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Summary

There has been an exponential rise in the popularity of over-the-top (OTT) services over the past few years, and Latin America has been a prime breeding ground for such offerings. With an ever-increasing user base, the OTT sector has brought about a rapid transformation of the communications landscape, leading to an environment where OTT providers operate mostly unregulated. And since most OTT service providers are not geographically confined and operate from abroad, it is a tough task to apply regulatory policies to them. OTT services proliferate via the networks of the telcos, without having to spend huge sums of money on spectrum acquisition or network infrastructure. The telecoms companies, on the other hand, face tough competition from OTT players while being burdened with regulatory norms and taxes. This has led to a debate on the need for regulation of the OTT environment.

Taxing OTT players – just the first step toward regulation

Colombia was the first country in Latin America to specify taxes for OTT players, having introduced a 19% value-added tax (VAT) for digital services accessed over telecommunications networks. The country overcame the difficulty of taxing OTT players based abroad by charging the institutions that process payments for these services. The reform came after the telcos raised the issue of unfair treatment from the tax authorities, citing the fact that they had to pay full local taxes while OTT players based in other countries could get away with tax-free profits.

Telcos bear the burden of increased data demand arising from the surge in popularity of video-content-based OTTs such as Netflix, Amazon Prime, and YouTube on mobile devices. This increased demand causes congestion in the network, compelling mobile operators to invest in network capacity enhancement, increasing their financial burden, while their text and voice profits get reduced. The move by Colombia sent a wave across the region, with many Latin American countries following similar lines to implement taxes on digital services and with others considering such reforms. The latest addition to the list is Argentina, which passed a tax reform at the end of 2017 to include digital services.

Under Argentina’s new tax law, set to come into force in April, all digital services bought from foreign companies will attract VAT at a rate of 21%. In what can be seen as part of a wider trend of tax reforms across Latin America, the country has gone a step further by having the new law cover access to and/or download of images, text, information, video, music, and games. The firms affected the most include the likes of Netflix, Spotify, Amazon, and Airbnb.

Brazil has had a long-running debate about taxing OTT players, and the country had been considering reforming its existing tax laws to bring digital services under the tax umbrella. It finally passed a law doing so in October 2017, but the reforms haven’t been implemented yet due to ongoing legal disputes concerning the reform. The case of Brazil is different than rest of the Latin America, as digital services would be taxed using ICMS, a state tax mechanism that applies to the supply of goods and services, with rates varying across the country’s 27 states from a standard 17% in most states to 18% and 19% in some others.

In addition, other Latin American countries – including Uruguay, Paraguay, and Costa Rica – are currently considering reforming their tax laws to bring OTT digital services under their tax purviews.

The time for further OTT reforms is now

Taxing VOD/OTT players is only the first step toward regulation of a vast and diverse market. A major chunk of OTT companies, for example those that provide messaging and voice services over the internet, remain out of the reach of the reforms currently being considered and implemented. This indicates a need for each category of OTT service to be assessed and addressed separately.

The telecoms industry is transforming quickly, and regulatory bodies need to be on their toes to ensure a level playing field where telecoms service providers and OTTs can complement each other. The OTT market has grown rapidly across Latin America, with an increase in internet penetration, and OTT service providers are riding high on ever-growing profits from the region.

While trying to regulate the market could have backfired a few years ago by curbing the growing market, now is the perfect time for such reforms and other regulatory changes. Latin America has around 21.5 million OTT video subscribers, and OTT messaging penetration in the region stands at more than 70%. This presents an ideal context for laying ground rules in areas such as competition, taxation, supervision, use and monetization of personal customer data, and obligations for the use of telco networks. Regulatory intervention would help maintain quality of service, while ensuring that consumer interests are taken care of.

Appendix

Further reading

2018 Trends to Watch: TMT Regulation, TE0007-001182 (August 2017)

"Colombia goes after OTTs with new tax laws," TE0001-001075 (February 2017)

Author

Vipul Babbar, Analyst, Americas Service Provider & Markets

vipul.babbar@ovum.com

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