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Cellphone firms under scrutiny over tax planning
By WILFRED EDWIN
THE EAST AFRICAN
Posted Sunday, September 28 2008 at 09:16
Mobile phone operators in Tanzania are among large taxpayers that have come under the spotlight as the Tanzania Revenue Authority moves to plug loopholes in the regulations in order to reduce the room for "tax planning."
Tax planning, or tax avoidance, is the term for manoeuvres to minimise tax liability that are legal under the Income Tax Act of 2004, whereby a firm deducts capital allowance from gross profit with the aim of attaining a taxable net profit, which is legally accepted.
But a taxpayer may well arrange for the figures in the net profit docket to appear as a net loss, thus paying minimal or no tax at all.
Now the TRA says it wants to embark on an exercise to determine whether large taxpayers in Tanzania, including mobile telephones companies, are planning tax to minimise their liability.
The official list of large taxpayers now amounts to 370 companies.
Placidus Luoga, Deputy Commissioner General of TRA, told The EastAfrican in an interview last week that while mobile firms in Tanzania have actually been paying taxes above the taxman's target, the TRA nevertheless wishes to check on the possible existence of tax planning.
Between July 2007 and June this year, mobile phone firms in the large taxpayers' category - among them Vodacom Tanzania, Tigo, Zain and Zantel - had paid excise duty to the government amounting to Tsh40.2 billion ($36.2 million) whereas the TRA target was to collect Tsh39.2 billion ($37.3 million), a performance of 102 per cent.
The deputy commissioner said value added tax (VAT) for all telecommunication forms, including the fixed line ones, had amounted to Tsh105.5 billion ($100 million), against the targeted Tsh81.8 billion ($77.9 million), a performance of 129 per cent.
"But as there is a problem with the income tax law, which provides for an avenue to minimise tax to be paid," he said, "TRA without discrimination or malice, under the law, is moving to check how the taxpayers have reached the figures of tax to be paid."
However, he said, since tax avoidance is legal, TRA is currently studying a prudent mechanism that would compel its taxpayers into paying a fair tax amount. "What is illegal is tax evasion, which we are increasing our capacity to fight," he added.
However, analysts say that even with such a move, to get the best from taxpayers, it is the end user who gets to pay the most due to contradictory tax structures.
They point out that Tanzania has the highest rate of tax in East Africa when it comes to mobile phone services.
With effect from July this year, the government raised excise duty on mobile phone airtime from 7 to 10 per cent.
Finance Minister Mustafa Mkullo said when presenting the national budget that mobile phone tax had been increased to adjust for inflation, which now stands at 9.5 per cent.
"But this is a generally acceptable range," said Mr Luoga.
However, with over 15 million mobile phone users subscribing to six service providers, the Tanzanian market may well be yielding revenues of over Tsh273.7 billion ($260.6 million) per annum, a large portion of which may be going unnoticed due to the current tax structure, analysts say.
Critics further say the current tax structure - with value added tax levied for service users - allows firms to get away with unclaimed VAT for users who are exempted from VAT.
This leaves Tanzania's mobile services 11 to 15 per cent more expensive than in India, and 9 to 11 per cent more expensive than in the US.
According to a new study undertaken by Deloitte for the GSM Association, usage of mobile communications is a powerful economic growth engine, which governments can fuel by lowering taxes on mobile services and handsets.
In a developing country, an increase of 10 percentage points in mobile penetration will lift that country's annual economic growth rate by 1.2 percentage points, the study found.
That represents a major uplift - if the proportion of people with a mobile phone in an economy growing at 4 per cent a year, rises from 10 per cent to 20 per cent - that would boost the economic growth rate to 5.2 per cent a year.
Africa is the fastest growing mobile phone market in the world, according to available statistics. In the opening quarter of 2008, mobile phone users in Africa passed the 280 million mark, overtaking the US and Canada, which have 277 million users.
Africa added 70 million connections in 2007, representing a growth of 38 per cent. This made it the fastest growing region in the world, ahead of the Middle East (33 per cent) and the Asia-Pacific region (29 per cent).
The report, titled Global Mobile Tax Review 2006/07, said 24 governments in Africa levy specific luxury taxes on mobile handsets, eight governments levy specific luxury taxes on mobile usage (air time) and over 25 governments levy specific luxury taxes on ICT equipment.
The report say luxury taxes levied on the mobile industry and its customers have a negative impact on coverage and penetration and constrain the wider potential the industry can bring to sub-Saharan Africa.
The GSMA commissioned Deloitte to analyse the impact of lowering and removing such luxury taxes.
The study found that by reducing and removing luxury taxes on mobile telephony, governments will collect more tax from the mobile industry as blackmarkets diminish and legitimate markets grow.
Uganda, for example, levies a 12 per cent luxury tax on airtime. Deloitte's analysis showed that if this tax were removed, the total tax taken from the mobile sector would continue to increase substantially each year.
