Countries with a weak tax administration, large informal sectors and a limited capacity to mobilise revenue tend to churn out tax policies driven more by expediency than principle. Where principle tells us that consumption taxes should be broad-based and neutral, expediency often leads to taxing specific goods and services to raise maximum revenue with minimum effort.
VAT has become widespread across the African continent in recent decades and a crucial source of revenue in many cases, but VAT is a complex enough tax both for the administration and the taxpayers, which means that in many developing nations it often only covers a limited pool of large businesses.
Widespread access to mobile communications and the use of mobile devices to manage payments and all sorts of daily life tasks has handed over a brand new taxable base to African governments beautifully gift-wrapped.
Taxing mobile communications affords governments the same advantage as the traditional excises on motor fuels or tobacco products: a small number of companies can be a stepping stone to a large number of consumers. When such an opportunity comes knocking, governments will be quick to open the door!
Spreading the word
African governments have been taxing the mobile communications sector left, right and centre in recent years, deluging it with special taxes or import duties on mobile devices, regulatory fees based on turnover, surtaxes on corporate income, among others.
But of all these novelties, indirect taxes on mobile voice and data services passed on to consumers are the most important trend. 20 African countries already levy this type of indirect tax and many more are steadily swelling their ranks, from Senegal and Côte d'Ivoire to Uganda and Zimbabwe.
Like with other tax experiments, this one has been spreading by imitation. Even the smallest African nations are jumping on the bandwagon in search of additional revenue, a need that the current pandemic has made all the more pressing.
Guinea-Bissau, a nation of 1.8 million, with tax revenues that do not exceed 9% of GDP, introduced a special tax on telecommunications this year, earmarked for various public investment programmes. The tax was introduced by the 2021 State Budget and is levied on voice calls and mobile data, amongst other services, amounting to FCFA 5 per minute on voice calls – around 0.75 euro cents – or 5% of the amount billed for mobile data services.
Equatorial Guinea, with 1.4 million inhabitants and tax revenues of 7% of GDP, introduced a tax on telecommunications last year, following the lead of its Central African neighbours. The tax was regulated in the 2020 State Budget and is levied on all telecommunications services at a rate of 10%, which is particularly relevant when it comes to mobile communications and internet service.
The introduction of these taxes has not been without resistance but – spoiler alert – governments have gotten the better of consumers in most cases.
Pros and cons
Taxes on mobile communications have obvious advantages. They can generate significant revenues, which will only keep growing in the coming years as a larger share of the population gains access to mobile services. 3G coverage in Sub-Saharan Africa grew from 63% in 2017 to 75% in 2019 and 4G doubled from 25% to 50%. Still, the region is home to over half of the world’s population that is not covered by mobile broadband, so this tax base has plenty of room to grow.
Moreover, taxing profits in capital-intensive sectors with large up-front deductions tends to generate limited revenues in the short run for many African nations, while indirect taxes on mobile services ensure governments immediate tax revenues.
The disadvantages of these taxes, however, are no less obvious: access to mobile telecommunications and data services in developing countries is a key instrument for economic development and social progress.
Imposing excise duties on mobile services penalises most of the population and the smallest economic operators in what is nowadays a basic necessity. Taxing mobile services also penalises investment in a continent with vast rural areas where extending the network is particularly costly for telecom operators.
Choosing between revenue mobilisation and economic progress is a crushing dilemma. Sadly not all African nations will be in a position to make the wisest choice.
Sérgio Vasques
Founding partner, Lobo Vasques
E: sergio.vasques@lobovasques.com
