionate contributor to the public finances. Excessive tax burdens have adversely affected investment incentives of the sector.

The proposed Fiscal Reform bill 178/2016, presented by the Ministry of Finances to the Parliament, proposes a new levy of four per cent consumption tax on mobile internet services. This levy is likely to lead to an increase in mobile internet prices, further compounding the affordability barrier. It could also hamper the broad adoption of the service and the associated benefits, negatively affect public policy objectives driven by “Plan Vive Digital”, and discourage investments needed to expand current LTE services and future 5G technology.

Reforming Mobile Sector Taxation to Drive Growth

The study also demonstrates that, rather than imposing new levies, removing the four per cent Consumption Tax on mobile voice usage has the potential to generate an additional 440,000 connections over the four year period to 2021, 312,000 of which could be mobile broadband connections. The increase in mobile ownership and usage has the potential to increase GDP by a total of US$1.4 billion and create additional 1,200 jobs in the economy over the four years to 2021.

This approach has been undertaken with positive results in countries across Latin America. For instance, Ecuador and Uruguay, where economic inequality is lower than in Colombia, have recently seen significant expansion in mobile access as a result of removal of special taxes on mobile consumption.

To further reduce affordability barriers, the Colombian government could also consider removing VAT on mobile handsets and smartphones altogether, similar to the approach adopted for laptops and computers. Elimination of the VAT on lower-end smartphones (under 650.000 COL), proposed in the Fiscal Reform bill, is welcomed by the industry. It has the potential to enable low-income populations to access smartphones for the first time or upgrade their feature phones in order better take advantage of new digital services.

Recognizing the importance of the current revenues that the Colombian government obtains from the mobile sector-specific taxes, the study estimates the equivalent level of general taxation required if sector-specific taxes are removed. For example, the current revenues obtained by the government through the Consumption Tax on mobile voice usage amount to around 0.48 per cent of all VAT collection. Considering 2014 data on revenues collected by the government through general taxation, a static economic analysis suggests that a rise from 16 per cent to 16.08 per cent in general VAT may be sufficient to recover the tax revenues from the Consumption Tax.

“A more balanced and equitable taxation structure with a broader base has the potential to reduce the digital divide, increase economic growth and protect Colombia’s fiscal position,” concluded Cabello. “In the short term, a marginal increase in general taxes across all sectors of the economy could allow the government to collect equivalent tax revenue in a simpler and more efficient way. In the medium term, the removal of sector-specific taxes has the potential to generate more tax revenues for the government as a result of larger user bases and higher economic activity.”

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