Eliminating luxury taxation on ICT essentials
In 2017, the Colombian government removed the value-added tax (VAT) on low-cost handsets and laptops – making internet-capable devices more affordable for millions.
Country:
ColombiaRegion:
South AmericaPolicy area:
Taxes & Fiscal PolicyStakeholder:
GovernmentContext
As recently as October 2016, mobile consumers in Colombia were subject to a 16% Value Added Tax (VAT), charged on the pre-tax value of mobile traffic, handsets and SIM cards. In addition, mobile consumers were also subject to a 4% consumption tax on voice services, for a combined tax rate of 20% for certain parts of mobile telephony. The consumption tax alone accrued an estimated US$80 million in 2015 that transferred from consumers to operators to the government’s coffers.
Imported telecommunications goods also had their own taxes — 16% VAT, 1.2% custom service tax and 5% customs duty. These taxes limited the affordability of mobile broadband for the poorest and also curbed levels of growth in internet penetration and use.
As a result of VAT charged on mobile handsets, up until 2016 the cost of mobile devices represented a key barrier to the uptake of mobile services. In the first quarter of 2016, for example, 66% of Columbians held a mobile subscription and 47% had access to mobile internet. These rates were lower than average when compared to the rest of Latin America and OECD countries.
Tax policy held the potential to substantially reduce the barrier of upfront costs for connectivity. Critically for the government, a policy of VAT removal had the potential to widen the user base of mobile consumers by increasing uptake, which would then have contributed to general consumption taxation, potentially increasing tax revenues and providing further cascading digital dividends in other sectors of the economy.
Policy Action
In 2016, the Colombian Congress passed a sweeping tax reform affecting several economic sectors. In 2017, in a drive to make mobile offerings more affordable, the government of Colombia implemented sweeping structural tax reform for the mobile sector. Within this reform, Article 424 included the grounds for a reduction or elimination of VAT on key ICT devices based on that device’s affordability.
VAT was removed from mobile devices which cost less than a set threshold – roughly US$245 at the time of the law’s enactment. This lowered the exemption from what was set in Law 1607 (2012) which had the exemption threshold at US$724, creating a much larger area of VAT exemption with the mobile device market. The 2016 law also removed VAT for personal desktop or laptop computers with a value of US$550 or less.
To compensate, Law 1819 (2016) also featured VAT increases from 16% to 19% for certain tiers of digital products and services and also expanded the definition of what services fell within this definition to include ‘over-the-top’ or OTT services, such as Uber and Netflix.
Results & Insight
The mobile device market saw immediate gains with the taxation reform. Mobile phone sales increased in 2017, even for devices that exceeded the VAT exemption for low-cost devices. In addition, a number of device manufacturers re-priced their devices to move from just-above the VAT threshold to just-below, bringing a wider range of devices at more affordable prices for Colombians.
These changes in the mobile device market continued to support growth in internet access and use and device ownership rates across the country. Smartphone adoption in Colombia dragged behind regional averages in the years preceding the tax reform. Now, Colombia has one of the region’s highest mobile phone ownership rates and one of the lowest gender gaps. In addition, rates of internet use and overall data consumption continue to rise, with 2017-2018 representing the country’s largest single-year of real terms growth in domestic mobile broadband traffic.
This mobile growth has been a key asset in supporting the foundation of Colombia’s ‘orange economy’, focused around the creative industries. In comparison with peer countries around the world, Colombia has a globally significant number of its population that sell services through microwork and freelancing online (13%, 2017), with 41% of those who undertake this work considering that income ‘essential’ to meeting their monthly living costs. As more users transition from basic phones to smartphones, individuals are able to leverage more of their economic power through their mobile devices.
Tax reform can have cascading consequences for the Colombian economy. By reducing the VAT burden on low-cost devices and reducing the perception of smartphones as a luxury item, the government’s policy change spurred smartphone adoption and internet use both in the number of users and in the amount of data consumed by those users. This has created a stronger digital economy that has then developed into a means for supporting other sectors of the Colombian economy.