By WILFRED EDWIN
THE EAST AFRICAN
Posted Sunday, September 28 2008 at 09:16
Mobile phone operators in Tanzania are among large taxpayers that have come under the spotlight as the Tanzania Revenue Authority moves to plug loopholes in the regulations in order to reduce the room for "tax planning."
Tax planning, or tax avoidance, is the term for manoeuvres to minimise tax liability that are legal under the Income Tax Act of 2004, whereby a firm deducts capital allowance from gross profit with the aim of attaining a taxable net profit, which is legally accepted.
But a taxpayer may well arrange for the figures in the net profit docket to appear as a net loss, thus paying minimal or no tax at all.
Now the TRA says it wants to embark on an exercise to determine whether large taxpayers in Tanzania, including mobile telephones companies, are planning tax to minimise their liability.
The official list of large taxpayers now amounts to 370 companies.
Placidus Luoga, Deputy Commissioner General of TRA, told The EastAfrican in an interview last week that while mobile firms in Tanzania have actually been paying taxes above the taxman's target, the TRA nevertheless wishes to check on the possible existence of tax planning.
Between July 2007 and June this year, mobile phone firms in the large taxpayers' category - among them Vodacom Tanzania, Tigo, Zain and Zantel - had paid excise duty to the government amounting to Tsh40.2 billion ($36.2 million) whereas the TRA target was to collect Tsh39.2 billion ($37.3 million), a performance of 102 per cent.
The deputy commissioner said value added tax (VAT) for all telecommunication forms, including the fixed line ones, had amounted to Tsh105.5 billion ($100 million), against the targeted Tsh81.8 billion ($77.9 million), a performance of 129 per cent.
"But as there is a problem with the income tax law, which provides for an avenue to minimise tax to be paid," he said, "TRA without discrimination or malice, under the law, is moving to check how the taxpayers have reached the figures of tax to be paid."
However, he said, since tax avoidance is legal, TRA is currently studying a prudent mechanism that would compel its taxpayers into paying a fair tax amount. "What is illegal is tax evasion, which we are increasing our capacity to fight," he added.
However, analysts say that even with such a move, to get the best from taxpayers, it is the end user who gets to pay the most due to contradictory tax structures.
They point out that Tanzania has the highest rate of tax in East Africa when it comes to mobile phone services.
With effect from July this year, the government raised excise duty on mobile phone airtime from 7 to 10 per cent.
Finance Minister Mustafa Mkullo said when presenting the national budget that mobile phone tax had been increased to adjust for inflation, which now stands at 9.5 per cent.
"But this is a generally acceptable range," said Mr Luoga.
However, with over 15 million mobile phone users subscribing to six service providers, the Tanzanian market may well be yielding revenues of over Tsh273.7 billion ($260.6 million) per annum, a large portion of which may be going unnoticed due to the current tax structure, analysts say.
Critics further say the current tax structure - with value added tax levied for service users - allows firms to get away with unclaimed VAT for users who are exempted from VAT.
This leaves Tanzania's mobile services 11 to 15 per cent more expensive than in India, and 9 to 11 per cent more expensive than in the US.
According to a new study undertaken by Deloitte for the GSM Association, usage of mobile communications is a powerful economic growth engine, which governments can fuel by lowering taxes on mobile services and handsets.
In a developing country, an increase of 10 percentage points in mobile penetration will lift that country's annual economic growth rate by 1.2 percentage points, the study found.
That represents a major uplift - if the proportion of people with a mobile phone in an economy growing at 4 per cent a year, rises from 10 per cent to 20 per cent - that would boost the economic growth rate to 5.2 per cent a year.
Africa is the fastest growing mobile phone market in the world, according to available statistics. In the opening quarter of 2008, mobile phone users in Africa passed the 280 million mark, overtaking the US and Canada, which have 277 million users.
Africa added 70 million connections in 2007, representing a growth of 38 per cent. This made it the fastest growing region in the world, ahead of the Middle East (33 per cent) and the Asia-Pacific region (29 per cent).
The report, titled Global Mobile Tax Review 2006/07, said 24 governments in Africa levy specific luxury taxes on mobile handsets, eight governments levy specific luxury taxes on mobile usage (air time) and over 25 governments levy specific luxury taxes on ICT equipment.
The report say luxury taxes levied on the mobile industry and its customers have a negative impact on coverage and penetration and constrain the wider potential the industry can bring to sub-Saharan Africa.
The GSMA commissioned Deloitte to analyse the impact of lowering and removing such luxury taxes.
The study found that by reducing and removing luxury taxes on mobile telephony, governments will collect more tax from the mobile industry as blackmarkets diminish and legitimate markets grow.
Uganda, for example, levies a 12 per cent luxury tax on airtime. Deloitte's analysis showed that if this tax were removed, the total tax taken from the mobile sector would continue to increase substantially each year.
