UAE Revises Telecom Tax

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Etisalat Telecom UAE
A service centre of Etisalat in Dubai Silicon Oasis. Etisalat, the United Arab Emirates’ No.1 telecom operator, posted a net profit of 2.21 billion dirhams ($602 million) in third-quarter profit, up from 1.72 billion dirhams in the year-earlier period. Photo: DubaiSiliconOasis

Telecom providers in the UAE have been slapped with a new tax or royalty. The only two telecom operators, Etisalat and Du will be taxed via royalties under licence agreements with the government.

The new tax is designed to protect state revenues after a sustainable profit slump at the former monopoly, Etisalat.   Based on this new formula, Etisalat will have to pay tax levy on its revenues as well as profits.

Etisalat which operates in 15 countries across the Middle East, Asia and Africa previously paid the government 50% of its annual profits in royalties. However, as its profits fell so did the government revenue.  Etisalat paid Dh5.8bn  ($1.58bn) in royalties in 2011, down from Dh7.6bn ($2.07bn) in 2010 and Dh8.8bn ($2.397bn) in 2009. Reuters calculates that for the nine months to September 30, 2012 revenue from Etislalat would rise 32% to roughly Dh 7.8bn ($2.12bn).

“This is not a new strategy”, telecommunications experts Manoj Pillai from Mumbai told Arabian Gazette. “Governments are increasing their levy on telecommunications companies and reducing their tax on other sectors.”

From 2012 to 2015, the firm will pay 35pc of its profit in royalties, plus a further 15pc of revenue, according to a government statement yesterday. That means state receipts will be less affected by Etisalat’s profitability, which has waned as a rapid foreign expansion failed to offset falling market share and margins at home.

However Du’s reigns are also being tightened. Du which has built up an estimated 47% of the UAE’s mobile subscribers has seen the government change  its royalty structures.

Du will pay 5pc of revenue and 17.5pc of profit in royalties for 2012, with this steadily increasing to 15 and 30pc respectively in 2016. Etisalat will pay the same rates as Du in 2016.

“It looks like; from the government’s point of view, one aim — perhaps the main aim — of the new royalty schedule is to deal with the changing financial performance at Etisalat and in particular the fact that profits have tended to decline over the past few years,” Matthew Reed, a senior analyst at Informa Telecoms and Media in Dubai said.

“The Telco royalty fees, particularly from Etisalat, represent a significant part of the  federal government revenues.”

Etisalat’s royalties in 2010 provided more than a sixth of the Dh43.6bn ($11.88bn) federal budget.

Few details were provided in the government statement, but it seems likely that the calculations determining Etisalat’s royalties will follow the existing method used for rival operator Du.

Last year, Du paid five percent of its revenue in royalties, plus 15 percent of its profit. Crucially, the revenue royalty was not deducted from its profit before the profit royalty was calculated. This meant Du effectively paid a profit tax rate of about 39 percent, according to analysts and Reuters calculations.

Du said in a separate statement that it plans to use the same method of calculating its royalties for 2012.

“The new schedule for Du reflects the maturing profile of that company — it’s no longer a start-up and in fact has substantial revenues and profits,” said Informa’s Reed.  The new rules also appear to end double taxation on Etisalat’s foreign operations, with the government saying the “royalty applies only on local revenues and profit.”

Some consumers feel that this tax hike might increase the cost they would have to pay for making calls. “Du provides a lot of low cost offers,” Mohammad Abdullah a labourer told Arabian Gazette. “Now we might have to pay more to call home.”

“Such taxes would definitely be sent down to the consumer,” Sarah Mahmood from Ajman told Arabian Gazette. “we would have to pay more, which is not fair.”

UPDATED: UAE Ministry of Finance: New methods to calculate fees on telecom sector introduced

What do you think? Would the new tax boil down to the end user? Please let us know in the comments!

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