Although mobile phones are ubiquitous in developed economies, penetration rates are still lagging in emerging markets, especially Africa. But the continent has come a long way from the days when telecommunications was a luxury and a mobile phone is now an essential part of the lives of individuals and their communities, offering from basic call and SMS services to the latter day 3G broadband internet.
In two decades, mobile telephony has engineered a whole new level of economic activity which has spurred growth in emerging market economies. This is in line with a recent Deloitte report which noted that, a 10% increase in mobile penetration resulted in a significant increase in per capita GDP. But this has by no means been the only dividend because through taxation, many states continually reap social and economic benefits from the industry whose copious revenues and impressive profits attract stringent tax demands from governments that have come to look on the mobile phone industry as some sort of a cash cow.
Research by Deloitte reported in the Deloitte Global Mobile Tax Review 2011, studied global taxation on the mobile phone industry and looked at tax measured as a proportion of the Total Cost of Mobile Ownership (TCMO), tax measured as a proportion of the Total Cost of Mobile Usage (TCMU), tax levied as a % of handset cost and mobile phone duties.
The global study showed Gabon had the highest tax as a share of handset costs (80%) and the state was ranked second for tax as a proportion of TCMO (37%). Furthermore, of the twenty countries which imposed duties on handsets, it was reported Niger levied the highest duties (47%).
While the approximate African average tax as a proportion of the TCMO, 18%, does not stray markedly from the global average, 19% (approx.), this assertion masks the over the top taxation by the likes of Gabon which is twice the global average. This is a similar story for the tax on handsets because both the African average (29%) and the global average (23%) are dwarfed by the Gabonese tax at 80%. This situation is by no means restricted to Gabon and other countries with similar taxation burdens from the report include DRC, Madagascar, Uganda and Tanzania.
Although it’s fair to say the study is a bit dated, it is nevertheless worth highlighting that between 2007 and 2011, tax as a % of mobile costs in African countries has been increasing. More crucially however, is the fact that penetration rates are higher in regions where tax as a % of TCMO was comparatively lower, for example, in the Asia Pacific region a lower tax as a % of TCMO is 13% and tax on handsets, 17% endows the region with higher mobile penetration rates, 75% versus Africa’s 60%.
Granted that various studies have shown links between mobile and broadband penetration rates and increases in GDP, it can be said that the high mobile tax rates reduce access and create barriers to the uptake of mobile phones. This point is buttressed by the example in Kenya, when in 2009 the 16% VAT on handsets was removed, penetration levels increased from below 50% to approximately 70% in 2011.
But, the tax on the cost of ownership and on the cost of usage, VAT and excise duties are by no means the only taxes taken out of the mobile phone industry. According to the Deloitte report, African MNOs face a plethora of fees for example, Gabon, collects Frequency and spectrum fees, numbering fees, service fees, a technology tax, and an annual license fee from revenues of MNOs. It must be noted that these are top line deductions and quite separate from what the company would pay in terms of corporation tax.
Again, it is worth noting that the mobile phone industry does not exist in isolation and therefore the taxes they come under are part of a much wider tax scheme in each state and African taxes rank some of the highest in the world. A KPMG report in 2012 notes that, while there was a drop in the average corporation and indirect taxes across the world, the African average actually increased to 29.02% and 14.57% respectively.
Yet, it’s long been recognized that lower taxation means higher corporate profits and growth to drive employment and higher wages, which in turn bring more tax revenues to the government’s treasury. While this argument has divided economists and politicians there’s no denying that almost half a century after John Cowperthwaite, Financial Secretary of Hong Kong, 1961-1971, who many have credited with Hong Kong’s low tax status, the territory continues to blossom economically and their low tax model has been copied successfully in many other Asian countries as well as in some East European countries which emerged out of communism in the ‘90s. Hong Kong has today a corporate tax rate of 16.5%. Gabon has a corporation tax rate of 35%.
The Deloitte Global Mobile Tax Review is but one argument making the case for globally competitive African tax rates – corporate taxes, labour taxes, indirect taxes etc, to drive not only adoption of technology as shown in the Kenya case, but also investment, innovation, entrepreneurship and employment, which are key pillars of a resurgent Africa.
Deloitte Global Mobile Tax Review 2011
KPMG Corporate and Indirect Tax Survey 2012