Reducing tax burden on essential data

In the past few years, Colombia’s mobile internet and smartphone user base has been one of Latin America’s fastest-growing, and this trend is expected to continue until at least 2025. The 2020 edition of the Inclusive Internet Index placed Colombia among the top ten upper-middle-income countries creating the necessary conditions to facilitate access to the Internet. This success story has been possible partly due to Colombia’s 2019 ICT modernisation law and the fact that the country passed the “1 for 2” affordability threshold for the first time that same year. The new law contributes to promoting private investment and infrastructure deployment in the telecommunications sector, while passing the “1 for 2” affordability threshold means that the cost of 1GB of mobile broadband is priced at 2% or less of the average monthly income in Colombia.

These achievements are reflected in the scope of mobile ownership and mobile internet access among the Colombian population. In 2018, mobile ownership reached 95.2% of all households, with at least one person owning a mobile phone per household and 72.5% of the total population over five years of age reporting mobile ownership. Access to mobile data and voice services has also been steadily increasing: In 2018, 84.9% of the total population over the age of five years indicated that a mobile phone is their primary device used to access the internet. Moreover, 77.2% of this population used their mobile phones to access the internet every day.

According to Colombia’s Ministry of Information and Communication Technologies (MinTIC), access to mobile data services reached 29.8 million users by March 2020, 1.6 million more people than in 2019. MinTIC also reported that 17.04 million people accessed mobile internet using prepaid plans, while 12.72 million used postpaid plans. In the same period, the number of mobile voice service customers reached 66.5 million, of which 52.4 million people accessed these services through prepaid plans and 14.1 million people through postpaid plans. The GSMA projects that by 2025, the number of mobile internet users in Colombia will increase by 8 million while some 54 million people will be smartphone users. Despite this growth in access, Colombia still has a digital divide and affordability remains an obstacle for low-income users nationwide, particularly those who live in rural areas.

Beginning in 2003, Law 788 established that telecom consumers must pay a 19% value-added tax (VAT) for mobile voice and data services, regardless of whether they have a prepaid or postpaid plan. Additionally, mobile voice and data users must pay a 4% national excise tax. These taxation levels mean that Colombia has one of the highest telecommunications sector taxation rates in Latin America. Although 1 percentage of the 19% tariff is used to fund social security, health, and education services (Article 468 of Estatuto Tributario Nacional), and all of the 4% tax is used to fund sports and culture (Article 512-2 of Estatuto Tributario Nacional), levying these taxes does not align with the best taxation practices that stimulate access to telecom goods and services.

In March 2020, this state of affairs was drastically impacted by the onset of the COVID-19 pandemic. The Colombian government declared an economic, social, and ecological state of emergency in its territory. Following WHO recommendations to encourage social distancing, national authorities rapidly developed and implemented a number of measures to mitigate the pandemic’s health, economic, and social consequences. Among these measures were the publications of Decree 417 and Decree 464, which declared that telecommunication services are essential public services and guaranteed state intervention to secure the population’s access to telecommunication services during the emergency.

In the context of rapid mobile sector growth colliding with the state of emergency, the Colombian national authorities devised Decree 540, a temporary fiscal policy designed to reduce the financial burden associated with mobile voice and data services access for all users, with an emphasis on low-income citizens.

On April 13, 2020, MinTIC issued Decree 540 to guarantee access to telecommunication services for the entire population during the pandemic. This Decree consisted of two articles: Article 1 focused on infrastructure and Article 2 on taxation. Article 2’s objectives were: first, to provide temporary relief from the financial burden that voice and data packages place on the population (on low income users in particular) and, second, to encourage the use of telecommunication services by increasing their affordability. Ultimately, the adoption of this fiscal measure would primarily enable people in lower income brackets to engage remotely in social, cultural, economic, and educational activities during the pandemic.

Article 2 of Decree 540 established the temporary removal of the 19% sales tax for certain voice and data plans. This meant that application of Article 468 of Estatuto Tributario Nacional was temporarily suspended between April 13 and August 14, 2020. The article specified that this discount would only apply to pre- and postpaid voice and data plans priced up to 71,214 pesos (18.4 USD). It also stated that the tax exemption should be reflected in the user’s billing during the designated tax relief period.

In addition to being legally founded on Decree 417 and Decree 464, Decree 540 was informed by the International Labour Organization’s (ILO) assessments of the negative impact of Covid-19 on the job market. Based on the ILO’s forecast that unemployment levels would rise and working conditions would become challenging for low income families, the Colombian government recognized the urgency of implementing measures to mitigate the pandemic’s effects on the most vulnerable. As highlighted by government officials when extolling the benefits of Decree 540, these measures would guarantee low-income households’ connectivity and the construction of telecom infrastructure in places where it has not been developed yet.

Developed after Article 3 of the 2019 Law 1978, Decree 540 is one among a number of measures rapidly implemented by Colombian authorities after the WHO highlighted the risks the pandemic posed for vulnerable populations. Like other measures adopted by the MinTIC during the state of emergency, including the introduction of new postpaid data and voice plans, the funding of at least 5 million prepaid lines with 1GB a month and 100 million minutes for voice services for low-income users, and the “Hogares Conectados” programme (Connected Homes), Decree 540 sought to guarantee the right of all Colombians to access and use basic information and communication technologies.

The implementation of Decree 540 between April 13 and August 14, 2020, benefited mobile voice and data services customers with pre- and postpaid plans whose market value was equal to or lower than 71,214 pesos (18.4 USD). Based on data from this period, estimates indicate that this fiscal policy benefited a substantial portion of the 29 million users of telecom services in Colombia, particularly the 17 million users with prepaid plans. By removing the 19% VAT tax, the policy directly improved affordability and reduced the total cost of mobile ownership (TCMO), which for people in the lowest 20% of the income distribution in Colombia, TCMO can represent a proportion of 14.4% of their monthly income.

An example of the policy’s immediate impact on pre- and postpaid plan customers was provided by Tigo, a mobile voice and data services provider. In addition to publishing a list of updated prices for all its prepaid plans (68 in total), Tigo advertised the discounts applied to three postpaid plans. During the implementation of the VAT-free policy, Tigo users paid reduced prices for the following plans: Plan 55 Mil, from 55,000 pesos to 46,347 pesos; Plan 60 Mil, from 60,000 pesos to 50,560 pesos; Plan 75 Mil, from 75,000 pesos to 63,189 pesos. Tariffs for on-demand data and voice services were also included in the list of discounted services. Tigo’s customers paid 2.54 pesos per minute instead of 3 pesos for voice services, and 0.123 pesos per KB rather than 0.146 pesos for data services.

In October 2020, two months after Decree 540 expired, a group of representatives presented a legislative initiative that proposed to make permanent the VAT exemption for mobile data and voice services whose market value is equal to or lower than 71,214 pesos (18.4 USD). By restricting the benefit to pre- and postpaid plans not exceeding two Unidades de Valor Tributario (UVT, Tax Value Unit), the initiative aimed at improving affordability for the low-income population.