GOVERNANCE AND THE DIGITAL ECONOMY IN AFRICA TECHNICAL BACKGROUND PAPER SERIES Taxes and Parafiscal Fees on Digital Infrastructure Services in Africa Copyright © 2023 The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org Disclaimer This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. Rights and Permissions The material in this work is subject to copyright. Any queries on rights and licenses, including subsidiary rights, should be addressed to: Office of the Publisher The World Bank 1818 H Street NW Washington, DC 20433 USA Fax: 202-522-2422 E-mail: pubrights@worldbank.org Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Acknowledgements This Background Note was prepared by Hannelore Niesten, Consultant, and Tania Begazo, Senior Economist, with contributions from Rami Amin (extended-term consultant), Sebastian Pena (consultant), and Mariluz Cancho (consultant). The Background Note benefited immensely from the participation, assistance, and insights from other experts. The team is especially grateful for the feedback provided by the peer reviewers Jan Loeprick and Jerome Bezzina, the insights shared by Chris Wales and Ana Cebreiro-Gómez, and the background work conducted by Coulson – Harney and country contributors to collect information on taxes and fees applied in the telecom sector across 20 countries in Africa. The team also thanks Ana Ruival, consultant, for support in the preparation of this note. This Note was prepared as part of the project 'Africa Digital Economy Governance and Anticorruption' (P172417), which is co-led by James Anderson, Tania Begazo, and Georgiana Pop. The Note consolidates findings from data collected and analyzed in 2020 and 2021. While periodic updates have been made to enhance the relevance of the information, readers are encouraged to carefully consider the context in which the data was originally collected, as this may influence its present applicability and accuracy. i Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Standard Abbreviations and Defined Terms This section explains the standard terms and abbreviations used in this paper. Abbreviation / Term Full Terminology / Definition ATAF African Tax Administration Forum AU African Union CASA Communications Authority of South Africa CEL Senegal’s Contribution Économique Locale CIT Corporate income tax CST Nigeria’s Communication Service Tax DFID Department for International Development DRC Democratic Republic of Congo EAC East African Community ECNS South Africa’s Electronic Communications Network Services ECOWAS Economic Community of West African States ECS South Africa’s Electronic Communications Services ESF Energy Support Fund GAT Gross annual turnover GSMA Global System for Mobile Communications Association HS Harmonized Commodity Description and Coding System IDF Import Declaration Fee ITU International Telecommunication Union MoF Ministry of Finance MSME Micro, Small and Medium Enterprise ii Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa NCC Nigeria Communications Commission NTRA Egypt’s National Telecom Regulatory Authority OECD Organization for Economic Co-operation and Development OTT Over-the-top services PURA Gambia’s Public Utilities Regulatory Authority RAM Registre des Appareils Mobiles RDL Railway Development Levy RUTEL Senegal’s tax for access to or use of the public telecom network ( Redevance d’utilisation des télécommunications) SIIT Surtaxes on incoming international traffic SIL Special Import Levy TARTEL Guinea’s Telephone Network Access Tax TCMO Total cost of mobile ownership USF Universal Service Fund VAT Value-added tax WAEMU West African Economic and Monetary Union WOAN Wireless open-access network WTO World Trade Organization iii Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Table of Contents Summary ............................................................................................................................................................... 1 1. Introduction to the fiscal challenges of digital economy governance in Africa............................................... 4 1.1. High fiscal burdens on telecom users and operators in Africa .....................................................................4 1.2. An overview of fiscal policy in the telecom sector in Africa.......................................................................11 1.3. Structure of the report ...............................................................................................................................14 2. Applying fundamental tax principles: Efficient, Simple, and Equitable framework for telecom taxation in Africa ................................................................................................................................................................... 14 3. Taxes and fees on Telecom Operators ......................................................................................................... 20 3.1. Telecom operators’ taxes ...........................................................................................................................20 3.1.1. Higher CIT on telecom operators than other sectors ........................................................................20 3.1.2. Customs duties ..................................................................................................................................24 3.1.3. Other socio-economic taxes with earmarked revenues ....................................................................27 3.2. Telecom operators’ regulatory fees ...........................................................................................................28 3.2.1. General regulatory fees .....................................................................................................................29 3.2.2. License fees .......................................................................................................................................30 3.2.3. Universal Service Funds (USF) contributions .....................................................................................31 3.2.4. Other regulatory fees ........................................................................................................................33 3.3. Telecom operators’ exemptions and incentives ........................................................................................35 4. Taxes and fees on users of digital connectivity ............................................................................................ 36 4.1. Taxes on handsets and SIM cards ..............................................................................................................37 4.2. Activation and connection charges ............................................................................................................38 4.3. Taxes on the use of telecommunication services ......................................................................................39 4.3.1. Mobile services: calls, SMS, and data ................................................................................................40 4.3.2. Taxes and fees on international traffic ..............................................................................................42 4.3.3. Taxes on digital services offered on digital infrastructure ................................................................44 4.3.4. Digital financial services ....................................................................................................................45 5. Tax policy considerations for digital transformation in Africa ..................................................................... 48 5.1. Recommendation 1. Re-evaluate the tax policy framework and its social costs. ......................................48 5.2. Recommendation 2. Ensure a simple and transparent legal and regulatory framework with clear provisions on the taxes and fees applicable to telecom companies and consumers. ............................................49 5.3. Recommendation 3. Ensure an equitable tax framework by minimizing over-taxation of the digital economy and harmonizing telecom operators’ and users’ taxes and fees with other sectors . .............................50 5.4. Recommendation 4. Streamline the national tax framework to the global tax policy reforms of the digital economy. ......................................................................................................................................................52 5.5. Recommendation 5. Maximize stakeholder involvement. ........................................................................52 Bibliography ........................................................................................................................................................ 53 Annex 1. Overview of taxes and fees in the Telecom sector in selected African countries .................................... 61 Annex 2. Overview of import duties in selected African countries ........................................................................ 62 Annex 3. Regulatory licensing fees in selected African countries.......................................................................... 64 Annex 4. Overview of USF contributions in selected African countries ................................................................. 68 iv Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa List of Figures Figure I. Percentages of population not connected to mobile services and mobile internet services in 2019 .............4 Figure II. Index representing a more favorable tax environment based on the cost of total taxation as a percentage of the Total Cost of Mobile Ownership .........................................................................................................................6 Figure III. General and sector-specific taxes and fees, as a proportion of market revenue ..........................................9 Figure IV. Tax-to-GDP ratio, 2018 ................................................................................................................................13 Figure V. Angola, Guinea, Tunisia and Côte d’Ivoire levy higher rates of corporate income tax on mobile operators in 2021 .........................................................................................................................................................................21 Figure VI. Overview of customs duties on communication apparatus and base stations ...........................................25 Figure VII. Overview of customs duties on users’ goods for mobile services (phones and sim cards) ........................27 Figure VIII. Consumer Tax Rate on Mobile Internet Services of selected African countries as advertised by operators .....................................................................................................................................................................................40 Figure IX. Consumer Tax Rate on Fixed Internet Services of selected African countries as advertised by operators .40 Figure X. Combined tax rates on use of mobile services in 2021 ................................................................................42 List of Tables Table I. Classification of taxes and fees of the telecom sector. .....................................................................................7 Table II. Overview of the different taxes and fees. ......................................................................................................20 Table III. Average Import Duty for Handsets by Income Group, Sub-Saharan Africa vs. Other Regions (2017 – 2019) .....................................................................................................................................................................................26 Table IV. Selected country examples in Africa that levy fees on numbering resources. .............................................33 Table V. Overview of numbering fees in African countries. ........................................................................................34 Table VI. Overview of selected activation taxes and fees in African countries. ..........................................................39 Table VII. Selected examples of taxes on incoming international traffic.....................................................................44 Table VIII. Summary of reform recommendations of the telecom sector in Africa.....................................................48 v Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Summary This report analyses the progress of African countries in establishing adequate fiscal regimes for telecom operators that provide digital infrastructure services and users to strengthen digital economy governance for the telecom sector in Africa. Based on a high-level comparative assessment of key legislative, tax, and regulatory policy instruments in more than 20 African countries, the report systematizes information on the state of play of telecom taxes and parafiscal fees by the end of 2021 to understand the status and trends in Africa and guide policy recommendations. Detailed information from these 20 countries is complemented with information for all countries in Africa (when available) and compared to other regions. Given the important benefits of digital connectivity, the stakes of having high taxes that prevent digitalization from reaching its potential are even more significant. The analysis of the African countries reviewed shows a high variability of approaches to tax the sector, resulting in the application of additional taxes compared to other economic activities and a complex array of taxes and parafiscal fees that are not always aligned with tax principles and public administration principles. Taxes discriminate among economic activities; some are regressive, and others are difficult to administer. Parafiscal fees are not proportionate to the cost of providing the service or are not used as a mechanism to boost the sector's efficiency or achieve specific sector goals. Compared to levels observed in other sectors and regions, a high tax burden on telecom operators and telecom consumers characterizes the African telecom landscape. Telecom operators are subject to corporate income taxes and other direct taxes on operators’ revenue s, some of which are comparable to other sectors. Operators pay corporate income taxes on profits (with higher rates for the telecom sector in a few countries), customs duties on their inputs (associated with the equipment used for mobile networks or access devices they resell), or other socio-economic taxes with earmarked revenues. For instance, general CIT rates vary from 15 percent (Mauritius), 24.72 percent (Zimbabwe), 25 percent (Ghana), 30 percent (DRC, Kenya, Rwanda, Tanzania, Uganda, Senegal) to 33 percent (Cameroon). However, an adjusted CIT tax on telecom companies applies in Angola and Tunisia (35 percent instead of 15 percent) and Côte d’Ivoire (30 percent instead of 25 percent). Specific taxes on telecom operators at a rate of 7 percent on annual net revenues apply in Burkina Faso. In Senegal, a telecom services tax applies at a rate of 5 percent of the operator’s revenue. In addition to telecom sector-specific taxes, operators pay other fees. Fees include regulatory fees (such as license and spectrum fees) and universal service funds contributions. In many cases, regulatory fees are set as a percentage of revenues and are not proportional to the costs required to perform regulatory functions or set in a way that minimizes market distortions. Furthermore, telecom operators in many African countries contribute a portion (varying between 1 percent and 5 percent) of their revenues to a universal service fund or their equivalent to finance the development of networks in rural areas and support greater use of digital technologies, although in many cases funds are not used. Other countries, such as The Gambia or Angola, do not have any USF. In Egypt, telecom licensees are not directly responsible for contributing to the USF but instead contribute indirectly through license fees, which form 1 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa part of the National Telecom Regulatory Authority budget. In African countries with a universal service fund, poor management of the contributions has been found to inhibit the efficient use of resources. Telecom users also must pay several taxes in addition to general VAT or sales tax. For instance, additional taxes apply to buying a mobile phone (already subject to VAT), activating a line, or using telecom services (subject to VAT and sector-specific taxes in many African countries). While activation fees are becoming less common these days, they – as well as additional taxes on devices - raise the costs of connecting to the network, making uptake more difficult. Because an activation fee is usually a fixed amount, it disproportionately affects the poor and those making the decision on whether to use internet and telephone services. Governments apply ad valorem excise taxes on airtime, SMS, and data. However, the motivation is unclear since it is difficult to argue that these services either generate negative externalities or are considered luxury goods. Some African countries (e.g., Senegal and Ghana) impose special taxes on international incoming calls, almost doubling their total costs and thus creating additional barriers to international connectivity. For instance, a surtax on international incoming calls applies at 19 cents per minute in Ghana. Excise duties subject the sector to a different tax system than standard goods and services, causing distortions across economic activities by artificially increasing the price of telecommunications services and discouraging access and use of digital services. According to data collected for the World Bank’s Telecom Taxes and Fees database, 7 countries (DRC, Ghana, Kenya, Madagascar, Rwanda, Tanzania, and Uganda) out of 20 African countries assessed apply excise taxes to telecom services (calls, SMS, and data). In Kenya, the excise tax on telephone services was increased in 2018 from 10 percent to 15 percent and subsequently increased to 20 percent in 2021, making it one of the highest excise duties. While Uganda has finally abandoned a failed sin tax on social media services in favor of a more lucrative levy embedded into the petrol pump price, Uganda placed a 12 percent tax on airtime (in addition to 18 percent VAT). Madagascar and Rwanda are among the countries levying a 10 percent excise tax on telecom services, while Tanzania has a high excise rate of 17 percent. 13 other countries do not charge any excise tax, including Angola, Burkina Faso, Cameroon, Egypt, Côte d’Ivoire, Mauritius, Togo, and Tunisia. Increased taxation to finance debt payments and economic recovery in the aftermath of the COVID-19 crisis may compromise sector growth and reduce the positive spillover effects of inclusive digital technology adoption; therefore, addressing gaps in the current policies in the sector is timely. As digitalization permeates economic activities, the stakes of setting significantly high taxes on digital connectivity that discourage optimal use of digital technologies become more worrying. Furthermore, telecom taxes and fees are often unpredictable due to their complexity and lack of transparency, making pricing and investment decisions more difficult. In 2020, 26 changes of tax or parafiscal fees on digital connectivity were implemented in 14 countries in Africa, including 16 tax or fee increases or introductions and 10 reductions or eliminations, notably in Chad. Because of the way the telecom taxes are set up, where no consideration is given to an individual’s financial situation, telecom levies disproportionately affect users with lower incomes (40 percent of individuals living under the USD 1.99 poverty line) and those deciding on whether to connect to the network or upgrade their device to use broadband internet. By affecting these decisions and demand, taxes also affect the commercial viability of expanding telecommunications networks to rural areas and upgrading to allow for high-speed broadband (World Bank, 2022). 2 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Determining the appropriate level of taxes and fees for the telecom sector is key to improving economic and administrative efficiency and enhancing economic transformation toward a digital economy. Given the importance of revenue mobilization to provide essential public services and boost economic growth, governments should establish a clear revenue strategy with tax policy linked to tax administration. Although a good source of revenue for national development, over-taxation of the telecom sector vis-à- vis other sectors and regions could undermine the use of digital technologies, investment decisions to enhance capital flows to Africa’s digital infrastructure, and, therefore, the growth of the digital economy in Africa. A gradual reduction of the overall tax rate borne by telecom operators and consumers to levels comparable to other sectors would allow for a more efficient allocation of resources across sectors. Phasing out excise-like taxes and realigning regulatory fees to ensure proportionality with the resources governments need for regulatory enforcement and boosting sector efficiency would be the first step. Complementary reforms to foster competition and ensure consumers benefit from lower taxation pressures are needed, as well as measures to address potential tax base erosion and profit shifting in the telecom sector (for example, through roaming arrangements, brand payments, and transfer pricing). Furthermore, greater digitalization can facilitate tax administration and improve overall tax collection. Breaking the dependence link between the telecom sector as a source of fiscal revenues and financial resources for regulators could limit potential regulatory capture in the sector. Looking into the future, governments also need to define their strategy regarding the taxation of digital services offered on digital infrastructure and online purchases of goods and services and identify approaches that support revenue collection while enabling the digital economy’s growth. 3 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa 1. Introduction to the fiscal challenges of digital economy governance in Africa 1.1. High fiscal burdens on telecom users and operators in Africa Digital inclusion is not equally developed across the globe and particularly in Africa. By the end of 2019, nearly half of Africa’s population (approximately 680 million people) lacks access to mobile services.1 Three-quarters of Africa’s population (950 million people) do not use mobile internet services.2 As a result, a significant share of the African population is deprived of connectivity benefits3 (such as remote education and remote work) (Figure I). Even in 2022, Sub-Saharan Africa presents the largest coverage and usage gaps for mobile internet, with a 15 percent coverage gap and 59 percent usage gap, respectively, compared to the world averages (5 and 38 percent).4 Figure I. Percentages of population not connected to mobile services and mobile internet services in 2019 Source: GSMA Intelligence.5 The tax environment in the sector is one factor that impacts investments and operational costs to provide connectivity and, therefore, the digital divide between and within African countries. Transforming the digital economy requires addressing the shortcomings of the fiscal system, among other sector-specific regulatory areas, to boost connectivity – a key enabler for the digital economy. In Africa, 1 Data as of the end of 2019. Source: GSMA Intelligence 2019. 2 GSMA. 2020. “Effective Spectrum Pricing in Africa", p. 5. 3 M. Abdullahi. 2020. “Improving mobile internet access through digital literacy”, GSMA. 4 GSMA. 2023. “The State of Mobile Internet Connectivity in 2022”. 5 See also: GSMA. 2020. “Effective Spectrum Pricing in Africa”. 