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Summary

In the dying days of 2016, Colombia approved a reform that overhauled its entire tax system. The ICT industry was impacted with higher taxes. However, one of the most significant developments was the taxation of digital services. In other words, Colombia has become one of the first countries to tax OTT players, and Ovum believes that more countries will start imposing taxes on internet companies.

Colombia tax reform targets offshore digital service providers

The debate around taxing internet services has been going on in several countries, and a key question is how to tax companies that are based abroad. The new Colombian law includes an innovation that is likely to be analyzed across the globe. The law states that banks processing payments for OTTs on credit, debit, and prepaid cards must collect the tax due before sending out the proceeds, overcoming the challenge of collecting taxes from companies that do not have a company established in Colombia.

The law defines digital services in a broad way as any online platform or service that delivers audio or video content, mobile applications, advertising, or distance learning. In other words, companies such as Uber, Netflix, Google, Amazon, and Airbnb will be subject to the same VAT of 19% that applies to all services, whereas before the tax reform OTTs did not pay VAT at all. It is expected that the cost of services for the end user will increase once the new regime is implemented in February. The reform increased taxes for fixed and mobile telecoms services as well, which is also likely to impact the cost of connectivity for the end user of digital services. The table below summarizes the changes.

Table 1: Colombia, % tax on telecoms and internet services before and after reform

Service

Tax

Before tax reform (%)

After tax reform (%)

Mobile

Voice

VAT

16

19

Additional tax

4

4

Total

20

23

Data

VAT

16

19

Additional tax

0

4*

Total

16

23

Fixed

Voice, internet, pay TV

VAT

16

19

Additional tax

0

0

Total

16

19

Companies based abroad

Digital services

VAT

0

19

Additional tax

0

0

Total

0

19

*Only applies to data plans above $16.6

Source: Ovum

The discussion about levying taxes on OTTs has been driven by telecoms operators questioning tax authorities about their perceived "unfair" treatment, since telcos are the ones paying local taxes in full. Typically, tax authorities struggle to apply VAT and similar taxes on services when they do not have an office established in a country. Colombia solved this issue by targeting the institutions processing payments for these services. Ovum believes that such a move will be considered by other countries, not only to level the playing field for all players, but also to increase tax revenues in a fast-growing industry. All in all, Colombia might be anticipating a movement that will see more taxation for OTTs and, as a consequence, higher prices for end users.

Appendix

Further reading

Colombia Update, December 2015, TE0001-001011 (January 2016)

"Is taxing OTT voice services the right step for the Jordanian market?" TE0015-000427 (February 2017)

Author

Ari Lopes, Principal Analyst, Latin America

ari.lopes@ovum.com

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