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The taxman puts the brakes on mobile broadband in developing countries

Written by Robin Hague

It is a shaming thought. Hundreds of millions of people in the developing world prevented from working their way out of poverty because their governments see telecommunications as a cash-cow to be taxed without mercy.

Taxation is always a tension. An act of balance where governments have to harvest money to fund public services, but at the same time avoid suffocating vibrant and growing areas of the economy.

However, a report out this week from the Telecom Advisory Service in conjunction with the GSMA reveals that taxation deliberately levied at the mobile communication sector is holding back the development and penetration of mobile broadband in developing countries.

The governments of far too many countries view telecommunications as a cattle beast brimming with cash and they cannot resist milking it for all it is worth. The TAS report shows more than 25 countries around the globe have special taxes focused on telecommunications services, many on handsets and services.

The most damaging and ironic result is that these deliberately applied taxes on telecommunications are constraining the development of mobile broadband in countries where that technology could reap significant economic rewards for business, the general population and of course government.

In the developing world, where fixed telecommunications infrastructure is either non-existent or ancient and unreliable, mobile broadband is key to increasing Internet penetration, which translates into wealth creation, GDP growth and a route out of poverty for hundreds of millions.

We already know small-scale entrepreneurs in the Third World use mobiles to purchase and sell-on produce such as fish, fruits and vegetables. These handsets are often rented, the result of another innovative business model.

Namibia provides a good example of a country where a long, attritional, war of independence left virtually no established telecommunications infrastructure. Post-1990, the country developed a sophisticated mobile and Internet strategy, with even the most remote towns boasting Internet facilities and the whole country enjoying unrivalled mobile reception. Apple’s iPhone 4 would work very well in Namibia.

Mobile broadband is the next step for all of these countries, with OECD and other reports showing a direct correlation between Internet penetration and growth in GDP, from which springs better education, healthcare, women’s and children’s rights, transport, political freedoms and an improved and more secure sense of nationhood. Prosperity and peace.

Yet the TAS report reveals how mobile sector specific taxation is holding back this development, robbing the population of all the benefits: “as [the] report reveals, every dollar reduced in taxes across Brazil, Mexico, Bangladesh and South Africa will generate additional GDP ranging between US$1.4 to US$12.6 through enhanced broadband uptake.

“Despite this however, all four countries have implemented a taxation approach that actively reduces Mobile Broadband penetration by putting an economic burden on the purchase of handsets and services.”

The report points out that fiscal policies that apply a special tax to the telecommunications sector cause distortions that frighten off private investment, creating even bigger holes in the finances needed to fund increased broadband penetration.

"The findings clearly show how distortive taxation approaches in some countries can increase the Total Cost of Mobile Ownership (TCMO), negatively impacting development of Mobile Broadband," said Tom Phillips, Chief Government and Regulatory Affairs Officer at the GSMA.

"This report highlights the inconsistencies between regulations aimed at developing ICT (information and communications technology) sectors and policies that single out the services they deliver as "cash cows" upon which taxes are levied.

"It is crucial that policy makers in these countries understand the impact Mobile Broadband will have on wealth creation, and align their ICT development strategies to sustain its ongoing growth", said Mr. Phillips.

The developing world has a long way to go to reach the Internet penetration levels enjoyed in much of the First World. For example the Netherlands and Denmark can both boast 37 broadband Internet subscribers per 100 members of the population. The UK has 29 and the US 26.

That said, and as we report elsewhere, mobile broadband is seen as a key Internet carrier into remote First World communities, such as rural America. Many developed countries are using telecommunication-specific taxes to help fund increased Internet penetration. However, the taxation is minimal and is matched with massive public funding.

The gains are obvious. A study in New Zealand found high speed broadband brought productivity gains of 10 percent.

For the developing world, greedy governments have got to get out of the trough, provide tax-cutting incentives for private investment in mobile broadband and encourage their populations to take advantage. Health, wealth and happiness for all.

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