Tax? Where is it cried the boy

“Another operator searched for the scourge of tax avoiding international carriers.”

These are the headlines lighting up the digital press mills of Facebook, WordPress, Joomla…etc, oh you get the point. Where a little boy cried “wolf”, a regulator cried “tax”.

In the last few weeks 2 operators with ‘Carrier of Carriers’ licenses have been searched by the regulator for providing services to unlicensed, but more importantly, non-tax paying, international companies. You can read more about the disconnection of services at Zesco here and the search conducted at CEC Liquid Telecom here. Both operators are holders of a specific license that empowers them to resell capacity, and but more importantly, import capacity. The carrier of carrier license has two main tenants:

• The holder can only sell to holders of Private Network licenses (big banks and corporates)
• The holder can only sell to holders of an ISP license

The goal behind the creation of the Carrier of Carriers license was to slowly migrate from a single international gateway with Zamtel, to a more open national network with several companies competing to provide international services. No mention of Zamtel’s capabilities. The goals of an open network are to drive down the price, increase network resilience, offer customers more choice, encourage competition and innovation. All valid and ambitious. None of the reasons covers tax governance or policing, these are elective subjects at engineering schools.

ZICTA, as a regulator, is responsible for crafting policies to encourage the usage of ICT for economic growth. ZICTA, therefore, must balance economic growth with the safety of the citizenry and equitable usage of scarce resources like spectrum. Those are the founding remits of a traditional regulator. Our regulator is in an interesting position where the funds it collects are handled by the Ministry of Finance whose key remit is around money. The key factors driving the Ministry of Finance’s policies are, ensuring that government balances its books by spending wisely and collecting taxes. With a financially prudent parent in the Ministry of Finance, ZICTA is now part of the revenue collecting offspring of government. Is that the best use of the regulator’s army of engineers and policy makers? LusakaTimes has quoted the Acting Director General of ZICTA as having said,

The regulator said it was also targeting 17 other companies in the operation

In the land where the boy cried wolf, are all the dams leaking? If that is the case, I had best develop gills and learn to breathe under water! Why are these international companies going to all this trouble to break the tax laws? A step back, how are they breaking the laws and why is it practical?

To explain how Zambia is connected to the rest of the world, I have attached the network maps of the two organisations, Zesco and CEC Liquid.

 

 

 

 

 

 

 

 

Both networks have common ingress and egress points; Sesheke, Livingstone and Chirundu to the South, and Nakonde to the North. None of the companies identified as having avoided tax in the breaking stories has network infrastructure from any of our borders to a major city. Network infrastructure is simply a fibre optic cable or a high-capacity microwave dish.The first sign that it might be more wolf than tax is the small detail of paying for capacity from the border to Lusaka. No one is giving that away for free. This means there is a net capital inflow into the country for that capacity, where we normally pay, sounds good to me.

To run a network you need a few nodes to handle the intelligence around who is your customer, where is your customer trying to send traffic and how to get your customers traffic to the end destination. For this example, we will group the nodes under the nomenclature of a router. To provide service, the non-tax paying companies, have to install routers within a Zambian providers network (someone who has fibre in the ground or towers). The Zambian provider must install a link from the router to the end customer. Once again, this link is paid for to a local ISP. At a minimum we have 2 sections of the link that Zambian companies are paid for:

• National backbone from the border to ISP
• ISP to end customer

Where is the wolf? Are the tax savings enough to make a link more affordable for the end customer by putting a router in the middle of a link with 2 local providers?

How does it all work? Firstly, the bulk of the customers being served by the non-complaint entities are either providers themselves or large corporates. The invoicing is a little complicated but here is a quick 5 step process of how it works;

1. A corporate negotiates internet access through its Head Office outside Zambia
2. Provider agrees to provide internet access for the corporate in Zambia
3. The provider invoices the corporate at their HO (outside Zambia)
4. Local companies are then sub-contracted to provide the links in Zambia
5. The local companies then invoice the provider for services in Zambia

The main reason for the above set-up is not tax avoidance. It is because large companies want to pay a single invoice for a service across multiple countries. they also want a single throat to choke when things go wrong! Simple, it is about scale and economics. It sounds weirdly similar to what the mining companies do with copper, ops I am crying wolf again! Back to my sheep minding duties.

Ok, I will shepherd a little more. Where is the tax component? The Internet as a service does not attract withholding tax when provided by a local company. If it is provided for by a foreign company it will attract withholding tax. Withholding tax is 20% in Zambia. Not an insignificant amount. The more important question is, what is the cost of doing business as an ISP? Will our internet as a whole be cheaper if the tax burden for providers was reduced?

Instead of targeting non-tax paying entities the regulator should refocus on its core task; creating a conducive environment for companies to go about the business of providing the internet. If I was the regulator I would focus on;

• Leverage the unique geographical advantage of having 8 neighbours
• Link East and West coast cables