4 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa nearly 1.1 billion new unique users must be connected to the broadband internet to achieve universal, affordable, and good-quality access by 2030.6 The importance of taxes compared to the costs of using telecom services varies across countries. Figure II depicts the score of the cost of taxation (as a percent of the total cost of mobile ownership (TCMO), expressed in monthly terms) based on data from the GSMA. Reports by this industry organization show that lower importance of taxes is associated with better connectivity (GSMA, 2017). The cost of taxation estimates the proportion of the TCMO that is accounted for by all taxes, including mobile-specific taxes. The TCMO is calculated based on the handset price,7 the activation and connection price or any other charges incurred to connect to the MNO’s network8, the price related to use9, and accounted for by mobile-specific taxes.10 The data has been normalized to have a value with a range of 0 to 100, with a higher score representing more robust performance. When looking at the individual countries, most African countries are below the value of 50, showing room for improvement. Figure II also illustrates that very few countries (e.g., Nigeria and Lesotho) had a value above 75 in 2019, indicating only a few scored a relatively better performance on the tax dimension. Still, in 2022, nine countries had scores above 75.11 In 2019, six out of the bottom 10 countries with a less favorable tax environment worldwide were in Africa, with Chad and Comoros ranking at the lowest end among 170 economies. However, based on 2022 data, Chad and Comoros improved considerably. Five of the bottom 10 countries worldwide are in Africa (Democratic Republic of Congo, South Sudan, Sudan, Tunisia, and Uganda). 6 Broadband Commission. 2019. “Connecting Africa Through Broadband. A strategy for doubling connectivity by 2021 and reaching universal access by 2030”, p. 16. 7 For handsets, general taxes refer to VAT and sector-specific taxes refer to custom duties and luxury taxes. 8 For the activation and connection price, general taxes refer to VAT and sector-specific taxes to activation and connection fees. 9 For the price relates to use, general taxes refer to VAT and sector-specific taxes refer to excise duties on usage. 10 GSMA. 2020. “Methodology: Mobile Connectivity Index 2020”, p. 12. https://www.gsma.com/r/wp- content/uploads/2020/09/GSMA-Mobile-Connectivity-Index-Methodology-2020.pdf. 11 GSMA Mobile Connectivity Index for 2022. https://www.mobileconnectivityindex.com/index.html#year=2022&indicatorType=dimension&index=affordability &dimension=taxation&indicator= 5 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Figure II. Index representing a more favorable tax environment based on the cost of total taxation as a percentage of Total Cost of Mobile Ownership Source: GSMA Mobile Connectivity Index Score and Dimension Score (2019). The indicators have a value within a range of 0 to 100, but they do not express a percentage. A higher score indicates a more favorable environment for mobile internet adoption and, thus, a lower tax burden. In Africa, governments and regulators subject telecom operators and users to a wide variety of taxes and parafiscal fees,12 which are often specific to the telecom sector (Table I). An analysis of the effective tax rate in the telecom sector in Africa shows that it is higher than that applied to gold mining.13 African telecom operators and users are subject to general taxes, such as corporate income tax (CIT) and value- added tax (VAT). Still, in some countries, they are at higher rates than other sectors. Some taxes also apply exclusively to the telecom sector. Sector-specific taxes encompass ad valorem (based on turnover) and specific (nominal amount based on some activity measures such as minutes, data, and SMS) excise taxes or a differentiated VAT or sales tax on handsets and other devices, activations and connections, and mobile usage. Annex 1 provides an overview of the taxes and fees in selected African countries in 2021. In some countries, elevated import duties on devices and telecom equipment are also present. Additionally, regulatory fees include compensation for operational licenses or annual regulatory contributions (many of them based on revenues), use of state resources such as spectrum, and fees for other regulatory services (such as numbering and equipment homologation). Mandatory contributions 12 According to the OECD classification, the term “taxes” is limited to compulsory , unrequited payments to the government or to a supranational authority. The government’s benefits to taxpayers are rarely proportional to their payments. “Non-tax” revenues are all other government revenues that are not classified as taxes. OECD . 2020. Revenue Statistics 1965-2019: interpretative guide, p. 319: http://www.oecd.org/tax/tax-policy/oecd- classification-taxes-interpretative-guide.pdf 13 Study conducted by Rota-Graziosi and Sawadogo (2020) including 25 African countries: Algeria, Angola, Benin, Burkina Faso, Cameroon, Chad, Cote d’Ivoire, DRC, Egypt, Ethiopia, Kenya, Gabon, Ghana, Guinea, Madagascar, Mali, Morocco, Niger, Nigeria, Senegal, Sierra Leone, South Africa, Tanzania, Tunisia, and Zambia. 6 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa for operators also apply, for example, to universal service funds intended to be used to finance universal access and service projects and other social goals. Taxes and Parafiscal Fees in the Telecom Sector Applied directly on telecom consumers Applied on telecom operators (and indirectly on consumers) Taxes on handsets and other devices Corporate Income Tax (CIT) and additional CIT (on profits) • VAT and higher VAT on handsets Customs duties • Handset excise tax • Handsets, infrastructure inputs, network Taxes on activations or connections equipment • VAT Regulatory fees for the sector • Specific or ad valorem tax on SIM, • General regulatory fees (on revenues) connection • Spectrum fees (one-off/variable) Taxes on usage • Licensing/authorization fees (one-off/variable) • VAT and higher VAT on usage • Other regulatory fees (numbering fees, • Usage excise tax (specific or ad valorem) homologation, and registration of equipment fees) Sector contributions • Universal service contributions (revenue) Other taxes with earmarked revenues: education tax, health tax, cultural tax, environment tax, vocational training tax Local taxes Table I. Classification of taxes and fees of the telecom sector14 In Sub-Saharan Africa, sector-specific taxes and fees account for a significant portion of the mobile sector revenue (Figure III). Sub-Saharan Africa has the highest average sector-specific taxes and fees in the mobile telecom segment.15 In a study of taxes in the mobile sector, the GSMA found that mobile taxes on consumers and industry accounted for 22 percent of market revenue in 2017, and almost a third of these payments are sector-specific taxes in contrast to broad-based taxation (i.e., taxes applicable to all sectors of the economy).16 Sector-specific taxation can be so high that the mobile sector’s contribution to sector-specific taxation is greater than general taxation. For instance, the tax contribution of the mobile sector in Tanzania was estimated at USD 404 million, representing 34 percent of total market revenue.17 In 2018, the Kenyan mobile sector’s overall tax contribution was estimated at USD 954 million, accounting for 37 percent of total market revenue.18 Regarding economic footprint, Kenya’s mobile sector contributes significantly to taxes and fees. While the mobile market revenue accounts for 3 percent of Kenya’s GDP, the sector’s tax and fee payments accounted for around 6.5 percent of the government’s total tax 14 The data collection on taxes and parafiscal fees of the telecom sector is sourced from various sources, including Bowmans’ data, GSMA’s country reports, Deloitte and PwC Tax Summaries & reports, OECD’s and IBFD’s tax databases, and from desktop research (e.g., countries tax legislations). Custom duties were collected from the World Trade Organisation. 15 Overseas Development Institute. 2020. “How tax officials in lower-income countries can respond to the coronavirus pandemic”, Coronavirus Briefing Note, London. 16 GSMA. 2019. “Rethinking mobile taxation to improve connectivity ”, p. 15. 17 GSMA. 2021. “Tanzania: Driving social and economic value through mobile-sector tax reform”, p. 4. 18 GSMA. 2020b. “Mobile taxation in Kenya: Accelerating digital development”, p. 5. 7 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa revenue. As a result, the tax contribution of the mobile sector is 2.2 times its economic size. In Côte d’Ivoire, the total tax contribution of the mobile sector was estimated at USD 358 million in 2016, accounting for 31 percent of the mobile sector’s total market revenue.19 In Guinea, tax contributions in 2020 were reportedly 64 percent of market revenues.20 These numbers exceed other regions, including Sub-Saharan Africa (25 percent).21 As shown in Figure III, the mobile sector in Sub-Saharan Africa was subject to a higher level of taxes in 2017 than any other region, including the Middle East and North Africa (24 percent), Asia Pacific (24 percent), Europe (21 percent) and Latin America (18 percent).22 In Sub- Saharan Africa, 60 percent of annual market revenue was generated from economy-wide taxes on operators and users and 40 percent from sector-specific taxes and fees. Taxes from digital infrastructure are important for overall tax collection, but there are cases where telecom operators’ contribution to fiscal revenues is less than expected. Regarding economic footprint, Kenya’s mobile sector contributes a significant amount of taxes and fees. While the mobile market revenue accounts for 3 percent of Kenya’s GDP,23 the sector’s tax and fee payments accounted for around 6.5 percent of the government's total tax revenue.24 As a result, the tax contribution of the mobile sector is 2.2 times its economic size. On the other hand, operators in Somalia appear to be paying well below the practice in the region.25 IMF estimated that the telecom sector contribution amounted to 5.6 percent of 2016 projected tax revenue.26 Lack of regulation, further complicated by the weak institutional capacity and inconsistent reporting by telecom operators, contributes to practical challenges in calculating and collecting taxes and fees in the telecom sector and enforcing payment.27 Increased revenue generation could require a more formal tax system and regulation that replace the de facto purely voluntary telecom contributions to the public finances.28 19 GSMA. 2018. “Reforming mobile sector taxation in the Democratic Republic of the Cong o”, p. 6. 20 As of May 2021, total mobile sector revenues were estimated at GNF 4,731 billion ($505 million) in 2020, corresponding to 3.3% of Guinea's GDP. The total fiscal contribution of the Guinean mobile sector is estimated at GNF 3,037 billion ($324 million) in 2020, representing 64% of total mobile sector revenues. 21 GSMA. 2021. “Tanzania: Driving social and economic value through mobile-sector tax reform”, p. 4. 22 GSMA. 2019. “Rethinking mobile taxation to improve connectivity”, p. 14. 23 GSMA. 2020b. “Mobile taxation in Kenya: Accelerating digital development”, p. 5, derived from Oxford Economics. 2018. 24 Kenyan National Bureau of Statistics. 2019. https://www.knbs.or.ke/?wpdmpro=statistical-abstract-2019 25 Federal Government of Somalia telecoms revenues (USD) as a % of estimated operator revenues. See also IMF Country Report No. 17/61 for Somalia. 2017. https://centralbank.gov.so/wp-content/uploads/2020/08/Article-IV- Feb-2017.pdf 26 IMF Country Report No. 17/61 for Somalia (2017), p. 18. 27 World Bank. 2018. “Federal Republic of Somalia: Systematic Country Diagnostic”, p. 36. 28 Annual revenue generation might range between USD 81 and USD 119 million, according to an expert’s report commissioned by the authorities. P. Lange. 2015. “Telecommunications Contribution to Public Finance in Somalia”, ICT Regulatory Technical Assistance. 8 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Latin-America 14% 4% Europe 17% 4% Asia Pacific 14% 10% Middle East and North Africa 14% 10% Sub-Saharan Africa 15% 10% 0% 5% 10% 15% 20% 25% General taxes and fees Sector-specific taxes and fees Figure III. General and sector-specific taxes and fees, as a proportion of market revenue Source: GSMA. 2019. “Rethinking mobile taxation to improve connectivity”. Sector-specific taxation of African telecom operators and users may impede digital economy transformation, resulting in a loss of the digital economy’s economic and social benefits . Sector-specific taxes raise costs for operators and prices for users. The countereffects negatively impact mobile connectivity,29 which in turn could also have a negative impact on GDP.30 The increasing fiscal burden on African telecom operators, including the system's complexity, potentially limits the opportunities for the telecom sector to invest in mobile infrastructure and affects the decisions to extend coverage to rural areas, leaving communities unconnected.31 Taxes on consumers may reduce the usage of telecom services (internet, voice, and SMS) and limit positive externalities of using digital technologies that require the Internet (e.g., digital platforms for agriculture, e-commerce, services) or phone connectivity (mobile financial services using USSD codes). The potential impact on the affordability of digital services and mobile devices could restrict user readiness in terms of educational attainment, digital literacy, and accessible content and services, especially in the current COVID context.32 As a result, GDP and tax revenues overall may be 29 P. Castells, X. Pedrós, M. Sivakumaran. 2019. The mobile tax bill: how mobile is impacted by sector-specific taxes, 30th European Conference of the ITS: "Towards a Connected and Automated Society", Helsinki, Finland, ITS, Calgary, p. 2. 30 According to an ITU study across 34 African countries, a 10% increase in mobile broadband penetration would lead to a 2.5% increase in GDP. ITU. 2019. Economic contribution of broadband, digitization and ICT regulation: Econometric modelling for Africa: https://www.itu.int/pub/D-PREF-EF.BDT_AFR-2019. 31 World Bank. 2022. “Using Geospatial Analysis to Overhaul Connectivity Policies: How to Expand Mobile Internet Coverage and Adoption in Sub-Saharan Africa”; GSMA. 2019. “Rethinking mobile taxation to improve connectivity”, p. 7. 32 ITU and World Bank. 2020. Digital Regulation Handbook, Geneva, p. 47. See also: M. Abdullahi. 2020. “Improving mobile internet access through digital literacy”, GSMA. 9 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa lower.33 Past studies show the potential positive impact of tax reforms on the digital economy in Africa.34 A recent example is the economic impact analysis by GSMA of Tanzania’s excise duty at a rate of 17 percent on mobile airtime, which increases the cost of mobile consumers.35 It was estimated that reducing the excise duty to 12 percent would have a net-positive macroeconomic impact on the mobile sector and the broader economy. The gradual reduction of excise duty on mobile airtime would help households and companies afford mobile services. An additional 2.4 million Tanzanians (or 3.6 percent of the population) would have access to mobile services; 87 percent would be considered low-income. GDP would have increased by $438 million five years after the tax cut. Besides the numerous sector-specific taxes to the telecom sector, the tax system’s ambiguity and complexity may increase compliance costs and have a negative impact on the spillover effects of technology adoption. Uncertainty about future taxation deters investments; the risk of future tax increases and fair tax administration is factored into investment decisions, reducing investment over time. In some countries, international investors have left after issues related to taxation. Transforming the African digital economy requires addressing the shortcomings of the fiscal system and tax administration, unlocking the key enablers of digital economy connectivity, and balancing increased revenue mobilization in the short term against higher tax collections in the medium term - as the digital economy grows and digital transactions are better monitored to increase the tax base. Despite the broad benefits of telecom services for economic growth and digital inclusion, the tax framework for the telecom sector appears to go in the opposite direction, increasing the cost of digital delivery, potentially slowing digital roll-out, and causing tax discrepancies between traditional and digital delivery of products and services. Telecom taxation provides governments with income to compensate for budget spending deficits. Increasing domestic revenue mobilization is especially a priority for low-income countries, given high debt-to-GDP ratios and low tax-to-GDP ratios. Multiple taxes and fees in many African countries may have significant consequences for both companies providing the services, but especially for the consumers for whom such taxes may account for a sizable portion of their income. Excessive taxation potentially raises the costs of digital delivery of products and services. It makes them less accessible, particularly for those living in rural areas or belonging to low-income groups. Furthermore, it can also reduce digital technology adoption by enterprises, especially MSMEs and informal firms, limiting productivity growth and job creation. Nonetheless, other core reforms are needed to ensure a more favorable taxation system delivers benefits to African citizens, such as boosting competition in telecommunications markets and enhancing transparency to avoid profit shifting to low- tax jurisdictions. 33 ITU and World Bank. 2020. Digital Regulation Handbook, Geneva, p. 48. 34 For instance, GSMA. 2015. “Digital inclusion and mobile sector taxation in the Democratic Republic of the Congo”, p. 30; GSMA. 2018. “Reforming mobile sector taxation in the Democratic Republic of the Congo”; GSMA. 2018. “Reforming mobile sector taxation in Zambia”; GSMA. 2019b. “Reforming mobile sector taxation in Madagascar”. 35 GSMA. 2021. “Tanzania: Driving social and economic value through mobile-sector tax reform”, p. 17. 10 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa 1.2. An overview of fiscal policy in the telecom sector in Africa Africa’s telecom sector needs an efficient, fair, and simple fiscal framework for fostering digital inclusion. The COVID-19 pandemic has shown that internet connectivity is a key enabler of universal digital inclusion, allowing for more resilient economies. Transforming the digital economy in Africa requires deliberate and strategic tax reforms following overarching fundamental tax principles of sound fiscal policy design. Fundamental principles (infra section 2) for assessing Africa’s fiscal systems are its efficiency (i.e., minimum impact on economic behavior), equity (i.e., the proportional tax burden to or increasing with income), and simplicity (i.e., low administrative and compliance costs). Sector-specific taxes on the consumption of mobile services are challenging to align with principles of efficiency, equity, and simplicity due to various affordability and connectivity considerations, as outlined above.36 An efficient, fair, and simple tax framework may lower barriers to affordability and increase network investment, promoting digital economy transformation. The non-consistency of African telecom tax treatment with these fundamental principles could stifle economic growth and undermine the social and economic resilience needed in the face of climate change. Despite the importance of an efficient, fair, and simple fiscal framework for boosting digital transformation, current tax policies and tax administration challenge the sector. Regarding tax policy, African countries’ rising public debt levels, particularly in the aftermath of the COVID-19 crisis and the global economic slowdown, may compromise economic development.37 Revenue mobilization helps governments to fund essential services and infrastructure. The relatively few operators, the degree of formality38, and the ability to trace revenues in the telecom sector make the telecom industry a more accessible channel for tax collection to generate fiscal space.39 Besides the cost burden, this might create a dependency relationship between the telecom sector and the government and create incentives to protect the major taxpayers instead of opening markets or boosting competition in favor of consumers. Estimating telecom companies’ overall fiscal burden is difficult. The introduction of telecom taxes and fees frequently lacks analysis of tax incidence, making it complex to assess the potential impact of a proposed tax. The telecom sector has seen a proliferation of special taxes and fees imposed by different institutions, from Ministries of Finance (MoF) to telecom agencies. Over 40 sector-specific taxes were introduced between 2011 and 2017 in Sub-Saharan African countries.40 In 2020, after the COVID-19 onset, 15 countries experienced tax reforms of sector-specific taxes and fees, including tax increases and reductions (GSMA 2022). This context makes “a straightforward cross-country comparison (…) extremely difficult”.41 36 IMF. 2014. “Taxing Principles”, Finance & Development series, Vol. 51, No. 4. 37 C. Calderón and A. G. Zeufack. 2020. “Borrow with Sorrow? The Changing Risk Profile of Sub-Saharan Africa’s Debt”, World Bank Group Policy Research Working Paper n. 9137. 38 Informality represents over 60% of the world’s employed population, rising t o over 85% in Africa. ILO (2018). Women and men in the informal economy: A statistical picture. Third Edition. 39 World Bank. 2019. Africa’s Pulse, Volume 20. 40 P. Castells, X. Pedros, and M. Sivakumaran, “The mobile tax bill: how mobile is impacted by sect or-specific taxes”, ITS 2019, p. 13. See also: O. Areo. 2019. “Telcos Lament Impact Of Over 40 Taxes, Levies On Expansion Drive”. See also Nigeria Communications Commission-NCC. 2020. “A compendium of taxes, levies and fees by state governments on telecoms operators in Nigeria and its effect on the national digital economy agend a”. 41 OECD and IDB. 2016. Broadband Policies for Latin America and the Caribbean: A Digital Economy Toolkit , OECD Publishing, Paris, p. 189. https://doi.org/10.1787/9789264251823-en 11 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa The complexity and unpredictability of the sector’s fiscal system undermine future investments and limit the sector’s development.42 In terms of tax administration, African countries face difficulties in collecting direct taxes on income (e.g., personal income tax) and indirect taxes (e.g., VAT, sales tax).43 Lower average tax revenues as a proportion of GDP in African countries compared to OECD countries (Figure IV) enhance the need for African countries to rely on taxes in a handful of large, formal-sector corporations, including telecom operators. Particularly fragile states (DRC, Nigeria) display low tax-to-GDP ratios. Several fragile states with low tax collections have made up for the revenue shortfall by relying on nontax revenues from extractive industries.44 In Sub-Saharan Africa, just 6.3 percent of large taxpayers (corporations) account for 78 percent of total tax collections.45 However, cross-border profit-shifting by multinationals complicates the collection of profit-based taxes.46 Due to a lack of resources, African countries experience difficulties in effectively combating profit-shifting, and one policy response has been more reliance on indirect (excise- like) taxes. Lower performance in terms of tax administration may correlate with less efficient but more administrable policy choices.47 These policy choices have their drawbacks. At the individual level, in the past, telecom services were overwhelmingly purchased by wealthier taxpayers in developed countries and thus considered a luxury product that is attractive to be taxed.48 However, this situation has changed radically, and now internet use is considered an enabler of inclusion and poverty reduction, as recent impact studies for Nigeria and Tanzania show.49 Taxing economic activity through transactional or consumption taxes (VAT or excises) rather than individual income results in potential harm to the less well-off. 42 World Bank. 2017. Étude sur la fiscalité appliquée aux secteurs des technologies de l’information et de la communication en République Centrafricaine, Rapport d’Expertise France sous le projet PURSeP II. 43 In developing countries, the tax structure only represents 16.3% PIT, 14.6% CIT and 31.5% VAT. In developed countries, the tax structure amounts to 24.2%, 8.9% CIT and 20.0% VAT. See OECD (2018). G20 Policy Guide: Digitisation and informality: Harnessing digital financial inclusion for individuals and MSMEs in the informal economy. http://www.oecd.org/g20/G20-Policy-Guide-Digitisation-and-Informality.pdf. See also: M. Carnahan. 