October 18, 2018 / 6:28 AM / in a month

Insight: Tax byte - Africans fear trend towards levies on data, services

KAMPALA/JOHANNESBURG (Reuters) - The brisk business Julius Kirya did from his cash transfer kiosk in the Ugandan capital has slowed right down with a new tax on mobile money. Many of his customers have returned to sending banknotes by hand, in some cases via motorbike taxi.

A customer conducts a mobile money transfer, known as M-Pesa, at a Safaricom agent stall in Nairobi, Kenya October 16, 2018. REUTERS/Thomas Mukoya

How to tax digital revenues, from fintech to social media, is a puzzle authorities around the world are working on. A solution catching on in Africa - levies on usage - has obvious appeal to indebted governments but a big impact on people like Kirya, who saw the tech revolution as a way out of poverty.

“I had a dream of steadily growing to middle income status,” he said from his tiny cubicle attached to a Kampala petrol station, one of thousands across the country that serve the millions of people without access to bank accounts.

He was making three times the average salary before the tax, was introduced in July. Now his income has slid to half that. “With this tax I have no chance,” he said.

It is not just Kirya and his customers who are losing out.

Mobile communications have revolutionised life in Africa where telecom company reports show calls and texts are giving way to data services like Facebook-owned WhatsApp, Skype, Viber and WeChat owned by China’s Tencent.

The telecom companies say taxes on mobile payments introduced by a string of countries hurt their revenues and threaten much-needed investment in infrastructure.

Levies on social media usage brought in by Uganda and Benin and a proposed tax on internet calls in Zambia have taken the shine off a fast-growing market and have all sparked protests.

Officials say the taxes are needed to preserve state revenues as technologies evolve.

The International Monetary Fund (IMF), which has long pressed African states to improve tax collection, urges caution.

“You want to make sure you don’t introduce taxes that are stifling innovation and curtailing activity in the sector,” Abebe Selassie, the IMF’s top official for Africa, told Reuters this month. “So striking that balance will be important.”

GLOBAL DISRUPTION

The communications sector is evolving fast in Africa, where the convenience and lower communication costs of “over-the-top” (OTT) services via the internet have particular appeal.

Data revenues in most African markets are increasing at a much faster rate than SMS and voice revenues are declining, a Reuters analysis of telecom company finances showed.

Kenya’s Safaricom - part owned by Vodafone - reported its customer base jumped nearly 12 percent last year but voice revenues grew just 2.9 percent while SMS revenues shrank nearly 4 percent and data revenue rose 38.5 percent.

MTN saw revenues from outgoing voice calls decline in a number of African countries in the first half of this year; SMS revenue fell across the group and in many markets by double digits year-on-year. But data revenues grew nearly 27 percent.

Mobile operators are expanding 4G networks, trimming data costs and nurturing financial services offerings to drive future revenues.

In theory, this should also protect countries’ tax take, but many African governments supplement revenue or profit taxes with separate levies on voice airtime, SMS and mobile money.

Amid fears the first two services are tailing off, authorities are bringing in or increasing taxes on mobile money and introducing them for social media to make up the shortfall.

In January, Ivory Coast imposed a 0.5 per cent tax on transfers via mobile money services. Kenya last month increased its tax on mobile money transfer fees from 10 to 12 percent. Benin introduced a tax of 5 CFA francs ($0.01) per megabyte consumed on social media usage. And Zambia has proposed a daily levy on consumers who use the internet to make phone calls.

In Uganda, riot police repressed demonstrations against two new taxes implemented in July - one on mobile money transactions and another, a daily levy on social media usage, with apps and websites blocked until a user pays the fee.

Amnesty International and local opposition parties say the OTT tax is a veiled attempt to stifle criticism of President Yoweri Museveni, who has been in power for over three decades. Opposition activists have used apps to organise protests.

Officials say the taxes are aimed at raising revenue, not suppressing dissent, and reject the telecom firms’ complaints.

Finance Ministry spokesman Jim Mugunga said they had helped the revenue authority exceed its third quarter targets.

“There’s no proof that these taxes are hurting business,” he said. “No one has given us empirical evidence ... That’s a narrative by telecom companies. I don’t accept it.”

Godfrey Mutabazi, executive director of the Uganda Communications Commission, echoed a common complaint around the world that social media companies keep local tax authorities at arms’ length.

“The traditional voice technology that we have lived with over the past 20 years is dying,” he told Reuters. “These big technology firms are not registered here ... so the only way the government can get revenue from them is to put a tax on OTT usage.”

“GETTING COMPLICATED”

As of last year, Facebook boasted 170 million users across Africa, a 42 percent increase from 2015, it said. Facebook’s WhatsApp is the most popular messaging app on the continent, home to more than a billion people.

The number of social media users in Africa grew 12 percent last year on the back of a 20 percent increase in internet users, the fastest rate of any region in the world, a report by social media marketing firms We Are Social and Hootsuite found.

A Facebook-financed report published in August by Christoph Stork, a telecoms analyst with Research ICT Solutions, said network operators in Uganda have seen a 20 percent drop in subscribers using data since the social media tax came in.

Such a decline could also affect the broader economy.

Studies, including one from the World Bank, estimate that a 10 percent increase in mobile broadband penetration translates to a 0.8 to 1.5 percent increase in a country’s GDP growth.

Mobile money transactions are also taking a hit. A spokeswoman for Airtel Uganda, a subsidiary of India Bharti Airtel’s, said the new tax on transfers had led to a significant drop in the volume and value of transactions.

“Any disruption in the Airtel Money operations causes an indirect negative impact on the growth prospects of emerging businesses, stifling economic growth,” said Sumin Namaganda.

Ugandan media have quoted MTN officials saying the tax had cut the company’s mobile transaction volumes in half.

As of March 2017, mobile money services were operating in 39 sub-Saharan African countries with almost 280 million registered accounts, according to mobile communications industry body GSMA.

At least six countries have introduced taxes on the service, prompting GSMA to warn in a report last year that high or unpredictable levies may cost states some of what it said would be $31 billion in investment across Africa, mainly focused on improving data coverage and services.

Some governments appear to be having second thoughts.

Zambia’s proposed levy on internet calls, announced in August, did not make it into the new budget approved last month.

And just three days after Benin introduced its social media tax to widespread public outcry, the government cancelled it, on the grounds it created “instability in the sector’s economy which harms the interest of consumers”.

Uganda’s mobile money tax was introduced as 1 percent levy “on receiving, payments and withdrawals”. Museveni later said the rate was 0.5 percent and applied just to withdrawals. Parliament corrected the law but the president has not enacted the revised text.

While kiosk owners and some of their clients in big cities are struggling on, Kirya said his colleagues operating mobile money kiosks in rural areas had simply shut up shop.

Slideshow (4 Images)

“With this tax everything is getting complicated,” he said.

($1 = 3,788.0000 Ugandan shillings)

($1 = 568.2200 CFA francs)

Additional reporting by Allegresse Sasse in Cotonou, Chris Mfula in Lusaka and Mathieu Rosemain in Paris; editing by Philippa Fletcher

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