The report, entitled “Digital Drag”, ranks 125 nations by the level of taxes and tariffs on ICT goods and services.
The countries with the highest level of ICT-related taxes are Bangladesh, Republic of Congo, Turkey, Brazil and Argentina, while the lowest rates of taxes which apply to ICT can be found in Japan, Malaysia, Singapore and Yemen. Qatar and UAE have no tax at all on ICT goods and services.
“Despite clear economic benefits from ICT, a number of countries persist in discouraging its use by adding extra costs in the form of tariffs and specific taxes,” said the report. “These added costs limit ICT adoption and the productivity increases associated with it.”
“If countries resist the temptation to impose excess taxes on ICT goods and services and eliminate ICT tariffs, they will reap the benefits,” the report added.
Robust driver of economic growth
The report explains that lower- and middle-income countries are particularly likely to impose discriminatory taxes and tariffs on ICT goods and services, particularly on imports, harming their economic development. This is because these taxes are generally easy to implement.
“Since ICT use is such a robust driver of economic growth, the net benefits from taxing ICT goods and services are usually short lived,” said the report. “Simulations of countries that reduce mobile taxes estimate that overall tax revenue returns to original levels within two to six years depending on factors such as elasticity.”
One example cited is India, where a separate study found that for every $1 of tariffs imposed on imported ICT products, the country lost $1.30 due to lower productivity levels.
India imposes the 22nd lowest level of taxes and tariffs on ICT goods and services and is relatively free of some of the bureaucracy traditionally associated with operating in the country.
“The business environment for the ICT industry in India has been largely attractive for its many players,” said Vijay Krishnamurthy, CFO and company secretary and legal head of SmartPlay Technologies, an Indian system design company.
“From its infancy, the government recognised its large export earnings and employment potential and supported the ICT industry through several fiscal benefits, such as an exemption to individual companies from paying income tax to the extent of their export turnover,” he said.
Such tax incentives, as well as the ICT industry not being affected by power shortages, due to lower power use than other sectors such as manufacturing or mining, and pollution control laws which affect other sectors in India, have led the industry to grow from less than $500 million in 1990 to around $108 billion today.
The industry, which employs four million people directly and eight million people indirectly, has raised the profile of India as a technically able jurisdiction and contributes to about 8% of Indian GDP.
There are challenges, however, for the industry in India. The exemption to companies from paying income tax on their export turnover was withdrawn in 2011 as the government felt the industry would continue strongly.
“A recent dampener and short-sighted move is the minimum income tax between 19% and 21% on all companies, including those in the ICT industry, located in tax-free export zones called Special Economic Zones,” said Krishnamurthy.
“If this minimum tax was abolished, there would have been more impetus to the ICT industry,” he added.
Special regimes and free trade zones
In countries with higher ICT taxes and tariffs, advisers are sometimes able to use free trade zones and creative accounting to mitigate their impact on the profits of ICT companies.
This is the case in South America, where the ICT tax burden is generally quite high.
“Although ICT companies may have a high tax burden under the general tax regime [in Argentina], they do have a lower tax burden under the Tierra del Fuego (TdF) special regime, where ICT business concentrates,” said Guillermo Teijeiro, partner at Teijeiro y Ballone in Buenos Aires.
“Though the special regime does not remain open nowadays, it is still possible to benefit from it by associating with manufacturing companies which have an approved project in the TdF,” he added.
Neighbouring Brazil is identified by the report as the jurisdiction with the fourth-highest level of ICT taxes and tariffs, but many companies are able to circumvent these charges by using the Free Economic Zone of Manaus.
Key findings of the report:
- ICT drives prosperity, innovation and quality of life
- Despite this, demand for ICT goods and services is relatively elastic
- Demand is particularly elastic in Asia, Latin America and the Caribbean
- Demand is less elastic in areas with fixed broadband connections
- In the 20 jurisdictions with the highest ICT taxes and tariffs, economic growth may be held back by as much as 1% each year
- Lower-income countries generally tax ICT goods and services higher
- Higher-income countries in the OECD generally tax ICT goods and services lower
- Taxes on ICT goods and services are a reliable income stream for governments, although they are regarded by the report as short-sighted revenue-raisers