2015. Taxation Challenges in Developing Countries Asia & the Pacific Policy Studies . 44 E. Crivelli and S. Gupta. 2014. “Resource Blessing, Revenue Curse? Domestic Revenue Effort in Resource-Rich Countries”, IMF Working Paper 14/5, IMF, Washington DC; J.-F. Brun, G. Chambas, and M. Mansour. 2015. “Tax Efforts of Developing countries: An Alternative Measure” in M. Boussichas and P. Guillaumont, Financial Sustainable Development, Paris, Economica. 45 ATAF. 2019. African Tax Outlook 2019. https://events.ataftax.org/index.php?page=documents&func=view&document_id=49 46 The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) aims to ensure that profits are taxed where the economic activities that generate those profits are performed and where value is created. https://www.oecd.org/tax/beps/ 47 See, for instance, the Tax Administration Diagnostic Assessment Tool (TADAT) reports. https://www.tadat.org/home 48 T. Matheson, P. Petit. 2021. “Taxing telecommunications in developing countries”, International Tax and Public Finance, Vol. 28, issue 1, No. 9. 49 K. Bahia et al. 2021. “Mobile Broadband Internet, Poverty and Labor Outcomes in Tanzania”. 12 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa 40 34.3 35 32.1 29.1 27.8 30 25 20.4 19.4 20 18.3 17.4 17.1 16.8 16.7 16.5 14.6 14.1 15 13.1 11.8 11.4 10 7.5 6.3 5 0 Figure IV. Tax-to-GDP ratio (in percentage), 2018 Source: OECD tax database In building an efficient, fair, and simple fiscal framework for the telecom sector, governments and policymakers must balance economic growth by improved digital connectivity and revenue mobilization maximization in the short term. Taxes play a key role in ensuring sustainable and equitable development for African countries, especially to build back the economy after the COVID-19 crisis and support debt payments. Revenue mobilization is tax policy’s overarching priority in most developing countries. Collecting taxes and fees is fundamental to raising public revenues that allow governments to finance their budget and development plan, including investments in human capital and infrastructure and the provision of services for citizens and businesses. However, revenue mobilization depends heavily on the government’s capacity and legitimacy to tax. Particularly in fragile states, the equity and efficiency of tax reform determine the resilience to economic and political shocks.50 Taxes must be set at the right level to avoid discouraging investment and further uptake of digital technologies, limiting tax collection potential in the future. When additional taxation and parafiscal fees are needed, they must be aligned with tax principles (efficiency, equity, and simplicity) and designed to minimize market distortions. The analysis of the data collected regarding telecom operators‘ and users’ taxes and fees in Africa can help understand the current landscape and formulate tax policy recommendations supportive of connectivity for digital transformation. 50 M. Mansour and J.-L. Schneider. 2019. “How to Design Tax Policy in Fragile States”, IMF, Fiscal Affairs Department, p. 4. 13 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa 1.3. Structure of the report The report focuses on how tax policy and administration can incorporate widely agreed tax principles and pre-conditions that lead to an efficient, fair, and simple tax system. The structure of the report is as follows. Section 1 introduces the African telecom sector background and challenges leading to rethink taxation of telecom services to enhance digital economy transformation and telecom sector governance. Section 2 presents the overarching principles of tax policy that traditionally guide the development of tax systems, focusing on the relevance of Africa’s telecom sector. For assessing the various telecom taxes and fees, the taxes and fees of the telecom operators (section 3) and users (section 4) are identified using regional comparators for benchmarking. For telecom operators, the study discusses the taxes a telecom operator must pay to operate, including direct taxes such as CIT and indirect taxes such as customs duties, taxes with earmarked tax revenues, and regulatory fees. For telecom users, the study assesses the taxes on handsets and other devices, activation and connection charges, and taxes on usage. The analysis identifies challenges and provides suggestions to improve tax policy and administration designed for digital economy transformation (Section 5). Methodology. The report is based on a new database for which the data collection on comparative taxes and parafiscal fees of the telecom sector in selected African countries is gathered from primary legal desk- based research and various other sources from Coulson and Harney and reviewed by the World Bank. This information was collected and systematized in 2020-2021. Complementary sources include but are not limited to the Global System for Mobile Communications Association (GSMA) Intelligence and country reports, the International Telecommunication Union (ITU), Deloitte and PwC Tax Summaries & reports, OECD’s and IBFD’s tax databases and countries’ tax legislation and regulations. Custom duties were collected from the World Trade Organization. Given the number of telecom taxes and fees in African countries, the report aims to highlight that taxes are misaligned with core tax principles. An exhaustive list of the different fees applied to the African telecom sector is beyond the scope of this report. It is important to acknowledge that the taxation landscape might have evolved in some countries since 2021, with some countries introducing new taxes – for example, on mobile money and digital services - and others reducing import duties and reforming taxes. However, the levels and complexity of taxation and fees applied in African countries remain a concern. Geographical delineation. The report studies 20 African countries in North, South, West, East, and Central Africa: Angola, Benin, Burkina Faso, Cameroon, Democratic Republic of Congo (DRC), Côte d’Ivoire, Egypt, Ghana, Kenya, Madagascar, Mauritius, Morocco, Nigeria, Rwanda, Senegal, South Africa, Tanzania, Togo, Tunisia, and Uganda. When secondary data is available, the report considers all African countries. Interesting examples from African countries are also highlighted in the report. 2. Applying fundamental tax principles: Efficient, Simple, and Equitable framework for telecom taxation in Africa African countries must balance the trade-offs in tax policy between raising revenues for short-term revenue collection and encouraging faster and broader digitalization for longer-term benefits. Taxation of the digital economy enables African governments to efficiently mobilize domestic resources for funding 14 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa public goods such as law and order and public infrastructure and to ensure an equitable level playing field between businesses.51 However, policymakers and regulators need to be careful not to over-tax and negatively affect users, particularly the poorest in urban, rural, and remote areas, as well as the spread of the benefits of digitalization. While these trade-offs are universal, particularly in response to the COVID- 19 crisis, new financial challenges of higher spending, tighter fiscal constraints, and lower revenue generation are more acute in Africa. Well-recognized tax principles,52 adapted to the telecom sector (Box I), can guide the development of African tax systems, guaranteeing a certain level of revenue while also considering the broader economic and fiscal policies of the country. A sound tax system accounts for the broader economic impacts of telecom taxes in terms of production and consumption outcomes as well as tax administration costs (efficiency). The tax system should be simple and transparent (simplicity) and not have a regressive effect (equity). This discussion focuses on those tax principles that have a direct impact on taxing the telecom sector from a tax policy (equity and efficiency) and tax administration (simplicity) viewpoint. However, other tax principles may also be relevant for the design of the tax system (e.g., tax sovereignty and benefit principles).53 The validity and applicability of the latter principles and how they interact with each other depend on country-specific context and its challenges, which fall outside the scope of this report. Box I. Framework for assessing African telecom sector taxation54 Taxes and fees of the African telecom sector are assessed in a framework that derives from the fundamental principles of taxation, with a focus on the following aspects: Efficiency. The efficiency of taxes and fees in the African telecom sector to enhance digital economy transformation is assessed according to two dimensions: • Economic efficiency reflects the need to balance revenue mobilization with economic development. A lack of consideration can lead to disproportionate negative impacts such as capital flight, labor market shifts, weakened export markets, and negative impact on national development plans. For instance, broad-based taxes with single and low rates should be preferred over specific taxes, maximizing revenue while minimizing disruptions to mobile 51 OECD. 2021. “Chapter 8. Financing development in Africa” in Africa’s Development Dynamics 2021: Digital Transformation for Quality Jobs, 2021. https://www.oecd-ilibrary.org/sites/377cc779- en/index.html?itemId=/content/component/377cc779-en#n-ch08-8 52 The basis of overarching tax principles that should apply to electronic commerce, including neutrality, efficiency, certainty and simplicity, effectiveness and fairness, flexibility, and equity, was launched at the 1998 Ottawa Ministerial Conference. See OECD. 2001. Taxation and Electronic Commerce-Implementing the Ottawa Framework Conditions, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264189799-en See also OECD. 2014. Addressing the Tax Challenges of the Digital Economy, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing. http://dx.doi.org/10.1787/9789264218789-en 53 For a useful discussion of tax principles that directly impact taxing the digital economy, see C.O. Lucas-Mas and R.F. Junquera-Varela. 2020. Tax Theory Applied to Taxing the Digital Economy, Chapter 3. 54 The principles are inspired by the IMF, OECD, UN, and WBG. 2016. Enhancing the Effectiveness of External Support in Building Tax Capacity in Developing Countries. Prepared for Submission to G20 Finance Ministers; ITU. 2013. Taxing Telecommunication/ICT services; R. Bird and E. Zolt. 2003. “Introduction to Tax Policy Design and Development”; V. Tanzi and H. Zee. 2001. “Tax Policy for Developing Countries”, Economic Issues No. 2001/001. 15 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa service consumption and provision. Specific taxes should also be limited and based on a clear rationale of negative externalities. • Administrative efficiency reflects tax administration costs for governments and compliance costs (including evasion and avoidance costs) for businesses. Tax administration costs should be limited, recognizing the importance of double taxation and minimizing the potential for evasion and avoidance. Simplicity. Simple and easily understandable telecom tax and regulatory rules are assessed according to two dimensions: • Clarity. Clear tax rules enable telecom operators and users to understand their obligations and entitlements. Telecom operators are more likely to make optimal (investment) decisions and respond to intended policy choices. Complexity also favors aggressive tax planning. • Transparency. Transparency of tax systems promotes investments. Equity. Equitable telecom tax and regulatory rules are to be assessed according to two dimensions: • Horizontal equity. Telecom operators and users should bear a similar tax burden to others in equal circumstances. • Vertical equity. The tax system should avoid imposing regressive taxes (i.e., the same taxes for all and taxes on necessary goods). Regressive taxes have a larger impact on users of mobile services in the lower-income groups. Excessive taxation of essential goods for mobile use and services (i.e., handsets and mobile usage) can hinder digital transformation. Source: Authors’ interpretation of the internationally recognized fundamental tax principles The analysis of telecom sector taxes and fees in light of tax principles has three limitations. First, the methodology applies tax principles but does not assess the dynamics of the political economy in telecom taxation that led to existing taxes and fees. The analysis, however, recognizes the essential role of the political economy in formulating telecom tax policies in many African countries. The distribution of power and resources among interest groups, as well as the underlying actors and processes,55 all have a significant impact on developing better tax policy. This may include negotiation between interest groups for competing claims, which determines how political decisions are taken and, as a result, allows for the identification of policy reform winners and losers.56 Interest groups can exert power and control over tax policy. For instance, assistance from multilateral financial institutions in maintaining stable macroeconomic balances often depends on increased domestic revenue that could conflict with sectoral objectives. But also, civil society and the public can find their interests in conflict with these groups and may eventually join forces to influence the policy.57 Controversial tax policy and tax collection in developing countries generally drop in the year leading up to a national election.58 55 OECD-DAC. 2008. Survey of Donor Approaches to Governance Assessment, p. 29. 56 DFID. 2009. “Political Economy Analysis How To Note”, DFID Practice Paper. 57 R. Nash, A. Hudson, and C. Luttrell. 2006. Mapping Political Context: A Toolkit for Civil Society. ODI. 58 W. Prichard. 2015. Taxation, Responsiveness and Accountability in Sub-Saharan Africa: The Dynamics of Tax Bargaining. Cambridge University Press. 16 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Second, information and legislation publicly available on telecom taxes and fees differ widely across African countries in terms of detail and specificity, which may reflect policy vagueness or a matter of limited monitoring. As a result, categorizing and benchmarking individual policy actions for the telecom sector in African countries requires some judgment and assumptions. Limited transparency on the details of the application of taxes and fees also restricts the analysis. Third, while the analysis allows us to contrast the tax systems for the telecom sector in a country against the above framework, it does not consider other variables that affect the efficiency, simplicity, and equitability of a fiscal policy, such as the budgetary space, implementation capacity, pre-existing spending and coverage gaps, and the policy’s cost. This deliberate decision allows us to standardize and compare telecom tax policies across African countries, but it comes with a tradeoff. The assessment only offers a one-dimensional discussion of how telecom tax policies operate compared to the framework. The data must be balanced with knowledge about the country’s context to determine the most relevant policies for a specific country. The results are not conclusive on the quality of a country’s tax framework for the telecom sector but do provide governments and policymakers with a benchmark against which to make their assessment. Learning that a country’s fiscal policy on the telecom sector is inefficient, inequitable, and complex raises a red flag and leads to a closer assessment. Taxes and fees applied to telecom services in Africa are not always aligned with sound tax principles, generating undesirable negative impacts. Table II provides an overview of the different taxes and fees, which will be discussed individually in the subsequent sections. It also provides illustrative country examples and a summary of their alignment with the three tax principles and their potential impact on the sector’s performance. Efficiency Equity Simplicity Selected country examples of sectoral Potential impact adjustments for the telecom sector in Africa Taxes on Telecom Users These taxes may potentially reduce the affordability of handsets (including General VAT: Kenya, Uganda, Côte Taxes on d’Ivoire, Ghana, Zimbabwe VAT smartphones), acting as a barrier to handsets and    exemption: Rwanda, Tanzania those without access to digital other devices connectivity and negatively impacting Favorable VAT: Tunisia adoption. Taxes on connections may negatively impact adoption, lowering the positive Taxes on economic impact of connectivity. These Benin, Côte d’Ivoire, Ghana, Egypt, activations or    taxes risk being regressive when expressed as fixed amounts, as they Tunisia connections represent a larger share of income for the least well-off. 17 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Efficiency Equity Simplicity Selected country examples of sectoral Potential impact adjustments for the telecom sector in Africa User taxes on connectivity usage distort Excise duty: Zambia, Tanzania, DRC, Taxes on consumption choices, reduce efficiency, Ghana, Madagascar, Uganda, Gambia,    Kenya, Rwanda, Cameroon mobile usage and make telecom services unaffordable for the poorest mobile service users. Excise duties on transaction fees of Taxes on new services such as mobile mobile money: Kenya, Tanzania, and Taxes on new money and other digital financial services Uganda can create inefficiencies, potentially and emerging    Specific taxes on the value of the actual leading to lower consumption of digital services connectivity and reducing the positive transfer of mobile money: Tanzania, externality linked with these services. Uganda, Zimbabwe, Cameroon, Nigeria, Ghana Taxes on Telecom Operators Regulatory fees, often based on revenue, may distort pricing decisions and lower Guinea (fee to telephone network General economic efficiency. Regulatory fees may Access/use), Gambia (fee to public regulatory  -  also generate complexity through the utilities regulatory authority), Senegal fees sheer number of fees, and potentially (fee for access to or use of the public discourage investment and FDI in the telecom network) telecom sector. Licensing and authorization fees can be Annual licensing fees in Kenya, Tanzania, inefficient if they represent double taxation of the service, create a barrier to Madagascar, DRC, South Africa, and Licensing and Egypt (ranging between 0.4 percent to 2 entry/expansion, and are not authorization  -  percent) proportional to the level needed to fees finance regulatory services. High Lump sum annual licensing fees (Rwanda licensing fees can prevent entry and limit investment and innovation in the sector. and Togo) When underused, if based on revenues, universal service funds leave capital Universal unemployed, which could otherwise be Varying between 0.3 percent (e.g., service productively invested to roll out the Tanzania) to 5 percent (e.g., Tunisia) of contributions network and increase mobile operators’ revenue  -  penetration. (if fund Zero percent in Angola since March 2020 underutilized) If raised based on revenues, they may No USF: e.g., The Gambia distort pricing decisions and lower economic efficiency. Other Regulatory fees should be high enough to Numbering resources fees applicable in regulatory  -  cover administrative tasks required to various countries, including Rwanda, fees offer the service (such as Côte d’Ivoire and Senegal homologation/equipment registration 18 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Efficiency Equity Simplicity Selected country examples of sectoral Potential impact adjustments for the telecom sector in Africa and maintenance of the numbering system). Disproportionately high fees can hamper market expansion and introduce another layer of taxation, which limits the transparency of the tax system and, in some cases, leads to double taxation of the same service. Corporation tax is usually payable on profits, but commonly on revenue as minimum alternative tax where profits are negative. Higher taxation in the Some African countries apply a higher CIT Corporation sector can affect resource rate in the telecom sector. For instance,  ✓ ✓ allocation/investments across industries. Angola, Guinea, Tunisia, Côte d’Ivoire tax However, from an equity perspective, shareholders may partly bear corporation tax, making it more desirable than indirect taxes. Since suppliers’ VAT payments are fiscally deductible for the purchasing firm, value- Increased VAT on sale of goods from added taxes may incentivize companies telecom companies: Sudan to enforce tax compliance along their supply chain. Higher VAT rates for Favorable VAT on mobile phones: Egypt VAT ✓  ✓ telecom services would affect affordability for low-income consumers Other countries exempt mobile handsets and affect equity principles, as well as and sim cards from VAT: e.g., Rwanda, create distortions in consumption Senegal decisions, reducing efficiency. Since they act as barriers to trade, import duties tend to be detrimental to economic efficiency. Countries tend to set lower duties on capital inputs High import duties: Ghana, Tunisia, (equipment) to support national Madagascar, and Cameroon Import duties   ✓ economic activities. Their impact on equity depends on the type of goods taxed; duties on necessity goods may be socially regressive, while high duties on inputs will distort production decisions Local taxes have various bases and forms across countries; their consistency with efficiency, equity, and transparency Local economic contribution (Senegal), principles should be considered case by Local taxes - -  Tunisia (local authority tax), Nigeria case. However, they tend to induce some level of complexity for firms operating (infrastructure maintenance fee) across the country, such as mobile operators. 19 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Efficiency Equity Simplicity Selected country examples of sectoral Potential impact adjustments for the telecom sector in Africa Non-regulatory but specific earmarked fees can have various bases and forms. Other taxes Côte d’Ivoire (culture contribution), They are only applied to the telecom (e.g., sector or various sectors, including the Guinea (research and development education tax, - -  telecom sector. Their consistency with fund), Egypt (to scientific research, cultural tax, efficiency, equity, and transparency education, and training programs in ICT) etc.) principles should be considered case by case. They tend, however, to induce some level of complexity. Table II. Overview of the different taxes and fees Source: Authors’ elaboration based on analysis by Deloitte, GSMA Association (2016), OECD (2014) and ITU (2013), and information on African countries based on the World Bank Telecom Taxes and Fees database. 3. Taxes and fees on Telecom Operators African telecom operators face a wide range of taxes and in some cases at higher rates (such as CIT, customs duties on operator equipment and handsets, and other special telecom taxes) and regulatory fees (licenses and contributions to the Universal Service Fund). Below is an overview of these different taxes and fees, and how their levels compare across select African countries. 