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Feasibility of Imposing a Windfall Profit Tax on Telecommunications Industry Particularly on CMTS Providers, September - October 2009

This study aims to look at the viability of imposing a windfall profit tax on the telecommunications industry and determine its possible effects on the operations of cellular mobile telephone system (CMTS). A windfall profit is a profit that occurs unexpectedly as a consequence of events not controlled by those who profit from it. It does not form part of income since it does not involve the sale of goods and services. Windfall profit can thus be subject to a windfall profit tax which is a form of an excise tax. Furthermore, a windfall profit tax is an additional tax on profits that ensue from a sudden windfall gain to a particular company or industry. This tax is usually, in addition to the normal corporate tax, that is payable by the business/industry on its profits. There is no doubt that the telecommunication industry especially Smart and Globe have high rates of profitability based on their ROIs and ROEs. Information is that 60% of the telcos’ income comes from text messaging or SMS. However, while imposing additional taxes on telcos with ROE and/or ROI of more than 12% is feasible, market conditions and other factors should still be considered. The imposition of a windfall profit tax may be perceived as killing a flourishing industry that significantly contributes to government revenues. It is pointed out that higher ROEs and/or ROIs do not necessarily mean that the industry is already stable to absorb additional taxes. It is worthy to note that there are other factors that need to be considered in determining the stability of a company. In addition, the drawbacks of these ratios must be considered. In fact, the telecom industry is a capital-intensive business characterized by fast obsolence of technology and equipment. It is also highly competitive on the basis of price, brand, network coverage, distribution, and technology and service quality. An industry with high ROE and/or ROI may not be liquid or it may have a long-term obligation or beset by other factors that may affect its continuous operation. Compliance for any additional tax may be burdensome to the industry since it is already paying corporate income tax, value added tax, overseas communication tax and other local taxes and licenses. Given all these arguments and data, a windfall profit tax on telcos based on income from SMS, may be interpreted as a selective tax which is due to the immense popularity of SMS and the alleged huge profits of CMTS providers from said service. The main point to be made, though, is that a windfall profit tax runs counter to the workings of a capitalist economy that is rooted in allowing business to maximize its profit potentials. Otherwise, there will be less motivation to go into business, a situation which may create more serious repercussions to the economy. The imposition of a windfall profit tax at this time when the corporate income tax had been reduced from 35% to 30% may be awkward. If government needed more revenues then it should have maintained the corporate income tax at 35%. Lastly, based on the experience of other countries like Malaysia that imposed a windfall profit tax, it caused additional tax burden to the industry as well as difficulty in the tax administration and created adverse economic effects.


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