Telecom Industry Incentives for Investments in Latin America

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Telecom Industry Incentives for Investments in
Latin America
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Overview Latin America Telecom Mkt.

• Deregulation The 1997 WTO telecommunications
  treaty has been a key deregulation driver. Most
  countries have established independent regulators
  to oversee deregulation and to develop
  competition in telecom markets.
• Privatization Most of the region's operators
  have been, or are being, fully or partially
  privatized. In most markets, deregulation has
  been phased in, usually in data and cellular
  markets, followed by long-distance, with local
  loop competition still somewhat rare.
• Economic Growth Privatization is driven by a
  number of factors, including the need for Latin
  American governments to reduce public spending,
  and the need to attract new capital to develop
  the industry, which seen as vital to economic
  development.

• Countries vary in development, but they all have
  one thing in common an influx of foreign
  investment. Weaker players are rapidly being
  acquired by the stronger ones, which are not
  always the incumbents.
• Deregulation and privatization is driving growth
  and investment in fixed telephony services.
  However, the local loop is still largely
  dominated by the incumbents.
• The Latin American wireless market has seen
  profound structural, financial and technological
  changes. Penetration rates are lower than in
  other regions, but deregulation and competition
  are driving growth.
• Internet penetration is still low compared to
  other regions, but there are signs that this
  sector will grow rapidly over the next few years.
  The demonopolization of the local loop will bring
  down access charges dramatically.

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Environment Telecom Industry

• Key forces and factors driving changes and
  strategies in the industry
• Evolution or revolution in the industry?
• -The collapse of the dotcom mania and the
  financial follies has cost the world a
• fortune. The telecom bubble far exceeded the
  dotcom debacle.
• The global financial system became addicted to
  fuelling this bonfire Between 1995 and 2001
  more then 900bn lent to the industry (400bn in
  loans and 500bn in equities)
• Overcapacity of communications networks
• 60 billion in telecoms loan defaults
• The stock market value has fallen 3,800bn or 60
  since its peak of 6,300bn in March 2000
• Most of 31 telcos filed for bankruptcy
• Because many of the top industry players have
  identified similar strategic goals, the
• winners of this competitive race will be those
  that differentiate in the implementation.

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Major Tax Issues - Telecom Industry

• Netting (Melbourne Agreement) vs. Withholding
  Taxes
• Permanent Establishment (servers, switching
  equipment, routers, intelligent peripherals, STPs
  (Signal Transfer Points), POPs etc.)
• Sourcing of local vs. international telecom
  income
• Transfer Pricing
• VAT
• Recoverability on payments by non residents
• Applicability of VAT on roaming services rendered
  to non residents
• Characterization of cross border payments on
  telecom related income
• Amortization of payments for concessions and
  IRUs
• Deductibility of fees paid to non residents

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Top Tax Challenges in Latin America

• Acquisitions and Dispositions
• Management of losses and cash flow
• Impact of currency fluctuation on bottom line
• In 2002 ½ billion dollars for a major telecom
  operator in Brazil.
• Case point Brazil Revenue Tax (PIS/Cofins)

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Tax Incentives in Latin America

• In general, no significant incentives apply to
  the telecommunications industry.
• Situation unlikely to change given increasing
  need to broaden tax revenue base.