3.1. Telecom operators’ taxes 3.1.1. Higher CIT on telecom operators than other sectors Telecom operators in at least four countries are subject to higher CIT rates (5 percent to 10 percent) than in other sectors. General CIT rates applicable across sectors vary from 15 percent in Mauritius to 40 percent in Zambia59. In some African countries, telecom operators face higher CIT rates than those that typically apply to other industries. Unless the legislation explicitly specifies the purpose and collection policy, the CIT collected from the telecom sector is levied to raise the general budget. For example, telecom operators in Angola60, Guinea61, and Tunisia62 are subject to a 35 percent CIT rate, which is higher than the standard rate of 25 percent (or even 15 percent in Tunisia) for other companies.63 Côte d’Ivoire64 subjects mobile operators to a 30 percent CIT rate, which is higher than the standard 25 percent CIT rate 59 The CIT rate is 40% for income over USD 11324,88 (ZMW 250.000). 60 Presidential Legislative Decree 3/12 of 16 March 2012. 61 Article 229 of the GTC. 62 Law 2002-1 of 15 January 2001. 63 Although a higher CIT rate applies on telecom companies, this is not considered as a mobile-specific tax since the same rate applies on banking and insurance activities (Angola), banks and insurance companies and companies importing, storing and distributing petroleum products (Guinea), oil service companies, banks, financial institutions, car dealers, large commercial enterprises and franchisees of foreign brands (Tunisia). 64 Article 51 of the GTC (30% for telecommunications and IT companies) and article 64 of the GTC (standard 25%). 20 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa applied to other sectors (Figure V). Note that Zambia levies a higher CIT rate of 40 percent for income over 9,069 USD (ZMW 250,000) – but this higher CIT rate is not limited to telecom operators – instead of the general 35 percent. Some African countries also have an alternative mechanism for CIT purposes (although not limited to the telecom sector), which taxes turnover. This so-called ‘minimum lump-sum tax’ (impôt minimum forfaitaire) mechanism applies to companies with a negative financial result or whose effective corporate tax charge is less than the above-mentioned CIT amounts. It varies from 0.2 percent in Tunisia,65 0.5 percent in Morocco (cotisation minimale)66 to not less than 2 percent in Cameroon67. For instance, in Congo (Dem. Rep.), regardless of a company’s taxable profit, the tax payable may not be less than 1 percent of its declared turnover.68 45% 40% 40% 35% 30% 10% 10% 33% 30% 30% 5% 30% 30% 30% 30% 30% 30% 25% 20% 28% 28% 28% 27% 27% 25% 25% 25% 25% 20% 23% 20% 15% 15% 15% 10% 5% 0% General CIT Rate Additional CIT rate for mobile operators Figure V. Angola, Guinea, Tunisia and Côte d’Ivoire levy higher rates of corporate income tax on mobile operators in 2021 Source: World Bank Telecom Taxes and Fees database Imposing CIT rates for telecom operators above the average headline rate in the African region (of 26.5 percent in 2021) is commonly claimed to be justified because the telecom industry is perceived to be profitable above average.69 A higher CIT rate is used to capture a larger share of the profits. In a short- run, static context, the CIT is unlikely to influence market prices. If telecom operators are optimizing profits, a proportional tax imposed on profits will not cause them to adjust their input/output behavior.70 65 This tax is not specifically outlined in a statute but is paid as a matter of practice. 66 Article 144 of the GTC. 67 Article 22 of the GTC. 68 Article 92 of Ordinance Law 69/009. 69 T. Matheson, P. Petit. 2021, supra, p. 264. 70 T. Matheson, P. Petit. 2021, supra, p. 264. 21 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa CIT taxes the normal return to capital, thus increasing the cost of capital and lowering investment, affecting the cross-sectoral and cross-country allocation of resources.71 However, higher CIT rates could result in lower output and higher prices, leading to oligopolistic collusion to raise prices by limiting output.72 A lower net-of-tax corporate discount rate increases the cost of future reprisal for cheating, allowing for more restricted equilibria.73 Imposing a CIT surcharge increases the incentive for multinational companies to transfer revenues across borders by more proactive tax planning aimed at shifting profits from higher to lower-tax jurisdictions.74 Additional administration capacity, such as transfer pricing expertise, data collection, and exchange of information, is likely to be required. The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (Box II) aims to strengthen nations’ ability to combat tax base erosion, including by setting a minimum global corporate income tax. A gross basis tax could also effectively penalize entrants, smaller operators, start-ups, and other growing firms with losses or limited profitability while providing a competitive advantage to mature profitable incumbents, thus helping to strengthen existing enterprises’ dominance.75 Finally, the most effective instrument to address concerns about the high profitability of certain operators due to weak competition would be to use sectoral rules to boost competition rather than imposing higher CIT rates on the digital infrastructure (telecom) sector. Box II. In addition to traditional telecom taxes, the international tax community is leading efforts to alter the global tax architecture for a digital economy by introducing a new, revised international tax framework Besides the recent implementation of a variety of telecom taxes and fees in Sub-Saharan countries, international organizations (e.g., OECD76) and other key players (e.g., the EU) discuss how to address the tax challenges arising from the digitalization of the economy. Traditionally, transnational digital platforms pay significantly lower tax levels than national companies. They use base erosion and profit shifting (BEPS) practices that enable tax to be paid in low-tax jurisdictions rather than where economic activity occurs. Supranational and national efforts aim to establish fairer tax rules for digital platforms so taxes are based on revenues generated in-country or profits proportional to each country’s platform revenues.77 71 T. Matheson, P. Petit. 2021, supra, p. 264. 72 C. Davidson, and L. Martin. 1985. “General Equilibrium Tax Incidence under Imperfect Competition: A Quantity - setting Supergame Analysis”, Journal of Political Economy 93(6), p. 1212-1223. 73 C. Davidson and L. Martin. 1985, supra, p. 1212–1223. 74 By the payment of e.g., excessive royalties from firm-specific technology, excessive management or service fees, over-invoicing for inputs through offshore cost centers (particularly capital goods), and excessive leverage (thin capitalization). See R. Schatan. 2012. “Tax Minimizing Strategies and the Arm’s-Length Principle”, Tax Notes International, p. 121-126. 75 OECD. 2018. Tax Challenges Arising from Digitalisation – Interim Report, para. 40. 76 OECD. 2014. Measuring the Digital Economy: A New Perspective. Paris; OECD (2018a), Tax Challenges Arising from Digitalisation: Interim Report 2018, Inclusive Framework on BEPS. OECD/ G20 Base Erosion and Profit Shifting Project. Paris: OECD. 77 OECD. 2018a. Tax Challenges Arising from Digitalisation: Interim Report 2018 , Inclusive Framework on BEPS. OECD/ G20 Base Erosion and Profit Shifting Project. Paris: OECD. https://doi.org/10.1787/9789264293083-en 22 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Delays by the COVID-19 pandemic and differing (political) views on technical issues caused the OECD to lack consensus on global digital taxation by the end of 2020 as planned. The international community made substantial progress in establishing a fairer international tax system on 8 October 2021 by introducing a two-pillar solution towards addressing the tax challenges arising from the digital economy. The new international tax reform envisages MNEs paying a fair share of tax in the jurisdictions where they operate and generate profits, regardless of whether they have a physical presence (Pillar One). In the report on Pillar One, the OECD/G20 Inclusive Framework on Base recognized that services providing internet access, or another electronic network would be out of scope.78 Such services typically require a degree of local infrastructure and are subject to local telecommunication regulations.79 The OECD identified telecommunications as a key infrastructure operator for which additional research would be conducted to consider an exclusion.80 The purpose of Pillar Two is to impose a 15 percent global minimum corporate tax rate. As of March 2022, 137 countries already joined the discussions to change the international tax rules to ensure that multinational enterprises pay a fair share of tax wherever they operate. While the details remain to be flashed out, and political uncertainty must be navigated, the international tax framework will change significantly if the Inclusive Framework agreement is implemented. The African Tax Administration Forum (ATAF) and African members of the Inclusive Framework have been heavily involved in the negotiations, and the ATAF has been providing technical support to its members to ensure that the two Pillars rules meet the needs of African countries by being simple and equitable. However, some African countries (e.g., Kenya and Nigeria) have expressed their reservations in endorsing the two-pillar solution because of concerns that backing the agreement would hamper future revenue mobilization as a market jurisdiction. Members joining the international tax agreement must withdraw their unilateral measures. In the absence of immediate measures on digital taxation at the global or EU level, individual countries (for instance, Kenya, Nigeria, Austria, France, Hungary, Italy, and India) have decided to continue with national initiatives such as individual countries (for instance, Kenya, Nigeria, Austria, France, Hungary, Italy, India) have decided to continue with national initiatives. The Kenyan Finance Act 2020 introduced the digital service tax at the rate of 1.5 percent of the gross transaction value (effective 1 January 2021). The tax is payable by a person whose income from the provision of services is derived from or accrues in Kenya through a digital marketplace. These emerging end-user taxes and surcharges for OTT services reflect the government’s efforts to set taxes such as the digital services tax.81 In Africa, Kenya, Nigeria, Sierra Leone, Tunisia, and Zimbabwe have implemented alternative tax measures aiming at taxing digital companies, while others, such as South Africa, are waiting for a global solution. For instance, the Kenyan Finance Act 2020 introduced the digital service tax at the rate of 1.5 percent of the gross transaction value (effective 1 January 2021). The tax is payable by a person whose income from the provision of services is derived from or accrues in Kenya through a digital marketplace. These emerging end-user taxes and 78 OECD, Tax Challenges Arising from Digitalisation – Report on Pillar One Blueprint: Inclusive Framework on BEPS , OECD/G20 Base Erosion and Profit Shifting Project (OECD 2020), no. 30. https://www.oecd.org/tax/beps/tax- challenges-arising-from-digitalisation-report-on-pillar-one-blueprint.pdf. [hereinafter Blueprint Pillar One]. 79 Blueprint Pillar One, p. 37. 80 Blueprint Pillar One, no. 153-155. 81 See, for example: KPMG. 2021. Taxation of the Digitalized economy: Direct Taxes. https://tax.kpmg.us/content/dam/tax/en/pdfs/2021/digitalized-economy-taxation-developments-summary.pdf 23 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa surcharges for OTT services reflect the government’s efforts to search for new tax bases with intensified efforts to tax the digital economy. While these charges are to be paid by the service provider, the tax paid can be calculated in the end price to the consumer. Against this backdrop, the IMF82, the World Bank83, and others84 have discussed various reform options with different costs and benefits for African countries from an administrative and a revenue generation perspective. 3.1.2. Customs duties 3.1.2.1. Equipment of operators African countries levy customs duties for the import of telecom equipment goods from 0 percent to 10 percent. Network equipment such as antennas, base stations, and communication apparatus may be subject to import duties and other surcharges, potentially higher than other goods and services (Figure VI). For example, Ghana subjects imported telecom network equipment to customs duty (e.g., base stations are subject to a 10 percent duty), while customs and VAT exemptions apply to machinery and apparatus used in other industries (e.g., agriculture, mining, and transportation). Angola imposes a 2 percent levy on base stations but import duties or other specific taxes do not apply to infrastructure inputs, notably antennas, towers, and network equipment. 82 A. Aslam and A. Shah. 2021. “Chapter 10: Taxing the Digital Economy” in R. de Mooij, A. Klemm and V. Perry , Corporate Income Taxes under Pressure, IMF; IMF. 2019. “Corporation Taxation in the Global Economy”, Policy Paper 19/007, IMF, Washington DC. 83 C. Clavey, J.L. Pemberton, J. Loeprick and M. Verhoeven. 2019. “International Tax Reform, Digitization, and Developing Economies”, World Bank, Washington DC; A. Cebr eiro-Gómez et al. 2020. ”Digital services tax: country practices and technical challenges”, World Bank, Washington DC. 84 W. Schön. 2021. “Is There Finally an International Tax System?”, World Tax Journal, Vol. 13, No. 3; A. Cebreiro- Gómez et al. 2021. “Digital Services Tax: Country Practice and Technical Challenges”, MTI Discussion Paper, Macroeconomics, Trade and Investment Global Practice, World Bank, Washington DC; A. Auerbach, M. Devereux, M. Keen, and J. Vella. 2017. “Destination-Based Cash Flow Taxation”, Working Paper WP 17/01, Centre for Business Taxation, Oxford University, Oxford, UK. 24 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa 10% 8% 6% 4% 2% 0% Base stations (HS 851761) Communication apparatus (HS 851762) Figure VI. Overview of customs duties on communication apparatus and base stations Source: Tariff lines of the WTO Customs duties on base stations and communication apparatus were collected from the World Trade Organisation (WTO) website. These refer to the Harmonised System (HS) code 851761 (‘Base stations for transmission or reception of voice, images or other data, incl. apparatus for communication in a wired/wireless network (such as a local/wide area network))’, HS code 851762 (‘Communication apparatus (excluding telephone sets or base stations); machines for the reception, conversion and transmissio n or regeneration of voice, images or other data, including switching and routing apparatus’). Based on the International Trade Centre’s data for the period 2014 – 2019 for 37 low-income and middle- income Sub-Saharan African countries, average import duties on base stations are 2.4 percent higher than the average country of all other regions and income groups (excluding African countries) and 2.5 percent higher on switches and transmission equipment.85 Annex 2 provides an overview of the import duties on base stations in selected African countries. Other levies and fees may apply to telecom equipment and goods for telecom services imports. Customs unions such as the African Union (AU), the Economic Community of West African States (ECOWAS), or the West African Economic and Monetary Union (WAEMU) raise fees or duties for the budget of their respective communities.86 For instance, imports in the East African Customs Union (Burundi, Kenya, Rwanda, South Sudan, Tanzania, and Uganda) from countries outside the Customs Union are subject to customs duty at a rate between 0 percent, 10 percent, and 25 percent.87 Additional VAT rates may also apply to telecom infrastructure. Telecom infrastructure in Egypt is subject to an additional 5 percent VAT rate to “develop State resources and to aim for social justice.”88 85 Latest year available at Market Access Map, International Trade Centre (ITC), www.macpmap.org. 86 For instance, a 0.2% African Union levy on all imported goods used to finance the African Union (its operations, programs and peace and security operations), the ECOWAS Community levy of 0.5% tax imposed on goods from non-ECOWAS Member States used to finance the activities of the ECOWAS Commission and Community institutions, and the WAEMU community levy at 0.8%. The community levy does not apply to goods imported from WAEMU member countries (Ivory Coast, Senegal, Burkina Faso, Mali, Benin, Togo, Niger, and Bissau Guinea). 87 East Africa Community External Tariff (CET). 88 Article 2 of the Egyptian Added Value Tax Law No. 67/2016. 25 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Customs duties and additional VAT on telecom infrastructure affect input prices and production decisions in the sector and may hinder investment in network rollout. Import tariffs and additional VAT only applicable to the digital sector risk slowing down investments from telecom operators and for private networks. Increased costs of equipment could limit businesses’ incentives for upgrading and extending coverage through new infrastructure investments, particularly in rural and remote areas.89 Reduced investment in network equipment could decrease economic activities associated with on-site installation, civil works, and the employment associated, resulting in decreased tax income. 3.1.2.2. Handsets and SIM cards Handsets and other attributes are typically subject to customs duties. Customs duties on devices (mobile phones) and SIM cards can make access devices more expensive and affect adoption and upgrading decisions by users. These expenses are initially borne by telecom providers but could be passed on to end-users. Based on ITC data for the period 2014 – 2019 for 37 low-income and middle-income Sub- Saharan African countries (Table III and Figure VII), average import duties on handsets are 1.6 percent higher than the average country of all other regions and income groups (excluding African countries). Annex 2 provides an overview of the import duties on mobile phones and SIM cards in African countries. Income Group Upper Lower Region High middle middle Grand 2017 - 2019 average income income income Low income Average Sub-Saharan Africa 0.0% 1.0% 6.8% 6.8% 5.8% All Other Regions 2.3% 6.7% 4.7% 8.3% 4.2% Grand Total 2.2% 6.1% 5.5% 7.0% 4.5% Table III. Average Import Duty for Handsets by Income Group, Sub-Saharan Africa vs. Other Regions (2017 – 2019) No. observations = 340 Source: ITC, Import duties for HS Product Code 851712 (Telephones for cellular networks or for other wireless networks) Import duties on devices are relatively stable, with a general range between 10 percent (including Angola, Benin, Burkina Faso, Guinea, Nigeria, Senegal, Togo, and Uganda) and 0 percent (Egypt, Kenya, Mauritius, South Africa, Tanzania, and Uganda). In Cameroon, imports of devices, handsets, and related components are subject to import duties depending on the nature of the goods. Mauritius exempts imported devices and handsets from customs duties or excise duties on importation, though VAT is levied when sold in Mauritius. In Egypt, the customs duty regime features several exemptions, where SIM cards, mobile tablets, mobile phones, and telecom satellites are all subject to a 0 percent customs duty rate. 89 See also GSMA. 2017. “Taxing mobile connectivity in Sub-Saharan Africa: A review of mobile sector taxation and its impact on digital inclusion”, p. 30. 26 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Import duties on SIM cards range from 0 percent to 30 percent (Figure VII). Import duties on SIM cards are the highest in Cameroon (30 percent), while Egypt and Tunisia do not levy any import duties on SIM cards. Interestingly, Kenya levies an Import Declaration fee of 3.5 percent on the customs value of the SIM cards and a Railway Development Levy on all imports into the country at 2 percent of the customs value. Uganda imposes an additional infrastructure levy of 1.5 percent on selected imports, including mobile phones and SIM cards, as well as replacement of batteries. Ghana imposes a Special Import Levy (SIL) on imported goods. Certain products are, however, exempt from this 2 percent levy, including some telecom- related goods.90 Togo imposes an import toll tax of 2,000 CFA (approx. USD 3.44) per ton of transported products on mobile phones and SIM cards. Higher-than-standard import duties on mobile phones and SIM cards may result in higher prices for devices and initial mobile subscriptions. The affordability of smartphones is affected by import duties, impacting digital technology uptake by low-income groups. 35% 30% 25% 20% 15% 10% 5% 0% Mobile phones (851712) SIM cards (HS 852321) Figure VII. Overview of customs duties on users’ goods for mobile services (phones and sim cards) Customs duties on telephones for cellular networks and SIM cards were collected from the World Trade Organisation (WTO) website for the latest data available in August 2021. These refer to the HS Code 851712 (’Telephones for cellular networks‘)and HS Code 852321 (‘Cards incorporating a magnetic stripe’). 3.1.3. Other socio-economic taxes with earmarked revenues In some countries, digital connectivity is subject to socio-economic taxes aimed at funding certain activities (i.e., education, culture, sports, etc.). These taxes include education tax, health tax, cultural tax, environment tax, vocational training tax, gaming tax, or advertisement tax. Despite the economic and 90 An exemption applies to telephone sets, including telephones for cellular networks/other wireless networks; other apparatus for the transmission/reception of voice, images, and other data (including apparatus for communication in a wired/wireless network; microphones, loudspeakers, headphones, earphones, audio- frequency electric amplifiers). 27 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa social benefits of socio-economic contributions, multiple taxation is not healthy; it raises operational costs and creates space for governance issues.91 In some countries, socio-economic taxes are targeted at the digital infrastructure sector. These earmarked taxes are mostly linked to funding technology-related activities, but in some countries, they aim at financing cultural activities, sports, peacekeeping, and social justice. For example, Côte d’Ivoire imposes a culture contribution of 0.2 percent on telecom companies and companies carrying out mobile transfers to promote cultural activities.92 Telecom operators in Guinea contribute 1 percent of net annual revenue to a Research and Development Fund.93 In Tanzania, municipal advertising levies apply to telecom companies in some municipalities, for example, ranging from TZS 10,000 (approx. USD 4.31) to TZS 100,000 (approx. USD 43.12) per square foot, aimed to collect revenues for service provision in Llala. In Egypt, all telecom licensees contribute 0.5 percent of their annual gross income to scientific research, education, and training programs in ICT. In Burkina Faso, besides the applicable standard of 27.5 percent CIT on the telecom sector, telecom companies and mobile phone money transfer companies are subject to an additional tax of 7 percent (previously 5 percent) on the annual turnover as of 2020.94 The tax supplements the government budget and is mainly (for 80 percent) used to promote sporting, cultural, and technological activities. It has been reported that many telecom operators claim to be overtaxed because of the rise from 5 percent to 7 percent and the introduction of mobile money firms as tax subjects in 2020. Other specific telecom-earmarked taxes include African Union Solidarity levy to finance peacekeeping and security operations (Benin), technology tax to develop new technology in rural areas (Côte d’Ivoire), culture tax to promote culture (Côte d’Ivoire), and State Financial Resources Development fees to foster social justice and the social solidarity (Egypt). The telecom sector may also be subject to generally applicable socio-economic taxes that are not limited to the telecom sector. For example, Nigeria imposes a 2 percent Tertiary Education Trust Fund Levy as an education tax on all Nigerian companies to finance education.95 The Gambia imposes a national education levy of 0.75 percent on gross annual turnover. Tunisia levies a vocational training tax of 2 percent of gross payroll96 and a 5 percent tax on the turnover to protect the environment. In Kenya, all goods imported into the country for consumption use are subject to a 2 percent Railway Development Levy (RDL) to provide funds for the construction of a standard gauge railway and a 3.5 percent Import Declaration Fee (IDF) of the customs value of the goods and the fees.97 3.2. Telecom operators’ regulatory fees African telecom operators pay general regulatory fees (to cover the cost of regulatory activities and provide revenues to support the financial independence of the regulator), licensing and authorization 91 M. Oseni, “Multiple Taxation as a Bane of Business Development in Nigeria”, p. 123. 