Text Tax is a Sneak Attack

Walk around Britain today, and you sometimes see old houses with recesses in the walls. They look like they should have windows in them, except there is no window. The space is the right size, and in the right place for a window, but they are bricked up. They are reminders of a time when Britain had a ‘window tax’, a tax where the wealth of a man was measured by the number of windows in his house. You can imagine the kind of reaction that provoked, with two small windows costing double one big window. Governments are always looking for different ways to tax the people. At one time, the Russian state generated 40% of its revenues from a tax on vodka. Public toilets in France, Italy and Romania are still named after Roman Emperor Vespasian, who taxed the collection of urine. There are still many stupid taxes today. Almost half of the states in the US have laws to make people pay tax on illegal drugs. Not surprisingly, most illegal drug users also dodge the drug taxes too. A few weeks ago, talkRA colleague Lee Scargall reported on a crazy suggestion to introduce a tax on SMS messages in the UK. I laughed it off, but I laughed too soon. Although there is no signs that such a bonkers tax will be levied in the UK, there is a serious proposal to introduce just such a tax in the Philippines.

Of course, the Philippine authorities are trying not to call it a tax. It will be a ‘fee’ of perhaps 5 centavos (about 1 US cent) per text. The fee will be used to pay US$30 million for metering devices, to check that the Philippines government is getting all their money. You can read about the story here, here, here and here.

The Philippines are the highest per capita users of SMS in the world, so a penny a text must seem like a great way to raise cash for the government. With US$30m at stake, there must be some vendors out there willing to tell the Philippine authorities what a good idea the scheme is, and how they are right not to trust the telcos. US$30m does not sound like the kind of number picked at random either, so somebody must have had a few sly conversations with possible suppliers. Money talks, but whoever is whispering sweet nothings about extra money from telcos, the Philippine government should turn a deaf ear.

The window tax was a bad tax, even though it was simple. That is why we no longer have it. It tried to make money from the richest, but counting windows is a poor way to work out who is richest. The same criticism applies to this text tax. If the Philippine government wants to tax telcos more, then they can just pass a law and take more of their profits. Taking money direct from revenues just ducks the question of how those revenues should be spent. The Philippines benefits more in the long-run if the telcos invested in infrastructure and services. The employees of telcos benefit if they are paid well and have job security. Profits come after costs like investments and the pay received by staff. Taxing profits does not punish businesses that invest or reward their staff well. Taxing revenues does. Taxing revenues is short-sighted, and discourages expenditure on infrastructure and on employees. One way or another, telcos who carry an extra tax burden will either charge the consumer more to compensate, or they will spend less on providing current and future services, or they will generate smaller profits. If customers end up paying more, then the text fee will be an extra stealth tax on them. If investment or pay falls, that hurts customers and the economy too. And if profits fall, then you end up in exactly the position you would have been in if you had just put a bigger tax on profits to begin with, except you wasted US$30m on a lot of extra technology to do it.

In the end, the only sure-fire winners in the Philippine scheme would be overseas. An overseas business will get the contract, because the technology will need to be imported. Whichever supplier wins the deal, the taxman in their country will be taking his slice. But back in the Philippines, somebody is paying for a lot of unnecessary equipment.

Despite the recent crisis, there is only one sensible place for governments to be looking for money, and that is in banks. Whether a telco makes money from SMS messages, voice or from the food sold in the staff canteen, that money ends up somewhere. Audit the company’s numbers, trace the money, take what is owed – that is how a tax system should work. Money comes out of the telco customer’s pocket and ends up in a bank somewhere. It does not just disappear. Looking for that money by poking around a telecoms network or interrogating a database would mean asking the taxman to run the telecoms business, instead of just taxing it. A good telco will turn all its network usage into money, and the taxman will take his share of the money. A bad telco will fail to turn all its network usage into money, meaning there is less money for the taxman too. But the taxman is not going to help himself by trying to interfere in a failing business. Even a greedy taxman is never going to be better at running a business than a greedy businessman. And even if the taxman did help the telco to make more money, it would be because customers were previously underbilled, or because the telco was engaged in fraud. If customers were underbilled, then the result is that customers will pay more, which is exactly what the politicians are promising will not happen. On the other hand, if the problem is internal fraud within, or by, the telco, then network data will not help. Any good RA practitioner should know you do not find hidden cash by trying to do a usage reconciliation – you do it by tracing cashflows. Trying to reconcile cash to usage would be a massive (and probably inconclusive) distraction from the real goal. Usage reconciliations are good for finding leakages nobody knows about, not for finding cases where real money is being hidden. A good auditor does not need to know about a customer’s usage just to tell if the money the customer spent has gone missing within the business being audited.

The text tax is a sneak attack – a confused and confusing attempt to raise taxes whilst pretending that nobody has to pay for them. Either it steals from customers whilst hiding behind the telco, or it involves governments invading telcos and telling them how to run their businesses. Neither is a credible or sensible way to increase public funds. It is a bad idea all round, and is seemingly inspired by a lot of confusion between the principles of auditing cashflow (something the taxman has a reasonable right to ask questions about) and auditing business performance (definitely not the job of the taxman in a free society).

Thankfully, it looks like the Philippine customers are less easily confused than the Philippine authorities. It is reported that consumer groups are angry at the proposal. Good for them. That stands as proof that you do not need to spend US$30m just to understand what is really going on…

Eric Priezkalns
Eric Priezkalns
Eric is a recognized expert on communications risk and assurance. He was Director of Risk Management for Qatar Telecom and has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and others.   Eric was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He was a founding member of Qatar's National Committee for Internet Safety and the first leader of the TM Forum's Enterprise Risk Management team. Eric currently sits on the committee of the Risk & Assurance Group, and is an editorial advisor to Black Swan. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.   Commsrisk is edited by Eric. Look here for more about Eric's history as editor.