Full Story
As recently as October 2016, mobile consumers in Colombia were subject to a 16% Value Added Tax (VAT), charged on the pre-tax value of mobile traffic, handsets and SIM cards. In addition, mobile consumers were also subject to a 4% consumption tax on voice services, for a combined tax rate of 20% for certain parts of mobile telephony. The consumption tax alone accrued an estimated US$80 million in 2015 that transferred from consumers to operators to the government’s coffers.
Imported telecommunications goods also had their own taxes — 16% VAT, 1.2% custom service tax and 5% customs duty. These taxes limited the affordability of mobile broadband for the poorest and also curbed levels of growth in internet penetration and use.
As a result of VAT charged on mobile handsets, up until 2016 the cost of mobile devices represented a key barrier to the uptake of mobile services. In the first quarter of 2016, for example, 66% of Columbians held a mobile subscription and 47% had access to mobile internet. These rates were lower than average when compared to the rest of Latin America and OECD countries.
Tax policy held the potential to substantially reduce the barrier of upfront costs for connectivity. Critically for the government, a policy of VAT removal had the potential to widen the user base of mobile consumers by increasing uptake, which would then have contributed to general consumption taxation, potentially increasing tax revenues and providing further cascading digital dividends in other sectors of the economy.
In 2016, the Colombian Congress passed a sweeping tax reform affecting several economic sectors. In 2017, in a drive to make mobile offerings more affordable, the government of Colombia implemented sweeping structural tax reform for the mobile sector. Within this reform, Article 424 included the grounds for a reduction or elimination of VAT on key ICT devices based on that device’s affordability.
VAT was removed from mobile devices which cost less than a set threshold – roughly US$245 at the time of the law’s enactment. This lowered the exemption from what was set in Law 1607 (2012) which had the exemption threshold at US$724, creating a much larger area of VAT exemption with the mobile device market. The 2016 law also removed VAT for personal desktop or laptop computers with a value of US$550 or less.
To compensate, Law 1819 (2016) also featured VAT increases from 16% to 19% for certain tiers of digital products and services and also expanded the definition of what services fell within this definition to include ‘over-the-top’ or OTT services, such as Uber and Netflix.
The mobile device market saw immediate gains with the taxation reform. Mobile phone sales increased in 2017, even for devices that exceeded the VAT exemption for low-cost devices. In addition, a number of device manufacturers re-priced their devices to move from just-above the VAT threshold to just-below, bringing a wider range of devices at more affordable prices for Colombians.
These changes in the mobile device market continued to support growth in internet access and use and device ownership rates across the country. Smartphone adoption in Colombia dragged behind regional averages in the years preceding the tax reform. Now, Colombia has one of the region’s highest mobile phone ownership rates and one of the lowest gender gaps. In addition, rates of internet use and overall data consumption continue to rise, with 2017-2018 representing the country’s largest single-year of real terms growth in domestic mobile broadband traffic.
This mobile growth has been a key asset in supporting the foundation of Colombia’s ‘orange economy’, focused around the creative industries. In comparison with peer countries around the world, Colombia has a globally significant number of its population that sell services through microwork and freelancing online (13%, 2017), with 41% of those who undertake this work considering that income ‘essential’ to meeting their monthly living costs. As more users transition from basic phones to smartphones, individuals are able to leverage more of their economic power through their mobile devices.
Tax reform can have cascading consequences for the Colombian economy. By reducing the VAT burden on low-cost devices and reducing the perception of smartphones as a luxury item, the government’s policy change spurred smartphone adoption and internet use both in the number of users and in the amount of data consumed by those users. This has created a stronger digital economy that has then developed into a means for supporting other sectors of the Colombian economy.
Suggested Citation: Alliance for Affordable Internet (2020). “Colombia: Eliminating luxury taxation on ICT essentials.” Good Practices Database. Washington DC: Web Foundation.