92 See Art. 1129 of Code Général des Impôts (http://www.dgi.cgici.com/indexs.htm). 93 World Bank. 2019a. “Guinea: Opportunities for Enhanced Domestic Revenue Mobilization” , p. 57. 94 Article 351 of the Tax Code and Finance Law of 2020. 95 Vodafone. 2020. “Tax Transparency Report”. http://vodacom-reports.co.za/integrated-reports/ir- 2020/documents/tax-transparency-report-for-the-years-ended-31-March-2019-and-2020.pdf. 96 Article 30 of Law no 88-145 dated Dec. 31st, 1988. 97 I.e., the Miscellaneous Fees and Levies Act of Kenya. 28 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa fees, spectrum fees98; and other regulatory fees (e.g., numbering and homologation of equipment), in addition to Universal Service Fund (USF) contributions. The amount and complexity of these fees can raise operational and investment costs and increase consumer prices, or limit infrastructure deployment in uncovered areas. 3.2.1. General regulatory fees General regulatory fees, also known as administrative or sectorial fees, on revenue and turnover, are present in most developing economies. General regulatory fees aim to guarantee the financial independence of the regulator and compensate the regulator for its costs of regulation.99 Fees based on revenues rather than profits require telecom operators to pay the same amount, regardless of whether telecom operators generate profits, keep the profits, or invest in new infrastructure. Although telecom operators bear regulatory fees, these costs may be indirectly passed on to end users. Fees should be proportionate to cover regulatory functions, and excessive regulatory fees on revenues and turnover should be avoided as they directly affect pricing decisions. These fees set on revenues can be as high as 5 percent of turnover. In Senegal, telecom operators are subject to the tax for access to or use of the public telecom network (RUTEL), levied at the rate of 5 percent of the turnover, excluding taxes, on the amount paid by users to the operator.100 In Côte d’Ivoire, a 5% tax on telecom enterprises101 applies to the company’s monthly turnover exclusive of VAT.102 A 2 percent surtax for developing new technologies in rural zones applies on a monthly turnover, excluding VAT, from prepaid and post-paid telecom services.103 In Mali, telecom companies are also subject to a tax on telecom at 5 percent of turnover derived from phone calls, as of January 1, 2013.104 Internet services and mobile devices and telecom equipment sales are exempt from this tax.105 Guinea imposes a Telephone Network Access Tax (TARTEL) of 3 percent of the annual net revenue of telecom operators.106 In the Gambia, a regulatory fee of 1.5 percent of the operator’s annual turnover has to be paid to the Gambia Public Utilities Regulatory Authority (PURA). Algeria imposes a 1 percent tax on the turnover of mobile telecom companies.107 Since 2018, Algeria also introduced new taxes for telecom companies, such as the 0.5 98 Given the economic nature of setting spectrum fees to allow for the efficient use of spectrum resources and foster competition in the market. The analysis of the level and method for charging spectrum fees is out of the scope of this note. For a general discussion on good practices on spectrum management see ITU and World Bank. 2021. Digital Regulation Handbook, Geneva. 99 C. Blackman and L. Srivastav. 2011. Telecommunications Regulation Handbook, Tenth Anniversary Edition. World Bank and the International Telecommunication Union, Washington, DC. https://openknowledge.worldbank.org/handle/10986/13278. 100 Law no. 2010-14 of 23 June 2010. This tax is imposed by Law 2008-46 of 3 September 2008, and the rate was increased from 2% by Article 20 of Law no. 2010-14 of 23 June 2010. 101 I.e., tax on telecommunications, IT and communication enterprises (taxe sur les entreprises de télécommunication et des technologies de l’information et de la communication ). 102 Article 1130 GTC. 103 Article 1127 of the GTC (i.e., taxe pour le développement des nouvelles technologies en zones rurales ). 104 Article 253 AD of the GTC (i.e., taxe sur l’accès au réseau des télécommunications ouvert au public ; TARTOP). 105 IBFD database, 2021. 106 GSMA. 2018. “Reforming mobile sector taxation in Guinea: Unlocking socio-economic gains from mobile connectivity”, p. 28. 107 Introduced by Finance Law 2012. 29 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa percent tax on the income of telecom operators from the wholesale distribution of electronic recharge of telecom credits, 0.5 percent tax on the annual turnover of the telecom regulatory authorities; and 0.5 percent tax on the annual turnover of telecom operators and the annual net profits of Internet service providers.108 In Sierra Leone, telecom operators are required to pay royalties calculated on their turnover at the rate of 0.5 percent.109 Telecom royalty is a deductible expense for corporate tax purposes. 3.2.2. License fees Telecom operators may be subject to initial licensing fees for obtaining the licenses and annual license fees to recover the cost of providing operators with a certain regulatory service. The telecom sector growth resulted in a significant increase in the number of licenses and, therefore, in revenue mobilization.110 Annex 3 provides an overview of the regulatory licensing fees in selected African countries. Many African countries, including Uganda, Kenya, Tanzania, Madagascar, DRC, South Africa, and Egypt, charge annual licensing fees as a percentage (ranging between 0.4 percent and 2 percent) of the telecom operator's annual gross turnover or revenue. For instance, the licensing fees in Madagascar and DRC represent an annual regulatory payment for the license arrangement of 2 percent on revenues. In Tanzania, annual licensing fees of 1 percent of the gross annual turnover apply. Egypt levies licensing fees as a lump sum (USD 32,000 or USD 640) or a percentage of the annual revenue. The annual revenue percentage is 3 percent for managing and operating the infrastructure for internet services and local and international data transfer services and 8 percent for establishing and operating networks providing telecom services in urban areas. South Africa applies variable annual licensing fees between 0.15 percent and 0.35 percent. Only a few countries (e.g., Rwanda and Togo) levy a lump sum for annual licensing fees. In Rwanda, operators pay a one-off annual licensing fee (between USD 184,000 and USD 275,000). In Togo, licensees are subject to an annual licensing fee of USD 37,000. In Somalia, telecom operators are required to pay license fees at a flat administration fee of USD 50,000 per year for 20 years. A 2015 study suggested that the Federal Government of Somalia could collect nearly USD 4 million in annual operator license fees if these fees were set as a percentage of operators’ revenue – as in the case of Uganda, Kenya, and Tanzania.111 Remarkable is that in Côte d’Ivoire, licensing fees depend on specific network characteristics. In Senegal, the local economic contribution replaced the business license tax from 1 January 2017.112 Operators of telecom networks are subject to the Contribution Economique Locale (CEL) that compromises a ‘property contribution’ annually on the rental value of the operator’s business premises (7 percent)113 and a ‘value-added contribution’ equal to 0.30 percent of turnover (instead of 1 percent applied to all other companies and sectors).114 In several African countries, telecom sector licensing is unclear. Publicly available regulations that provide guidance on applicable licensing fees are missing. Few regulators publish detailed information on licensing 108 Finance Law 2018. 109 Section 26A of the Telecommunications Act 2006. 110 For instance, Nigeria has about 6,870 class licensees and 860 individual licensees as of March 2020. https://www.ncc.gov.ng/licensing-regulation/licensing/licensees-list#list-of-individual-category-licensees 111 P. Lange. 2015. “Telecommunications Contribution to Public Finance in Somalia”, ICT Regulatory Technical Assistance. 112 Article 320 of the GTC. Law 2012-31 of 31 December 2012. 113 Article 329 of the GTC. 114 Article 335 of the GTC. 30 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa fees and annual licensing fee revenues.115 Tunisia’s sector licensing regime is not as robust. The license fee structure is not publicly available, and the fees are determined per license between the State and the telecommunication network operator. The license fees for installing and operating public telecom networks to public or private companies are determined in a license agreement signed between the Tunisian State and the telecom network operator. The taxation regime in Angola is also unclear and necessitates direct engagement with the regulator. License fees as regulatory charges can be substantial, creating barriers to entry and affecting pricing and penetration rates. As the telecom sector liberalizes, entry should be open without a limit on the number of operators, and schemes based on license auctions should be phased out.116 Regulatory and licensing fees should be limited to the cost of performing the regulatory service to minimize barriers to entry.117 A recurring tax on telecom activity is preferable over a one-time licensing fee because telecom operators may already be licensed. New entrants may bargain and negotiate with the government when they have information about future rents and the government’s fragility.118 3.2.3. Universal Service Funds (USF) contributions Telecom operators in many African countries contribute a portion of their revenues to a universal service fund (USF) or their equivalent to finance the development of networks in unconnected areas and support the adoption and use of digital technologies. Annex 4 provides an overview of USF levies in selected African countries, varying between 0.3 percent (Tanzania) to 5 percent (Tunisia) of operators’ revenue. For example, operators in Guinea pay a USF contribution of 1.5 percent of net annual revenue into a fund intended to support expanded coverage. In Egypt, telecom licensees are not directly responsible for contributing to the USF but instead contribute indirectly through license fees, which form part of the National Telecom Regulatory Authority (NTRA) budget.119 Any amounts to be transferred to the USF must be utilized on, inter alia, infrastructure projects required for the universal service, reallocation of spectrum, indemnifying telecom services operators and providers for the price difference between the approved economical price for the services and that which may be determined in favor of the telecom consumers. Other countries, such as The Gambia or Angola,120 do not have any USF. Even if an USF is in place in African countries, the funds do not always sufficiently support greater connectivity. In some countries, financial reporting amongst the existing funds remains absent. For instance, all telecom operators in Uganda licensed by the UCC are required to contribute 2 percent of their annual gross revenue to USF for the purpose of developing rural communications, information, and communication technology. However, no publicly available information exists on how the UCC utilizes the funds or how much it has collected in the last three years. Proper guidelines to govern the funds, especially in terms of contributions, have yet to be developed in many countries. It is common for significant sums 115 For more details see World Bank. 2021. Regulatory Watch Initiative Phase 2. 116 ITU and World Bank. 2020. Digital Regulation Handbook, Geneva, p. 44. 117 See World Bank, ITU. 2011. Telecommunications Regulation Handbook, p. 76. 118 M. Mansour and J.-L. Schneider. 2019. “How to Design Tax Policy in Fragile States”, IMF, Fiscal Affairs Department, p. 9. https://www.imf.org/~/media/Files/Publications/HowToNotes/HowToNote1904.ashx 119 Article 9 of Egyptian Telecoms Laws. 120 Previous to March 2020, network operators and public use electronic communications service providers were subject to 1% of gross revenues contributions to the USF. 31 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa of money to go unused in USF. For instance, telecom operators in Kenya contribute 0.5 percent of their annual turnover to the USF. The Kenya Information Communications Act (KICA) USF regulations generally outline that the funds from the USF may be applied to activities that support national communications development programs. Project implementation under this Fund has been hampered by delays and challenges (e.g., fund management structure, tendering procedures, and lack of cooperation from licensees),121 and does not appear to have been re-directed towards COVID-19 challenges.122 The government may have adopted a short-term regulatory measure to support companies by temporarily suspending payments into the Fund, as was done by the Colombian government,123 and use the money in the Fund more proactively to support government-led programs to improve internet connection.124 Specific allocation of the funds to other programs than the telecom sector may reduce the resources earmarked for universal service development missions. ITU125 and GSMA126 found that less than half of the USF funds collected are spent on extending telecom networks. Public telecom network operators in Senegal are required to participate and ensure the development of universal service in their service area by paying contributions at a rate of 5 percent of the operators' revenues (excluding taxes and interconnection charges), but 2.5 percent of the amounts collected are allocated to telecom and 97.5 percent to the Energy Support Fund (ESF).127 This significantly reduces the resources earmarked for universal service development missions. The authorities have decided to pool the resources of this fund, which should help to finance the energy sector, remedy the current energy crisis, and promote the development of the universal telecom service. Guided by a concern for inter-sectoral solidarity, this decision aims to better articulate sectorial policies for improved overall development. Levies on revenues are particularly distortive because they remain constant regardless of whether the operator makes a profit or a loss or invests in new innovative networks. African countries levy USF contributions based on gross revenues via annual fees. Moreover, the frequent delays or lack of disbursements of collected levies results in wasted financial resources. The operation of USF can help bridge the digital divide, but more effective use is needed. More transparency on the allocation and use of USF collections, including annual audits and publication of annual reports, are essential for greater effectiveness128 and increased capacity to design and implement appropriate projects. 121 See Presentation by ITU and Communications Authority of Kenya. “Opportunities and challenges of using a Universal Service Fund”. 122 J. Walubengo. 2020. “Kenya: Let’s mobilise the universal service fund for e-learning”. 123 GSMA. 2020., “Adjusting mobile tax policy in light of Covid-19: How fiscal policy can keep us connected”. 124 V. Bhandari. 2020. “Improving internet connectivity during Covid-19”, p. 14. 125 ITU. 2013. “Universal Service Fund and Digital Inclusion”. 126 GSMA. 2016. “Are Universal Service Funds an effective way to achieve universal access?”. 127 Decree No. 2007-593 of 10 May 2007 on the Telecommunications Code, the ECOWAS Supplementary Act No. A/SA/6/01/07 of 19 January 2007. In 2017, the Contribution to the Development of the Universal Telecom Service and the Energy Sector (CODETE) was replaced by the Economic Development (CODEC). 128 For more details on USF governance in selected African countries, see World Bank. 2021. Regulatory Watch Initiative Phase 2. 32 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa 3.2.4. Other regulatory fees Other regulatory fees may add to the complexity of the fees structure and increase compliance costs. Several African countries impose additional regulatory fees (Table IV). The two most common are numbering resources fees,129, and homologation and registration of equipment fees. Numbering fees generally apply given the relative scarcity of numbering resources and to facilitate effective control and supervision of the numbers due to the rising number of electronic communication users and services. Several countries also implement homologation fees to protect users from counterfeit mobile devices.130 Rwanda The management, assignment and Fees of 50,000 FRW (approx. USD 5602) for initial licensing usage of telecom numbering application and 9,000,000 FRW (approx. USD 1,0008,476.61) resources are subject to fees. for annual licensing are chargeable to companies that wish to allocate numbering resources.131 Côte The reservation or allocation of The amount of the fee depends on whether it is a reservation d’Ivoire numbering resources is subject to fee or an allocation fee and the type of number (telephone the payment of an annual fee due service, special services, other services, carrier prefix, long per calendar year regardless of the number, short number) and it varies between 100 XOF date of allocation or reservation. (approx. USD 0.18) and 50,000,000 XOF (approx. USD 92,336).132 Senegal The issuance and management of Long numbers (9 digits) are subject to 150 CFA (approx. USD phone numbers are subject to 0.27) per number and 500.000 CFA (USD 894.15) application fees. study fee. Short numbers (4 digits) are subject to 5.000.000 CFA (approx. USD 8941.48) per number and 500.000 CFA (approx. USD 894.15) application study fee.133 Table IV. Selected country examples in Africa that levy fees on numbering resources. 129 Overall, there are three main categories of numbering fees: a) standard telephone numbers E.164 (for the subscribers directly connected to the operator); b) carrier selection code (to select the operator); and c) signaling point codes (for interconnection with other networks at national (NSPC) and international (ISPC) level). https://ec.europa.eu/digital-single-market/en/news/5th-report-implementation-telecommunications-regulatory- package-1999 130 GSMA. 2019a. “Mobile Policy Handbook: An insider’s guide to the issues”. 131 According to Article 12 of the 2018 Regulation governing The Management, Assignment, And Usage of Telecom Numbering Resources in Rwanda, the fees payable include an application fee payable at the time of application and an annual maintenance and management fee payable on the first allocation of a numbering resource and on an annual basis within fourteen (14) days after reception of the invoice. 132 Decree 2013-439 of June 13, 2013. 133 Decree No. 2007-1445 of 27 November 2007 amending and supplementing Decree No. 2004-839 of 2 July 2004, which laid down the terms and conditions for managing the National Numbering Plan, the conditions for using numbering resources, and the related fees. 33 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Numbering fees are observed across various Sub-Saharan African countries (Table V).134 In 2018, the average numbering fee within the Sub-Saharan African countries was USD 0.26 per assigned/booked phone number.135 In developed countries, charges for numbering are not very common.136 Numbering fees (number of Numbering fees (number of assigned/booked phone numbers assigned/booked phone Country (USD/number) Country numbers (USD/number) Burkina Faso 0.71 Egypt 0.00 Ghana 0.49 Kenya 0.00 Congo, Dem. Rep (DRC) 0.44 Madagascar 0.00 Senegal 0.35 Morocco 0.00 Cameroon 0.27 South Africa 0.00 Benin 0.27 Angola 0.24 Tanzania 0.20 Tunisia 0.19 Cote d'Ivoire 0.17 Nigeria 0.02 Table V. Overview of numbering fees in African countries. Source: Data taken from G. Rota-Graziosi and F. Sawadogo, 2020, “The tax burden on mobile network operators in Africa.” The DRC has introduced a registration levy consisting of an annual payment of USD 1 for 2G handsets and USD 7 for 3G and 4G handsets.137 The DRC also imposes a new monthly fee (RAM – Registre des Appareils 134 GSMA. 2019. “Rethinking mobile taxation to improve connectivity” . 135 G. Rota-Graziosi and F. Sawadogo. 2020. “The tax burden on mobile network operators in Africa”, Foundation pour les Études et Recherches sur le Développement International . 136 Antelope Consulting (2018), “Discussion on the numbering regulation for Somalia”. http://public.antelopeweb.fmail.co.uk/publications/Discussion%20on%20the%20numbering%20regulation%20for %20Somalia.pdf. 137 Decree no. 20/005 of 9 March 2020 (Décret n° 20/005 du 09 mars 2020 modifiait et complétant le Décret n° 012/15 du 20 février 2012 fixant les modalités de calcul et les taux des revenus des prestations de l’Autorité de Régul ation de la Poste et des Télécommunications, « A.R.P.T.C.» en sigle). See, for instance: https://www.financialafrik.com/2020/04/28/rdc-les-appareils-mobiles-desormais-taxes-de-1-a-7-dollars- usd/#:~:text=C'est%20le%20Journal%20officiel,la%20Poste%20et%20des%20T%C3%A9l%C3%A9communications; 34 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Mobiles) on all mobile devices on Congolese territory “ranging from the equivalent of US$0.17 for 2G devices to more than US$1.17 for 3G and 4G devices over a six-month period.” According to the government, this fee would allow them to “limit the market of counterfeit mobile devices, combat mobile device theft, and improve the quality of the mobile phone network by blocking non-compliant devices with international standards.”138 3.3. Telecom operators’ exemptions and incentives Most countries reviewed have tax incentives that apply across all sectors or in the telecom sector. The incentives frequently aim to attract foreign investment by promoting the country as a location for investors or fostering local investment in specific economic sectors or zones with low-income or high unemployment rates.139 Incentives may be profit-based (e.g., CIT holidays, preferential tax rates, or income exemptions) or cost-based (e.g., special deductions and tax credits, accelerated depreciation schemes, or reducing the cost of acquiring new equipment). There are thresholds that have to be met to access general tax exemptions. For example, in Burkina Faso, a company in all sectors that invests between 2,000 million XOF (approx. USD 3.69 million) and 25 million XOF (approx. USD 46,17) and creates at least 40 jobs enjoys an exemption from income tax for 4 years and reduction of income tax of 50 percent on years 5 to 7 during their operational period.140 Nigeria offers investment incentives and license incentives to telecom operators. For example, investing telecom operators can periodically recover their investment and have access to a guarantee of long-term loans at minimal interest rates. Some countries, such as Tanzania, Togo, and South Africa, do not provide specific tax incentives to telecom operators. Other benefits related to import duties apply. For example, businesses in the East African Community (EAC) region (including those in the telecom value chain) enjoy a Common External Tariff rate within the community. Telecom equipment is subject to 0 percent customs duty, and ICT equipment is exempt from VAT. Tunisia provides an exemption for import duties for equipment from EU countries in the application of the Tunisian-EU Union Association agreement. Customs exemptions for capital goods are justified to support production efficiency. However, a better policy would be to direct tax policy towards neutrality and set a zero tariff on all capital products in the customs code to reduce distortions that may create welfare costs.141 Incentives can affect the level playing field. In some countries, telecom operators may enjoy tax incentives due to special agreements with the government. MTN Congo S.A. (MTN Congo-Brazzaville) was granted a five-year 50 percent reduction on its corporate tax rate as a result of such an investment agreement. In the 2019 financial year, following the enactment of new local legislation, the tax incentive granted was https://deskeco.com/2020/04/27/rdc-la-nouvelle-taxe-de-larptc-sur-la-certification-des-smartphones-vient- frapper-le; https://www.digitalbusiness.africa/rd-congo-un-decret-introduit-une-taxe-de-1-a-7-dollars-sur-les- telephones-mobiles/ 138 P. Baraka. 2020. “New tax on mobile devices threatens digital inclusion in the Democratic Republic of Congo” . https://globalvoices.org/2020/12/30/new-tax-on-mobile-devices-threatens-digital-inclusion-in-the-democratic- republic-of-congo/ 139 T. Matheson, P. Petit. 2021, supra, p. 274-275. 140 Investment Code: Loi 038-2018/AN. 141 M. Keen. 2003. “Changing Customs: Challenges and Strategies for the Reform of Customs Administration”, IMF . https://www.elibrary.imf.org/view/books/058/01185-9781589062115-en/ch02.xml 35 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa reduced to a 25 percent reduction for the remainder of the agreement.142 Deferred payments for spectrum fees have been observed, too, although for selected types of operators. The licensing framework in South Africa provided a payment holiday for three to five years for the proposed wireless open-access network (WOAN), while in Kenya, operators with more than 50 percent local ownership can pay spectrum fees in installments during a 5-year period. In these cases, the differential treatment of operators regarding taxes and fee payments can affect the level playing field and market dynamics. It is worth highlighting that specific investment agreements might be necessary for fragile countries to be able to attract investment. Still, robust monitoring and triggers to phase out incentives should be considered. The adequate tax level of telecom companies raises the question of whether tax incentives are appropriate. Some authors argue that allocating investment incentives to the telecom sector is unjustifiable, given that telecom operator licenses confer exclusive rights to exploit locational rents from selling services to the domestic market.143 However, telecom companies help in bridging the digital divide. Tax incentives, such as exemptions or lower rates, could make mobile phone equipment and services more affordable.144 Still, alternative policies, such as targeted subsidies to the demand or supply side, could be more effective. Therefore, tax incentives must be well-designed and administered to maximize effectiveness and efficiency.145 Fiscal transparency and good governance are required for accountability and consistency, as well as to decrease opportunities for rent-seeking and corruption. To the extent possible, tax incentives should also be granted based on rules rather than discretion. Tax incentives should be subject to legislative oversight unified in the tax legislation, and their fiscal costs on the broader economy should be assessed periodically as part of a tax expenditure review. Countries should prioritize the establishment of adequate systems for monitoring the implementation of projects that receive discretionary fiscal benefits based on performance criteria, at the very least through random audits. 4. Taxes and fees on users of digital connectivity Subscribers of telecommunications services in some African countries are subject to general taxes such as VAT and sales taxes at higher rates than other sectors and to sector-specific taxes and fees applicable to telecom products and services. Box III provides an overview of telecom users’ taxes and fees on handsets and other mobile devices (including customs duties at higher rates), SIM activation and connection charges, and telecommunication services (voice, SMS, and data), which are directly borne by telecom 142 MTN Group Limited, Annual Financial Statements for the year ended 31 December 2020, p. 54. https://www.mtn.com/wp-content/uploads/2021/03/2020-MTN-Annual-Financial-Statements.pdf 143 T. Matheson, P. Petit. 2021, supra, p. 271. 144 J. Mistry. 2005. “A conceptual framework for the role of government in bridging the digital divide”, Journal of Global Information Technology Management 8(3), 28-47. 145 IMF, OECD, UN and World Bank. 2015. “Options for Low-Income Countries’ Effective and Efficient Use of Tax Incentives for Investment”, report to the G-20 Development Working Group, p. 19. https://www.oecd.org/tax/options-for-low-income-countries-effective-and-efficient-use-of-tax-incentives-for- investment.pdf. For guidance on cost-benefit analysis of incentives, see also H. Kronfol and V. Steenbergen. 2020. “Evaluating the Costs and Benefits of Corporate Tax Incentives: Methodological Approaches and Policy Considerations”, Finance, Competitiveness and Innovation in Focus. World Bank, Washington, DC. 36 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa users and affect user prices. These taxes can be particularly regressive when the tax burden falls disproportionately on those with lower incomes. •General taxes (VAT) Handset/access device •Sector-specific taxes (excise taxes, luxury taxes) •General taxes (VAT) User Activation and connection •Sector-specific taxes (activation and connection fees) •General taxes (VAT) Use/consumption •Sector-specific taxes (excise duties on use) Box III. Overview of telecom user taxes and fees In revenue terms, voice is still the most important source of revenue in digital infrastructure, followed by data. Therefore, excise taxes or higher VAT on these services would have a relatively higher effect.146 4.1. Taxes on handsets and SIM cards Surcharges to general VAT on handsets increase the cost of device acquisition and accessing digital technologies. Countries such as Tanzania and Sudan apply higher VAT rates on handsets. According to the GSMA, taxes account for about 35 percent of the costs of mobile ownership in Tanzania. 147 In Sudan, an increased 30 percent VAT rate (as opposed to the regular 17 percent) applies to the sales of goods from telecom companies.148 Some countries implement tax exemptions or reduced VAT for handsets and other devices. For instance, Rwanda exempts mobile handsets and SIM cards from all taxes (including VAT) as an incentive to promote the ICT sector. Senegal also exempts VAT with respect to mobile and landline phone devices and SIM cards used by individuals and legal entities liable to the tax on telecom services.149 In Tunisia, a favorable VAT rate of 7 percent (instead of the general 19 percent) applies to mobile phones and accessories in a bid to promote the ICT sector. Kenya decided to implement tax exemptions on handsets in 2009, removing the 16 percent VAT rate on mobile handsets, encouraging their widespread adoption150 This shift made handsets more affordable, followed by a more than 200% increase in handset 146 For example, in Kenya, mobile services generated revenue of KES 280.1 billion (USD 2.50 billion) in 2020 representing an increase of 1.3% when compared to KES 276.6 billion (USD 2.47 billion) in 2019. Voice revenue contributed the highest share (35.8% of total mobile service revenue) followed by other mobile services including mobile money (33.7%) and data (24.7%), whereas SMS contributed only 5.8%. Investments in the mobile sub- sector grew by 28.9% to stand at KES 45.9 billion (USD 409 million) from KES 35.6 billion (USD 318 million) reported in 2019. Kenya’s Sector Statistics Report Q4 2020-2021, p. 20-21. https://www.ca.go.ke/wp- content/uploads/2021/09/Sector-Statistics-Report-Q4-2020-2021.pdf 147 GSMA. 2015. “Digital Inclusion and Mobile Sector Taxation in Tanzania”, p. 6. 148 Section 14(1) of the VAT Act (from 1 Jan. 2012). 149 See also art. 361 of the GTC. IBFD database, 2021. 150 N. Ndung’u. 2019. “Taxing mobile phone transactions in Africa; Lessons from Kenya”, Brookings Africa Growth Initiative. 37 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa purchases and a 50 percent-70 percent increase in penetration rates.151 The VAT Act 2013 allowed taxation of previously exempted products such as mobile phones, computer hardware, and software; now, mobile phone users in Kenya pay a 16 percent VAT on purchasing a mobile telephone.152 From a tax policy perspective, the question arises whether handsets, SIM cards, and other devices deserve to be subject to a reduced VAT rate to encourage consumption. Reduced VAT rates are generally seen as an inefficient subsidy to the poor and can greatly complicate VAT administration.153 Single-rate consumption tax systems are generally considered the least distortive and the most desirable.154 Also, rather than granting VAT exemptions, the focus should be minimizing distortions and eliminating any higher VAT on telecom goods and services than in other sectors. Targeted supply or demand subsidies as part of universal service policies in the sector would be more efficient than blanket VAT exemptions or lower VAT rates on access devices. The affordability of devices and mobile services is a key barrier to increasing penetration and usage, particularly for those with lower incomes. Governments and policymakers may address the affordability barriers caused by taxes on devices and connections to allow more users to access the internet and use digital technologies, expanding the size and value of the telecom network. Both higher VAT rates and higher import duties on devices and SIM cards may be passed on to the users and should be avoided. Tax policy should not raise the cost of network access. Removing different VAT treatments (by reducing VAT exemptions and reduced VAT rates) could be considered to improve the efficiency and revenue-raising potential of VAT systems. The elimination of excessive customs duties, as well as VAT overcharges, could lower the effective price of devices. Removing high taxes on small, portable goods like mobile phones may also reduce the risk of smuggling.155 4.2. Activation and connection charges In addition to handsets and SIM cards, users may be subject to sector-specific taxes and fees for the activation and connection (e.g., activation fees for SIM cards and numbering fees). While these types of charges are rarely observed internationally, some African countries levy such charges. These are usually fixed amounts, disproportionately affecting lower-income people, especially when deciding to connect and adopt digital technologies. Table VI provides an overview of three African countries. Selected countries Levies/fees Benin 0.80% WAEMU Community Solidarity levy on SIM cards 0.50% ECOWAS community levy on SIM cards 151 D. Strusani and G. Solomon. 2011. “Mobile telephony and taxation in Kenya”, GSMA and Deloitte LLP, United Kingdom. https://www.gsma.com/publicpolicy/wp-content/ 152 N. Ndgung’u. 2019. “Taxing mobile phone transactions in Africa: Lessons from Kenya”, Africa Growth Initiative, Policy Brief, p. 2-3. 153 T. Matheson, P. Petit. 2021, supra, p. 270. 154 OECD. 2017. International VAT/GST Guidelines, OECD Publishing, Paris. https://www.oecd.org/ctp/international-vat-gst-guidelines-9789264271401-en.htm 155 T. Matheson, P. Petit. 2021, supra, p. 270. 38 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa 0.20% African Union Solidary levy on SIM cards 1% statistical fee on SIM cards 0.5% urban development charge on SIM cards Côte d’Ivoire 1% statistical fee on SIM cards 1% Community Solidarity levy on SIM cards 0.5% Community compensatory levy on SIM cards Ghana 2.5% National Health Insurance Levy on the supply of SIM cards 2.5% GET Fund levy on the supply of SIM cards 20% of copyright levy on unrecorded SIM cards Table VI. Overview of selected activation taxes and fees in African countries. Telecom subscription services on mobile and fixed terminals may also be subject to a stamp duty tax. For instance, everyone using an Egyptian SIM card has to pay 0.67 EGP (approx. USD 0.042) every month in stamp tax to the Egyptian authorities.156 Tunisia levies a 0.140 DT (approx. USD 0.049) on each dinar or fraction of a dinar invoiced or paid, for telephone services and recharging operations, except for internet services provided to natural persons not intended for professional use.157 SIM card taxes and levies increase prices, create barriers to mobile ownership, and threaten digital inclusion. Reduced affordability of mobile services could result in a loss of revenue that could be generated otherwise through taxes on mobile usage and revenues from operators. Removing these activation and connection taxes can help lower affordability barriers, encouraging more people to enter the mobile market and use digital services, thus expanding the government's tax base. 4.3. Taxes on the use of telecommunication services After purchasing a handset and paying activation fees to gain access to a telecom network, the user is subject to VAT (in some cases at higher rates) but also sector-specific taxes for using fixed and mobile telecommunication services. Based on Tarifica data collected in June-October 2020 for 37 African countries, the average consumer tax rate on mobile internet services is 11 percent, and the average rate for fixed internet services for a plan catered to SMEs is 15 percent - higher than the average for low- income countries and middle-income countries (excluding African countries) (Figure VIII and Figure IX).158 At least 6 countries have tax rates higher than 20 percent. 156 Article 99 of the Stamp Duty Law No. 111 of 1980. The stamp duty tax on telecom services has been increased with 31% mid 2020, from EGP 0.51 (USD 0.032) to EGP 0.67 (USD 0.042). 157 Art. 117(8) of the Registration and Stamp duty Code. 158 Implied taxes calculated by comparing final prices for internet packages including taxes versus prices excluding consumer taxes based on information published on operators’ websites. The total sample of countries included in the analysis is 70 with 37 in Africa. The mobile services plans include 1GB (prepaid) or 10 GB (prepaid/postpaid) and the fixed internet plan includes 25 Mbps and unlimited monthly data. 39 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Figure VIII. Consumer Tax Rate on Mobile Internet Services of selected African countries as advertised by operators Source: Authors based on price data collected by Tarifica in June-October 2020. Figure IX. Consumer Tax Rate on Fixed Internet Services of selected African countries as advertised by operators Source: Authors based on price data collected by Tarifica in June-October 2020 4.3.1. Mobile services: calls, SMS, and data Many African countries levy sector-specific taxes on usage (including excise duties and other taxes). Zambia charges the highest excise duty at 17.5 percent to telecom services such as internet and data 40 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa services, placing and receiving calls and text message services, and mobile money services. In Tanzania, mobile services, including calls, SMS, and data, are subject to an airtime excise tax of 17 percent in addition to the 18 percent VAT rate. Algeria imposes a tax on prepaid mobile phone services of 7 percent (previously 5%).159 In Cameroon, an excise duty of 2 percent applies to mobile telephone communications and internet services. In the DRC, 10 percent excise duties apply to mobile services in addition to the standard VAT rate.160 In Uganda, excise duty is chargeable on telecom goods and services at the following rates: 12 percent on airtime161 and value-added services.162 Starting July 1, 2021, a 12 percent excise duty on mobile data replaced the social media tax imposed in 2018 (daily tax of 200 shillings (USD 0.055) to use any of the mobile apps covered under the OTT tax). Consequently, the total tax on internet use is 30 percent after factoring in the existing 18 percent VAT.163 In Madagascar, an excise duty of 8 percent (previously 10 percent in 2020) applies to telecom services such as internet and data services, placing and receiving calls and text message services, and mobile money services.164 In Gambia, mobile phone services are subject to 10 percent excise duty. In Kenya, airtime and telephone services (SMS, voice, and mobile data services) are chargeable to excise duty at 20 percent of their excisable value.165 Rwanda features an excise duty of 10 percent on telephone communications.166 Telecom services, such as the provision of data and telephone calls, are generally subject to the general rate of VAT, ranging from 12.5 percent (Ghana) to 19.25 percent (Cameroon). Ghana imposes a 5 percent (previously 9 percent) communications service tax on charges payable to users of an electronic service, which includes placing and receiving voice calls, SMS/text messages, and internet/data services.167 Burundi levies a tax on local calls at the rate of BIF 52 per minute (approx. USD 0.026).168 In Côte d‘Ivoire, a specific tax on phone calls, information technologies, and communication services is levied at a rate of 3 percent on the VAT exclusive invoice amount in respect of communication services provided by mobile companies and internet service providers.169 Mauritius levies 10 cents per SMS on every message that an operator sends.170 Benin levies a consumption contribution on all electronic communication services (voice, SMS, and internet) at 5 percent of the service price.171 In Guinea, the tax on telephone consumption applies to telephone usage at the rate of 1 GNF (USD 0.0001) per second on telephone calls (outgoing and incoming), 10 GNF (USD 0.001) per connection for SMS messages, and 5 percent of the price of any 159 Article 76 of Finance Law 2017. 160 Ordinance-Law No. 007/2012 of 21 September 2012 on the Excise Code, and Ordinance Law No. 011/2012 of 21 September 2012 establishing a new Tariff of Import Duties and Taxes. 161 12% for fiscal year 2021/2022 (previously 20%). Value added services include internet. See also: https://www.ucc.co.ug/wp-content/uploads/2021/09/2Q21-MARKET-PERFOMANCE-REPORT-compressed.pdf 162 Excise Duty Act 2014. 163 https://qz.com/africa/2028653/uganda-replaces-ott-social-media-tax-with-tax-on-internet-bundles/ 164 Article 03.01.01 with its appendix of the General Tax Code. 165 Increased from 15% to 20%, effective 1 July 2021 (Finance Act 2021). Sec 32(b)(i) Kenya’s Finance Act 10 of 2018. 166 Article 4 on Products and corresponding rates of the 2019 Law Establishing the Excise Duty. 167 Introduced by the Communications Service Tax (Amendment) Act 2019. 168 Budget Law 2018/19 (taxe spécifique de téléphonie mobile sur le trafic national) (article 66). 169 Article 1141 of the GTC (i.e., taxe sur les communication téléphoniques et technologies de l’information et de la communication). See also IBFD database, 2021. 170 Value Added Tax Act, Sec. 506. 171 Decree No. 2018-341 of July 25, 2018. 41 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa internet services.172 The tax of 1 GNF per second raised the average price per minute by 14.2 percent, resulting in an immediate 16.1 percent fall in voice traffic.173 The decline in voice traffic was offset by an increase in SMS traffic, which prompted the government to include texting in the excise base in late 2015, resulting in an even steeper drop in SMS traffic. Voice traffic quickly resumed its increasing trend but remained around 15 percent below its pre-tax level.174 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% VAT on usage Mobile-specific tax on usage Figure X. Combined tax rates on use of mobile services in 2021 Source: Authors’ calculation using Telecom Taxes and Fees database and national legislations in 2021 The cost of mobile usage represents a large component of the total cost of mobile ownership for African users, and excise taxes only contribute to higher prices that affect the adoption and use of digital technologies. The removal of sector-specific (excise) taxes on telecom services could result in a reduction in the cost of mobile services. For instance, several telecom operators reduced the costs for internet services in response to the removal of the excise duty on telecom services on 1 January 2020 in Chad175.176 4.3.2. Taxes and fees on international traffic International incoming calls may also be subject to additional sector-specific taxes in the form of ‘surtaxes on incoming international traffic’ (SIIT). Surtaxes on incoming international traffic may impact users in the 172 World Bank. 2019a. “Guinea: Opportunities for Enhanced Domestic Revenue Mobilization” . 173 T. Matheson, P. Petit. 2021, supra, p. 267. 174 T. Matheson, P. Petit. 2021, supra, p. 267. 175 Chad’s Finance Act 2020, adopted on 30 December 2019. 176 Airtel reduced the cost of 200Mb from USD 0.89 (FCFA 500) (the price since Jan 2018) to USD 0.72 (FCFA 400). It also lowered the costs of its 4Gb and 7Gb data plans to USD 7.16 (FCFA 4000) and USD 17.89 (FCFA 10,000) respectively, from USD 8.95 (FCFA 5,000) and USD 21.47 (FCFA 12,000). Tigo also lowered the prices of its data plans. Its 50Mb data plan costs USD 0.27 (FCFA 150) instead of USD 0.36 (FCFA 200), it lowered the cost of its 200Mb plan by USD 0.18 (FCFA 100) and its 500Mb plan fell from USD 1.79 (FCFA 1000) to USD 1.51 (FCFA 845). 42 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa African region and raise the cost of international connectivity. Increased costs of international calls could create obstacles to regional and international trade for local and regional businesses. The taxes also risk reducing remittances to local users and reducing the country’s overall competitiveness. Excises on international calls could also trigger a shift to untaxed platforms, both legal and illegal.177 Cross-border callers have been particularly inclined to use voice-over-Internet protocol (VoIP) to avoid these taxes. An illegal alternative is the usage of ‘SIM boxes,’ which employ local SIM cards to convert international calls made over the Internet into local phone calls.178 Among the 20 countries in the sample, incoming calls are subject to fees ranging between USD 0.08 per minute and USD 0.19 per minute (Table VII). According to Deloitte and GSMA’s report on surtaxes on international incoming traffic in Africa, the tax in the countries where SIIT is applied has caused the price of terminating international incoming calls to increase by an average of 97 percent.179 Kenya, Rwanda, Burundi, Uganda, and South Sudan agreed in May 2014 to waive the SIIT for calls originating in these countries as part of the agreement for the One Network Area, but Burundi reimplemented the SIIT in 2019. ECOWAS countries are also subject to policies to eliminate such fees, but with limited implementation. Benin stopped applying the specific tax, which was 53 CFA (approx. USD 0.098)/min in 2016.180 Niger USD 0.16 per minute181 Burundi USD 0.16 per minute182 Senegal CFAF 74.45 (USD 0.13) per minute183 Guinea USD 0.12 per minute184 177 T. Matheson, P. Petit. 2021. “Taxing telecommunications in developing countries”, International Tax and Public Finance, Vol. 28, issue 1, No. 9, p. 269. 178 While estimating the magnitude of the illegal market is complex, the GSMA (2014) reported that 10% of international calls in Ghana were re-routed via illegal SIM boxes. As a result, authorities have employed sophisticated tools to track SIM boxes and their owners. GSMA. 2014. Surtaxes on International Incoming Traffic in Africa. 179 GSMA. 2014. “Surtaxes on International Incoming Traffic in Africa”. 180 Regulatory Watch Initiative (RWI) phase 2 (March 2021), “Thorough legal, regulatory and competitive analyses of issues related to licensing, OTTs, international gateways, spectrum management, and regulatory governance ”, p. 103. 181 The tax on incoming international calls (taxe sur la terminaison du trafic international entrant, TTIC) at F.CFA 88 (approx. USD 0.16 per call, per minute), repealed by Finance Law 2018 in November 2017 (previously, the TTIC was USD 0.11 per min), was reintroduced by Finance Law 2019. 182 Article 64 of the Budget Law 2018/19. The Budget Law 2018/19 introduced a tax on incoming international telephone calls (redevance téléphonique). 183 Decree No. 2011-1271 of 24 August 2011, repealing and replacing Decree No. 2010-632 of 28 May 2010. USD 0.215 (CFAF 141.035) per minute for international telephone calls entering Senegal for termination to fixed and mobile networks. 184 World Bank. 2019a. “Guinea: Opportunities for Enhanced Domestic Revenue Mobilization” . 43 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Uganda USD 0.09 per minute (other than calls from the Republic of Kenya, the Republic of Rwanda and the Republic of South Sudan)185 Table VII. Selected examples of taxes on incoming international traffic Source: authors’ own desk research. 4.3.3. Taxes on digital services offered on digital infrastructure Applying taxes to transactions involving digital goods and services remains a challenge. Given the growing popularity and success of over-the-top and digital financial services, we discuss these two examples of digital services that have attracted the attention of tax authorities and governments. Challenges in taxing digital goods and services As more transactions are conducted online, governments are rethinking the application of indirect taxes on these transactions to keep or expand the tax base. Applying VAT/GST on online purchases is a good practice to level the playing field between online and offline transactions.186 Monitoring and identifying digital activity is extremely challenging in case of a lack of physical presence and the intangible character of the goods and services provided in the region, particularly in a cross-border context. By 2021, more than 80 countries worldwide, 10 in Sub-Saharan Africa, have introduced consumption taxes on digitally provided goods and services.187 188 Kenya, while electronic services delivered to a person in Kenya were already within the scope of the VAT, the Finance Act 2019 specified that supplies made through a digital marketplace are also subject to VAT. However, the current administrative challenges of collecting VAT from digital goods and services provided by non-residents remain unaddressed. Regulations are to be passed to provide for implementation mechanisms.189 Over-the-top (OTT) services A trend in several African countries is taxing the usage of certain digital media services, commonly referred to as over-the-top (OTT) services. Online social networking and communication services provided on online platforms have been singled out as taxation targets. For example, on July 1, 2018, Uganda introduced a social media tax of UGX 200 (USD 0.055) per day or UGX 1,400 (USD 0.38) for a week on July 1, 2018, accessing digital platforms, including WhatsApp, Facebook, and Twitter.190 The OTT tax in Uganda was intended to reduce the time citizens spent online and supposedly curb the spread of false information. Interestingly, the OTT tax only generated 0.27 percent of overall revenues in fiscal year 185 https://taxsummaries.pwc.com/uganda/corporate/other-taxes 186 See, for example, OECD. 2019. https://www.oecd.org/tax/the-role-of-digital-platforms-in-the-collection-of-vat- gst-on-online-sales-e0e2dd2d-en.htm 187 World Bank. 2022. Presentation on digital taxation, Webinar on Digital Taxation. 188 VAT Act, No. 35, Sec. 5(7) and 5(9). http://www.kenyalaw.org:8181/exist/kenyalex/actview.xql?actid=No.%2035%20of%202013 189 For a more detailed discussion on the taxation of digital services worldwide, see the World Bank. 2021. World Development Report: Data for Better Lives, chapter 7. 190 Ivory Coast, FY19 Financial Law. 44 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa 2019,191 less than 20 percent of the target due.192 The low tax collection was mainly due to poor policy design, which encouraged high avoidance (e.g., by using virtual private networks) and administrative difficulties.193 The Excise Duty (Amendment) Act 2021 repealed the OTT tax. Starting July 1, 2021, all internet subscribers in Uganda will have to pay a new 12 percent on internet bundles. Benin repealed a social media tax of USD 0.0089 (5 FCFA) fee per MB for data used to access social media to raise revenue for public services after online and street protests.194 4.3.4. Digital financial services More recently, mobile money and other digital financial services have attracted the interest of tax authorities looking to close budget deficits. Taxation has taken various forms, ranging from excise duties on the fees or charges levied by mobile money providers (including telecom operators) to transaction taxes on the underlying amount. Kenya was one of the first countries in Africa to introduce a tax on fees charges for mobile phone-based financial transactions. Implementing the Finance Act 2023 has aligned this rate with the 15 percent excise duty imposed on fees for traditional money transfer services by banks and money transfer agencies.195 Excise duty on digital transaction fees also applies in Uganda (15 percent) and Tanzania (10 percent), similar to the excise duties imposed on fees charged by banks and other traditional financial service providers. Taxing transaction fees may have a more significant impact on poor consumers, as these fees often represent a larger proportion of the transaction amount due to price discrimination.196 Transaction taxes on the underlying amount have gained importance in Sub-Saharan African countries.197 In Uganda, a digital financial services tax went into effect in July 2018, which was the first time a transaction tax (at an initial rate of 1 percent on mobile money deposits, withdrawals, transfers, and payments between persons) had been enacted.198 It was reported that the measure had a significant impact on Ugandan demand for mobile money services, with over half of mobile money users abandoning 191 Although the telecom sector contributes less than 2% of Uganda’s GDP, ICT contributes a significant share of domestic revenues – climbing to 10.5% of overall revenues (3% consists of excise duties) in 2019. See World Bank. 2020. “Digital solutions in a time of crisis”, p. 7. 192 S.N. Kavuma et al. 2020. “An analysis of the distributional impact of excise duty i n Uganda using a tax-benefit microsimulation model”, WIDER Working Paper, No. 2020/70, ISBN 978 -92-9256-827-6, The United Nations University World Institute for Development Economics Research (UNU-WIDER), Helsinki, p. 5. 193 S.N. Kavuma, et al. 2020, supra, p. 5. 194 The Decree 218-34 of July 25, 2018. 195 Sec 32(b)(iii) Kenya’s Finance Act 10 of 2018, as amended by the Finance Act 2023. See also Excise Duty Act (First Schedule, part II – excisable services, as amended). Before 1 July 2023, money transfer services by banks, money transfer agencies, and other financial service providers incurred a 20 percent excise duty, whereas excise duty on mobile-based money transfer services was set at 12 percent. 196 H. Niesten and A. Diouf. 2023. “How do taxes affect the price of digital financial services”, Blog International Center for Tax and Development. https://www.ictd.ac/blog/taxes-affect-price-digital-financial-services/ 197 See the interactive website developed by A. Diouf and H. Niesten, 2023, “Taxation of Digital Financial Services in Africa”, International Centre for Tax and Development. https://digitalfinancialservices.tax/. 198 GSMA. 2020a. “The causes and consequences of mobile money taxation: An examination of mobile money transaction taxes in Sub-Saharan Africa”, p. 21. 45 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa mobile money transactions in favor of cash and bank transfers.199 Weaknesses in the tax policymaking process, particularly minimal research and incident analysis and limited stakeholder consultation, undermined the quality of policy design.200 In response to public outcry and the drop in usage of MM services, the tax law was revised in November 2018, imposing a 0.5 percent tax on the value of withdrawals only (but not at the time of actual transfer).201 In other countries, such as Guinea, mobile money is not subject to any specific excise taxes, although revenues are included in sector-specific taxes on revenues (TARTEL in Guinea).202 In Tanzania, in the face of the Covid-19 pandemic, the government introduced new levies on ‘mobile money transfers and withdrawal transactions levy’ (MM transfer tax) in July 2021203, which were later adjusted with a reduced rate and a broader scope effective September 1, 2021, following public outcry.204 The Finance Act 2021 amended the National Payment Systems 2015 (NPS Act) to establish this levy, initially ranging from USD 0.0043 (TZS 10) to USD 4 (TZS 10,000), depending on transaction size. This led to a shift away from mobile money usage.205 On August 31, 2021, the Finance Minister announced a 30 percent reduction in these levies, with mobile telecommunications operators also lowering their fees by 10 percent.206 The Finance Act 2023 abolished the mobile money transaction levy on sending and receiving money via digital platforms. The levy, which still applies to electronic payment withdrawals, applies in addition to indirect taxes on money transfers by way of excise duty (10 percent) and VAT (18 percent). In Zimbabwe, the Ministry of Finance and Economic Development promulgated a law in October 2018 that imposes an intermediated money transfer tax at a rate of 2 percent on the transfer of money between persons mediated by financial institutions other than by cheque.207 This levy encompassed all financial 199 GSMA. 2020a. “The causes and consequences of mobile money taxation: An examination of mobile money transaction taxes in Sub-Saharan Africa”, p. 22. 200 A. Lees and D. Akol. 2021. “There and Back Again: The Making of Uganda’s Mobile Money Tax”, ICTD Working Paper 123. 201 Excise Duty (Amendment) (No. 2) Bill, 2018. See: A. Lees and D. Akol. 2021. “There and Back Again: The Making of Uganda’s Mobile Money Tax”, ICTD Working Paper 123, Brighton, Institute of Development Studies. 202 World Bank. 2019a. “Guinea: Opportunities for Enhanced Domestic Revenue Mobilization ”, p. 57. 203 These regulations have been issued as follows: The National Payment Systems (Electronic Mobile Money Transfer and Withdrawal Transactions Levy) Regulations, 2021: Government Notice No 496A of 2021, published on 30 June 2021, and The Electronic and Postal Communications (Airtime Levy) Regulations 2021: Government Notice No 496M of 2021, published on 30 June 2021. http://www.parliament.go.tz/polis/uploads/bills/1623832428- 13.06.2021%20THE%20FINANCE%20BILL%202021.pdf 204 Government Notice No 642A of 2021, published on 31 August 2021. 205 GSMA. 2021a. “Tanzania mobile money levy impact analysis”. 206 The tax ranges from TZS 7 to TZS 7,000 (USD 0.03 to USD 3.04), depending on the transaction size. Furthermore, the scope of electronic MM was broadened to “also include money transferred or withdrawn throug h an approved payment system administered by a bank or financial institution”, aiming to level the playing field between banks and mobile companies. 207 Finance Act [Chapter 23:04], Sec. 22 G. http://www.zimtreasury.gov.zw/index.php?option=com_phocadownload&view=category&id=14:finance- act&Itemid=790. See also: Income Tax Act, Sec. 36G; Statutory Instrument 205 of 2018. https://www.veritaszim.net/sites/veritas_d/files/SI%202018-205%20- %20Amendments%20to%20Finance%20Act%20%26%20Income%20Tax%20Act.pdf ; 46 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa transactions conducted through digital platforms, including mobile money.208 The policy’s primary goal was to mobilize resources to address various macroeconomic challenges.209 As Zimbabwe experienced a predominance of electronic transactions due to cash shortages, this tax significantly increased the cost of digital financial transactions. The government’s rationale rested on the notion that the economy was predominantly informal, with the informal sector not paying taxes, necessitating a means to formalize this sector’s contributions. Comprehensive technical assessments to measure the effects of mobile money taxation on revenue collection, user costs, service utilization, and market dynamics are yet to be undertaken. Furthermore, well-designed tax policies are important to avoid double taxation and mitigate adverse effects, such as setting a de minimis threshold for exempting smaller transactions or considering the tax as an input tax credit under VAT or a withholding tax for business income tax purposes. Ghana, one of the recent countries implementing a tax on digital financial services, initiated an electronic transfer levy (e-levy) on 1 May 2022.210 Since January 2023, the e-levy applies at a rate of 1% on specified transactions’ value, primarily imposed on the payer (previously 1.5% before January 2023).211 Significant economic distortions can occur when mobile money taxation disproportionately penalizes digital transactions over traditional banking services (banks or cash transactions).212 Traditional means (e.g., bank transfers) are often not an option for poor consumers living in rural or urban areas. Such taxation policies risk impeding progress in electronic payments and financial inclusion without substantially expanding the tax base.213 For example, mobile money-related taxes typically contribute less than 1 percent of total tax revenue in Kenya, providing only marginal revenue while incurring high economic opportunity costs. Higher tax rates on low-level retail electronic transactions may likely discourage the use of mobile phone transactions, especially among price-sensitive users with lower incomes, incentivizing them to revert to cash transactions and reducing tax revenue.214 Furthermore, taxing emerging digital services may limit uptake and positive externalities to the economy, including the possibility of expanding the tax base as more transactions enter the formal economy. http://www.zimtreasury.gov.zw/index.php?option=com_phocadownload&view=category&id=14:finance- act&Itemid=790 208 Income Tax Act (Chapter 23:06), Thirteenth Schedule, par. 1. See also: https://www.veritaszim.net/sites/veritas_d/files/Analysing%20the%20Impact%20of%20the%20Intermediary%20Fi nancial%20Transactional%20Tax.pdf 209 The recent Addis Tax Initiative indicated that developing countries must make use of tax revenue resources from their tax policies to complement technical support from developed countries. https://www.addistaxinitiative.net/ 210 Electronic Transfer Levy Act 2022 (Act 1075). 211 Electronic Transfer Levy (Amendment) Act 2022 (Act 1089). 212 H. Niesten. 2023. “Are Digital and Traditional Financial Services Taxed the Same? A Comprehensive Assessment of Tax Policies in Nine African Countries”, Working Paper No. 17937, Institute of Development Studies, International Center for Tax and Development. 213 N. Ndung’u. 2019. “Taxing Mobile Phone Transactions in Africa: Lessons from Kenya”, Brookings Institution, Africa Growth Initiative Policy Brief. 214 N. Ndung’u. 2019. “Taxing Mobile Phone Transactions in Africa: Lessons from Kenya ”, Brookings Institution, Africa Growth Initiative Policy Brief. 47 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa 5. Tax policy considerations for digital transformation in Africa Enhanced governance on imposing taxes and fees on the telecom sector could address grey areas, ambiguities, and gaps in the various laws regulating tax and parafiscal fee policies. Multiple taxes and parafiscal fees are applied in the sector under various laws and regulations, increasing the system's complexity. Based on the analysis of the African countries reviewed for this report, transparency and simplicity of specific taxes and fees on telecom services and equipment/infrastructure vary due to the lack of clear guidelines on calculating, paying, and collecting taxes. Some of these taxes and fees are confidential or hard to access, which creates operational and regulatory uncertainty, resulting in discouraging investors and opening space for governance issues. This report identifies five key considerations to help African countries enhance taxation and parafiscal fees policies by developing a more efficient, equitable, and simple governance framework. Table VIII provides a summary of the reform recommendations, described in more detail in this report. It is worth highlighting that the extent to which reduction of tax and parafiscal burden on the sector will translate into further investments and benefits for citizens depends on the effectiveness of sectoral and cross- cutting policies to foster competition in the sector and provide incentives for infrastructure expansion and innovation. Therefore, reform of taxation and fees in the sector is not a silver bullet. Principles Reform recommendations Efficiency 1. Re-evaluate the tax and parafiscal fees policy framework and its social costs to eliminate distortions across sectors Simplicity 2. Ensure a simple and transparent legal and regulatory framework with clear provisions on the taxes and fees applicable to telecom operators and consumers. Equitability 3. Ensure an equitable tax framework by minimizing over-taxation of the digital economy and eliminating regressive taxes and those that discourage the uptake of digital services by the unconnected. Multilateralism 4. Streamline the national tax framework in line with the global tax policy reforms of the digital economy. Engagement 5. Maximize stakeholder involvement to ensure administrability, mitigate negative effects, and boost accountability. Table VIII. Summary of reform recommendations for the telecom sector in Africa 5.1. Recommendation 1. Re-evaluate the tax policy framework and its social costs. Governments and policymakers are advised to re-evaluate the tax policy framework and its social costs. • A clear tax policy framework should be binding on all authorities with competencies that may overlap or impact the telecom sector and ensure that when such decisions are being made, they are in line with the general policy goal. The new policy framework for taxes and fees in the telecom 48 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa sector should include improved research and analysis of tax proposals and a robust multi- stakeholder consultation process. The existing fiscal framework and rules on parafiscal fees result from years of a balance of competing interests, such as increasing tax collection, raising funds for the proper operation of regulators, and supporting the development of the telecom sector and now the digital economy. A common understanding of the policy goals regarding taxation, fees, and government priorities is key. • Amending the tax regime of the telecom sector requires mapping all the applicable taxes and fees and determining the appropriate level of taxes and fees to improve economic and administrative efficiency, enhance the transformation of the digital economy, and maximize financing for development in African countries. The tax policy formulation process should include an assessment of the potential impact of a proposed telecom tax on the broader economy and certain groups in the society (operator and consumer level). Additionally, the long-term benefit of digital economy development should be balanced with short- to medium-term revenue mobilization. For instance, although excise taxes on mobile phone services or international calls may raise immediate revenue for the treasury, higher taxes may translate into higher prices for users, thus limiting the use of digital technologies and subsequent services that could be taxed. Furthermore, inconsistencies in the tax and fees framework may unintentionally build an unequal playing field for the development of the sector versus other sectors of the economy. Based on efficiency considerations, excise taxes (or higher VAT) on digital connectivity services and access devices should be phased out. VAT exemptions or reduced VAT should be assessed against alternatives such as targeted demand or supply subsidies. • The implications for revenue collection in the overall legal framework should be carefully assessed. Governments could address the tax collection barriers to improve revenue collection from the telecom sector. Establishing and enforcing a reporting framework for telecom providers is crucial to collecting revenue from existing taxes before introducing new taxes. Revenue collection efforts from the telecom sector may be hampered by inadequate security and governance conditions, particularly in FCV countries, and necessitate significant improvements in revenue administration and tax collection. 5.2. Recommendation 2. Ensure a simple and transparent legal and regulatory framework with clear provisions on the taxes and fees applicable to telecom companies and consumers. Tax systems should be simple, transparent, stable, and predictable. The myriad of taxes and fees that are unique to the telecommunication sector increase not only the costs of filing on the part of operators but also increase revenue collection costs on the part of governments. When systems are unclear and in constant flux from year to year, this further exacerbates these administrative challenges. Additionally, the lack of transparency and predictability can also delay private investments. Easy access to simple and transparent information is key for decision-making for taxpayers, governments, and regulators. Updated information relating to the applicable telecom taxes and fees is either confidential or not publicly available in some jurisdictions. This necessitates regulatory engagement by potential investors and/or licensees to obtain the information. The lack of transparency creates operational and regulatory uncertainty, discouraging investors and making it unclear to users what taxes 49 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa they face. A simple and transparent tax system decreases the number of taxes that companies are obliged to pay, encourages fairness, and lowers the risk of tax evasion. It also reduces costs for operators and improves certainty about returns to investments. Strengthened legal regimes and regulations on licenses, authorizations, and regulatory fees will reduce barriers to entry and further open the telecommunications sector to competition and avoid penalizing entrants and smaller operators. African countries should revise their regulatory and legal framework or guidelines for the telecom sector to ensure that databases on the applicable taxes and fees, regulations, and regulatory processes are transparent and publicly accessible. Precise provisions on the taxes and fees must apply to the telecom sector. Keeping simple and straightforward regulations encourages compliance with applicable standards in the telecom sector. Where authorities have been granted discretion, clear guidelines should be in place to ensure that the discretion is exercised to conform to the legislation. Regulations that are redundant and inefficient taxation should be eliminated. African countries should make it clear how fees collected outside of the treasury system are used to improve services (e.g., universal service fees, research and development fees, surtaxes on international incoming calls). As the digital economy grows, countries should modernize tax administration to increase efficiency and consider this as part of their policy objectives. Digital technologies can be used to foster tax compliance. For example, mobile money enables tax authorities to allow digital payments, which likely reduces inefficiencies and corruption of opportunities in tax collection. Allowing citizens to use mobile money to pay their taxes may minimize tax compliance costs. For instance, the Tanzania Revenue Authority allowed tax payments via mobile money for personal income and property taxes. Within a year of its launch in 2013, 15 percent of the tax base, including people who had never paid taxes before, were using mobile money to pay their tax bills. 5.3. Recommendation 3. Ensure an equitable tax framework by minimizing over- taxation of the digital economy and harmonizing telecom operators’ and users’ taxes and fees with other sectors. Revising the legal and regulatory framework of the telecom sector is needed to ensure a more equitable tax framework. While sufficient revenue is needed to finance the proper functioning of the government, an equitable tax system contributes to the re-establishment of the state’s legitimacy, which is key to stability and efficiency, especially in an FCV setting. Over-taxation of the African digital economy vis-à- vis other sectors and regions should be minimized. A simplified system and a more level-playing field for foreign and domestic telecom players should continue to be encouraged. Pathways to improving the fiscal framework include phasing out overcharges applied to the telecom sector, such as excise taxes or higher VAT rates, and re-evaluating the level of parafiscal fees, orienting them to costs needed to provide regulatory services. On the telecom operators’ side, discriminatory sector-specific taxes on top of general taxation raise the cost of investment, discourage the rollout of network coverage, and disproportionately disincentivize the use of digital services and investment in the telecom sector relative to other sectors. • Sector-specific taxes and parafiscal fees should be minimized. Instead of a high level of taxation mainly composed of sector-specific taxes and fees, countries should focus on a broad taxation base with a lower tax rate to raise the same revenue. CIT surcharges, particularly in fragile states, 50 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa may incentivize companies to shift profits across borders through more aggressive tax planning. Ad valorem excises (taxing the value of sales) and specific excises (based on quantities sold) should be assessed against trade-offs since these may generate market distortions. • Regulatory fees should be cost-based and not be levied on revenues. Excessive regulatory taxes and fees that exceed the administrative cost of monitoring and enforcement should be adjusted to alleviate the regulatory burden. Regulatory fees on revenues rather than profits result in the same payment from operators regardless of whether they retain their profit or use it to invest in new infrastructure and services, reducing economic efficiency by discouraging investment and innovation. • More targeted tax incentives can be adopted by states where investment in the telecom sector is still lagging. Targeted and temporary tax reductions with specific performance commitments could be considered, although strong monitoring and enforcement would be needed. This could also be evaluated with improvements in the universal access framework and implementation. Eliminating import duties for capital inputs (equipment) or other local taxes levied directly on infrastructure deployment can deliver immediate cost relief and facilitate network investment and could be an option given the relatively low importance as a tax collection source. On the telecom users’ side, taxes that target access to mobile devices and services (e.g., additional taxes on handsets, SIM cards, and other activation/connection charges) create a direct barrier for users to connect, access mobile networks, and start using digital technologies. • Additional (excise) sector-specific taxes on devices and telecommunication services should be minimized to reduce affordability barriers and enable more users to gain access to the internet and digital services. The negative effect of sector-specific taxes on the affordability and expansion of the digital sector should be carefully considered. Specific excise duties generally intend to discourage the use of certain products that cause negative externalities or to encourage income redistribution from a tax policy viewpoint. When fiscal resources allow, countries could eliminate or reduce sector-specific taxes to foster digitalization. In terms of VAT, there exists room to strengthen the functioning and design of VAT systems in African countries. Decreasing the number of VAT exemptions and lowering VAT rates could improve the efficiency and revenue- raising capacity of VAT systems in many developing countries. Surtaxes on incoming international calls are particularly detrimental to African businesses and users. Reducing over-taxation of receiving international calls could enhance telecom services affordability and ease barriers to regional and international trade. • Achieving neutrality between domestic and foreign suppliers is important, too. Part of the broader debate is also the removal of distortions across (local and foreign) suppliers and the application and expansion of VAT to effectively collect revenue on digital services to final consumers provided by foreign suppliers. The effective collection of VAT by tax authorities from foreign suppliers should be ensured, helping governments to protect VAT revenues and leveling the playing field between domestic and foreign telecom suppliers. The playing field between foreign and domestic suppliers can only be leveled through uniformly implementing common norms. • Taxation for emerging and new innovative services – such as mobile data and mobile money transfers – should be evaluated carefully to avoid negative impacts on goals to accelerate productivity and financial inclusion. The tax policymaking process should consider the implications on the mobile sector (consumer, the provider, the market) and the wider economy. 51 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa 5.4. Recommendation 4. Streamline the national tax framework to the global tax policy reforms of the digital economy. In addition to working towards an efficient, equitable, and fair tax system, African countries should significantly mitigate multinational operators from base erosion and profit shifting. At an administrative level, priority should be given to increasing capacity to deal with the complexities of international taxation and implement more effective transfer pricing rules. Furthermore, alignment with international practices on taxation of digital purchases and digital services and agreement on a multilateral or regional approach would help broaden the tax base in a context where transactions are becoming more digital. 5.5. Recommendation 5. Maximize stakeholder involvement. Stakeholder involvement is important for building trust between public authorities and private operators to establish a tax framework in line with international best practices. Developing multi-stakeholder platforms – involving government institutions, civil society (consumer associations), international partners, and the private sector (telecom business associations, business associations for SMEs, and other consumers of digital technologies) – incentivizes coordinated action and engagement at the regional and international level. These platforms could help African countries to learn from others and ensure that new international standards reflect the needs of African countries. A common understanding of commercial practices in telecommunications and taxation rules, as well as the technical capacity of regulators, tax administration authorities, and operators, would support better design of taxes and fees and minimize disputes on tax payments. As part of building trust in the tax policy and administration process, telecom operators could be involved in mapping out the various taxes and parafiscal fees applicable in the sector and their effects on the resources available for investment and consumer prices. The involvement of the telecom sector before setting new rates or imposing new taxes could give regulators a proper perspective on the expected impact that the taxes (rates) will have on the market. Excessive tax burdens, including double taxation, may cause telecom providers to lose confidence in the tax system, look for other means of reducing tax payments, or decide to exit the market. Telecom operators are also incentivized to make efforts to improve tax transparency. BEPS resulted in the development of country-by-country reporting that requires multinational entity groups to report on their operations in all countries where they operate, enabling tax administrations to better understand the structure of a group’s business and improving their risk assessment capacity. Vodafone is an example of a small number of companies that publish Country-by-Country reports voluntarily. Similar measures to address information asymmetries (e.g., cooperative compliance processes and frameworks) could help build trust, which is particularly important for a large share of African administrations that are not (yet) in a position to obtain these reports bilaterally. 52 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Bibliography Abdullahi, Mariam. 2020. “Improving mobile internet access through digital literacy”. 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Overview of taxes and fees in the Telecom sector in selected African countries Info collected as of 31 October 2021. Best efforts were pursued to ensure completeness relying on Bowmans, GSMA, ITU, IBFD databases. EXCISE DUTIES AND CIT VAT VAT STAMP SURCHARGES REDUCTIONS SURCHARGES DUTIES INCENTIVES/EXEMPTIONS Angola Yes No No Yes Investment incentives Benin No No No No No Burkina Faso No No No No No Tax credits, customs waivers and investment Cameroon No No Yes No incentives Congo, Dem. Rep (DRC) No No Yes No No Cote d'Ivoire Yes No No No No Egypt No Yes No Yes No Ghana No No Yes No No Capital allowance, deductibility of capital Kenya No Yes Yes No expenditure Madagascar No No Yes No No Mauritius No No No No No Morocco No No No No No Nigeria No No No No Investment incentives Rwanda No Yes Yes No Investment incentives Senegal No No No No Investment incentives South Africa No No No No Investment incentives Tanzania No No Yes No No Togo No No No No No Tunisia Yes Yes No Yes Investment incentives Accelerated capital Uganda No No Yes No allowance deductions 61 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Annex 2. Overview of import duties in selected African countries Customs duties were collected from the World Trade Organisation (WTO) website. These refer to the Harmonised System (HS) code 851761 (‘Base stations for transmission or reception of voice, images or other data, incl. apparatus for communication in a wired/wireless network (such as a local/wide area network))’, HS Code 851712 (’Telephones for cellular networks’); and HS Code 852321 (‘Cards incorporating a magnetic stripe’). BASE STATIONS (HS MOBILE PHONES (HS SIM CARDS (HS 851761) 851712) 852321) Algeria 5% 5% 30% Angola 0% 10% 2% Benin 10% 10% 20% Botswana 0% 0% 5% Burkina Faso 10% 10% 20% Burundi 0% 0% 10% Cabo Verde 0% 0% 30% Cameroon 10% 10% 30% Central African 10% 10% 30% Republic (CAR) Chad 10% 10% 30% Comoros 20% 20% 20% Congo, Dem. Rep 10% 10% 20% (DRC) Congo, Rep. 10% 10% 30% Cote d'Ivoire 10% 10% 20% Djibouti 8% 8% 26% Egypt 0% 0% 0% Eswatini 0% 0% 5% Gabon 10% 10% 30% Gambia 10% 10% 20% Ghana 10% 10% 20% Guinea 10% 10% 20% Guinea-Bissau 10% 10% 20% Kenya 0% 0% 10% Lesotho 0% 0% 5% Liberia 10% 10% 20% Madagascar 5% 5% 20% 62 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa BASE STATIONS (HS MOBILE PHONES (HS SIM CARDS (HS 851761) 851712) 852321) Malawi 0% 0% 0% Mali 10% 10% 20% Mauritania 13% 20% 13% Mauritius 0% 0% 0% Morocco 2.50% 2.50% 2.50% Mozambique 7.50% 7.50% 7.50% Namibia 0.00% 0.00% 5.00% Niger 10.00% 10.00% 20.00% Nigeria 10% 10% 20% Rwanda 0% 0% 10% Senegal 10% 10% 20% Seychelles 0% 0% 0% Sierra Leone 10% 10% 20% South Africa 0% 0% 5% Tanzania 0% 0% 10% Togo 10% 10% 20% Tunisia 0% 0% 0% Uganda 10% 10% 10% Zambia 0% 0% 25% Zimbabwe 0% 25% 20% 63 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Annex 3. Regulatory licensing fees in selected African countries Country License Initial Licensing Fee Annual License Fees (Formula) Uganda National Public Service Prover USD 86,030 0.89% of prior year total audited (NPSP) gross revenue multiplied by license payment term/ minimum License valid for 5 years license value- whichever is higher National Public Infrastructure Provider (NPIP) License valid for 15 years Kenya Network Facilities Provider (Tier-1) KES 15,000,000 0.4% of Annual Gross Turnover, or (approx. USD 150,000) KES 4,000,000 (approx. USD License valid for 15 years. 40,000) whichever is higher. Allows a licensee to deploy communication infrastructure using any technology countrywide and allows for a national spectrum reservation and allocation particularly for mobile services. Network Facilities Provider (Tier-2) Same Tier-2: 0.4% of Annual Gross Turnover, or KES800,000 (approx. License valid for 15 years. USD 8,000) whichever is higher. Allows a licensee to deploy communication infrastructure countrywide, using any form of technology, with regional spectrum allocation. Tanzania Network Services License International USD 1% of GAT 300,000 Authorizes to operate electronic 1% of GAT or USD 3,000 whichever communication networks to deliver National USD 600,000 is greater services. Regional USD 23,100 1% of GAT or USD 2,500 whichever is greater District USD 5,000 1% of GAT or USD 1,000 whichever is greater Network Facilities License International USD 1% of GAT 200,000 Authorizes ownership and control 1% of GAT or USD 3,000 whichever of electronic communication National USD 400,000 is greater infrastructure. Regional USD 15,000 1% of GAT or USD 2,500 whichever is greater 64 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Country License Initial Licensing Fee Annual License Fees (Formula) District USD 100 1% of GAT or USD 1,000 whichever is greater Rwanda Entire Network Infrastructure USD 12,000 USD 184,000 Provider (NIP) Licence package License issued under cost-based approach and is valid for 15 years. Entire Network Service Provider USD 18,000 USD 275,000 (NSP) License package The license issued under cost-based approach and is valid for 15 years. Madagascar License for fixed network operator License fee of at least 2% of the turnover for a 40 Million Euros telecommunication company License valid for 20 years. operating with a license License for mobile network License fee of at least Same operator 60 Million Euros License valid for 10 years. Congo DRC Telephony: The initial license fee is 2% of annual pre-tax turnover. set by the regulator on a • Fixed line discretionary basis and • Fixed, wireless may either be set by auction or at a price not • Mobile lower than the price set before. High speed fibre-optic USD 50,000 – USD Same telecom network 150,000 – national connectivity Togo Fixed or mobile electronic No initial fee is provided Annual fee: 20,000,000 F CFA communication open to the by legislation. public South-Africa Individual licences: Applications for Licensee’s annual - percentage individual ECS and ECNS Electronic Communications Services licenses can only be (ECS) made once ICASA has 0 - 50 000 000: 0.15% Electronic Communications issued an invitation to 50 000 001 - 100 000 000: 0.20% network Services (ECNS) apply (ITA). The license 100 000 001 - 500 000 000: 0.25% 65 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Country License Initial Licensing Fee Annual License Fees (Formula) application fee will be 500 000 001 – 1 000 000 000: included in the ITA. 0.30% 1 000 000 001 – and above: 0.35% Egypt Access EGP 1,000,000 and a 8% of the total annual revenues. performance bond of (Licenses the establishment and A license burden annual fee of EGP EGP 50,000,000 operation of networks providing 500,000 plus the inflation rate telecom services in urban declared by CBE annual charges for communities) the equipment of the licensee’s subscribers Lump sum/percentage of the annual revenues Class A A performance bond of 3% of the total annual revenues. EGP 500,000 Licenses the managing and A license burden annual fee of EGP operating the core infrastructure 10,000 plus the inflation rate necessary for offering internet declared by CBE. services only and does not include Lump sum/percentage of the the right to offer voice telephony annual revenues services. Class B A performance bond of 3% of the total annual revenues. EGP 150,000 Licenses setting up, managing and A license burden annual fee of EGP operating the core infrastructure 10,000 plus the inflation rate necessary for offering local and declared by CBE international data transfer services Lump sum/percentage of the only and does not include the right annual revenues to offer voice telephony services Côte Individual License category C1A 100,000,000,000 CFA The fees payable vary depending d’Ivoire francs payable in three on whether it is a terrestrial, Confers on a company a set of or four years maximum satellite radio communication specific rights and obligations, service, a temporary use of a radio under which it is entitled to station or the use of certain special establish and operate an electronic equipment. Starting from these communications network open to categories, a distinction is made the public, including those requiring depending on whether the the use of rare resources for the network is open to the public or provision of telecom/ICT services private, radio, aeronautical or provided for in the specifications amateur. According to these annexed to the individual license. characteristics, a fixed price is License valid for fifteen years which fixed or an amount determined on may be extended for one or two the basis of a certain number of years maximum. The extension of elements in particular the number 66 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Country License Initial Licensing Fee Annual License Fees (Formula) the first- time limit constitutes a of megabits, the link distance, the bonus in the event of payment frequency, the base station before September 10, 2015 or December 10, 2015. After this time, the maximum duration of twenty years is renewable without limitation. Individual License category C1B 250 000 000 XOF Same payable 50% upon It gives a company a specific set of issuance of the license rights and obligations under which it 25% at first year (n+1) is entitled to establish, operate, and 25% at second year maintain an electronic (n+2) communications network open to the public, including those requiring the use of rare resources for the provision of telephony services or national or international transmission capacity. License valid for ten years renewable. 67 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Annex 4. Overview of USF contributions in selected African countries Since March 2020, 0% (previously 1%) of gross revenues of network operators and public use Angola electronic communications service providers Benin 1% of gross revenues by all operators Burkina Faso 2% of annual net revenues of interconnection payments from all operators Cameroon 3% of untaxed annual turnover Contributions assessed against all operators, providers of services, and manufacturers or importers of telecom materials; no known assessments to date Congo, Dem. Some licenses provide that 2% of Gross Annual Revenues will also contribute to the USF, those Rep (DRC) amounts are, in fact, paid only as license fees. Côte d’Ivoire 2% of gross annual revenues (turnover) from mobile operators only Telecom licensees are not directly responsible for contributing to the USF, but instead contribute indirectly through license fees, which form part of the NTRA’s budget. The budget surplus of the NTRA is then transferred to the USF. All telecom licensees are also required, as a condition of their licenses, to contribute 0.5% of their annual gross income in scientific research, education and Egypt training programs in ICT in Egypt. Gambia No USF Licensed operators (fixed/mobile operators and MNP CRDB service providers) are required to contribute 1% of their annual revenue (Net revenue means Gross Revenue less VAT, National Health Ghana Insurance Levy) Guinea 1,5% of net annual revenues by all operators 0.5% of gross revenues by all licensees offering communications systems and services on a Kenya commercial basis 2% of gross revenues earned from operating public telecom networks and provision of public Madagascar telecom services (annual contributions) by all operators Either a percentage of turnover or a percentage of the price of every incoming call on each fixed and mobile operator’s network: 1). Annual contribution paid in monthly installments by operator - 5% of gross revenue generated by operator from provision of international roaming service for that month Mauritius 2). US$ 0.025 per minute of international calls terminated by operator in that month Morocco 2% of gross revenues by all network/facilities-based operators 68 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Operators do not contribute directly to the USPF but are required to pay 2.5% of net operating revenue, (Annual Operating Levy: AOL). The NCC, in turn, contributes 40% of the AOL to the USPF for its activities. Based on the 2007 Regulation, the fund is to be financed based on 1% of net Nigeria revenues (net of interconnection payments) of the licensees Rwanda 2% of gross annual revenues by all operators Senegal 3% of gross annual revenues by all operators The Independent Communications Authority of South Africa (CASA) decides the basis of operators’ contributions, which may not exceed 1% of their annual turnover. Currently, the contribution is set at 0.2% of annual turnover (total revenue from licensed activity, less service provider discounts, South Africa agency fees, interconnection, facilities leasing charges, government grants and subsidies) Tanzania 0,3% of yearly gross operating revenues from all operators Togo 2% of annual gross revenues net of interconnection payments from all operators Tunisia 5% of gross annual revenues by all operators Uganda 2% of gross annual revenues by all operators 69 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Annex 5. Contributors ANGOLA Vanessa Bah Leroux Houda Law Firm Rua Joaquim Kapango MC Jurist Advogados Lilian Cadel Biassaly Houda Law Firm BENIN EGYPT Nicolin Assogba Cabinet d’Avocats Olga Anasside & Nicolin Mohamed Hashish Assogba Soliman, Hashish & Partners Délalie Hélène Paty Kounake Frederic Soliman Attorney at Law /Certified Compliance Officer Soliman, Hashish & Partners BURKINA FASO Saifallah Kadry Soliman, Hashish & Partners Cheikh Fall Cabinet Maitre Cheikh Fall GHANA Mamadou Moctar Faye Kimathi Kuenyehia Cabinet Maitre Cheikh Fall Kimathi and Partners CAMEROON Kafui Quashigah Kimathi and Partners Jing & Partners Law Firm KENYA CONGO, DEM. REP. John Syekei Benoit Kadima Bowmans John W FFooks & Co Denis Magonga CÔTE D’IVOIRE Bowmans Khaled Abou El Houda Rose Njeru Houda Law Firm Bowmans Malick Lo Angela Mukora Houda Law Firm Bowmans Assane Dieye MADAGASCAR Houda Law Firm Hanna Keyserlingk Elodie Dagneaux Houda Law Firm HK Jurifisc Law Firm 70 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa Benjamina Rasoanaivo TANZANIA HK Jurifisc Law Firm Wilbert Kapinga Sariaka Randrianarisoa Bowmans Tanzania HK Jurifisc Law Firm Aisha Ally Sinda Bowmans Tanzania MAURITIUS TOGO Devarshi Ramburn Bowmans Koffi Sylvain Mensah Attoh Cabinet Attoh-Mensah Vartika Sahai Bowmans TUNISIA MOROCCO Omar Ferchiou Ferchiou & Associés Mehdi Benouna Ecovis Sonia El Mabrouk Ferchiou & Associés NIGERIA UGANDA Dipo Komolafe Templars Brian Kalule Browmans Emmanuel Gbahabo Templars Sophie Nyombi Browmans Igonikon Adekunle Templars RWANDA Arthur Rugango Cedar Ark Law Consolate Ndagire Cedar Ark Law SENEGAL Abou Faye SARR Scp D'avocats Geni Et Kebe SOUTH AFRICA Livia Dyer Bowmans 71 Background Paper: Taxes and Parafiscal Fees in the Telecom Sector in Africa • State-Owned Enterprises in Digital Infrastructure and Downstream Digital Markets in Africa • Competition Advocacy for Digital Markets in Africa • Competition Policy in Digital Markets in Africa 72 GOVERNANCE AND THE DIGITAL ECONOMY IN AFRICA MAIN REPORTS VOLUME 1 Digital for Governance: Reaching the Potential for the Digital Economy in Africa—Digital Tools for Better Governance VOLUME 2 Governance of Digital: Regulating the Digital Economy in Africa— Managing Old and New Risks TECHNICAL BACKGROUND PAPERS • ICT Procurement in Africa • Adoption of eGP in Africa • Vulnerabilities of ICT Procurement to Fraud and Corruption • Regulating Digital Data in Africa • Taxes and Parafiscal Fees on Digital Infrastructure Services in Africa • Corporate Governance and Transparency of State-Owned and State-Linked Digital Enterprises in Africa • State-Owned Enterprises in Digital Infrastructure and Downstream Digital Markets in Africa • Competition Advocacy for Digital Markets in Africa • Competition Policy in Digital Markets in Africa