The FINANCIAL — The new draft of tax code introduced by the Ministry of Finance has sharpened the topic of increasing GSM operator prices. The representatives of GSM companies have said that if the tax code is adapted there is high probability of tariff increases. High tariffs have long been a concern of Georgians, the press, NGOs and even politicians.
The GSM operators’ representatives, in interview with The FINANCIAL, speak about the negative aspects of imposing excise tax on telecommunication companies as well as future forecasts of tariff price increases.
“If you add 10% to your costs and 10% of your sale price is being taken from you, you can’t continue with the same price plan, it’s impossible. I can’t speak for the other companies, but we already have highly competitive prices for the new product Bani, which is very good value. Bali is also very competitive and has very cheap rates for students and young people.
We are constantly trying to keep our tariffs low, but if we are suddenly faced as an industry with this discriminatory tax we have to try, we are a business and we have to make some money, I can’t predict what will happen, the market will have to somehow find its own balance again but inevitably there will be an effect on pricing and on re-investment,” said David Lee, General Director of Magticom.
“If the tax is imposed, there is a probability that the tariffs may increase,” said Irma Tskitishvili, Head of the Public Relations Department at Geocell.
“An increase in unit prices is quite a complex issue and is dependent on different factors, on a competitive environment, customer behaviour, consequently it is difficult to forecast what influence the tax will have on customer prices, however in general an additional payment puts significant pressure on this sphere,” said Teona Bagdavadze, Public Relations Manager at Beeline.
“We understand that the Government is to bring in a special tax, an excise tax just for mobile telephone companies, the apparent ‘reason’ being that mobile telephone companies are making super exceptional profits. From our position in the industry, we think that that is incorrect. If you look at the mobile companies in Georgia, there are only three of them, and they do not make an exceptional profit compared to companies around the world.
The bigger the country, like China, the more you pay compared to in a smaller country, when we look at it this way we are actually paying a lot compared to the world rate. So we want to make it clear that the companies are not making superior profits as they are paying large amounts of tax and fees for licenses, we also pay regulatory tax,” said Lee, Magticom.
“When you look at the mobile sector we have already paid huge amounts of money into the budget. Magticom has paid 890 million – 1 billion GEL to the budget. Moreover, in the last few years mobile companies as a group have paid 200 million to the budget for licenses that are renewed after 10 years,” added Lee.
“Excise tax is a revenue tax imposed on a product, those products are normally in one of either two categories: they are either harmful substances such as cigarettes and alcohol, whereby the Government is trying to actually raise revenue and at the same time discourage people from using too much of these products; and the other is excise tax on very high-end luxury goods. In any case telecomm is neither luxury nor harmful, in fact with three mobile telephone companies, telecomm has become an essential sphere of modern lifestyle in Georgia,” declared Lee.
“Any changes or worsening of the investment environment may prevent further investments from being made. The investment depends on the investor, within which there is a 51% share of Vimpelcom, international provider of telecommunication service. Moreover, the shares of Vimpelcom are traded on the New York Stock Exchange and consequently, many international companies are observing its investment directions,” said Bagdavadze, Beeline.
According to Bagdavadze, Beeline has made a 200 million USD investment in the Georgian economy during its operations period in the country. The company is actively involved in enlarging its chain and implementing high-technology directions, which will result in higher service and increased workplaces.
“Considering the fact that the tax under question directly affects company profitability, due to the consequent tax environment new investments may become less attractive for the whole telecom sector,” declared Tskitishvili, Geocell.
“Telecommunication as an industry is extremely high capital intensive. Each year 30-45% of the revenue of the company is re-invested back. Due to this model Georgia has a world class mobile telecommunication system. Most of the Georgians we talked to, most of our customers, say that it works very well, is high quality and even if you want the latest technology like 3G, you can get it. Georgia was the first country in this entire region to have this technology and we want to continue at the same pace especially at a time when fourth generation is coming in,” declared Lee.
“Geocell’s attitude towards tax increase is negative, principally because of the whole burden of newly proposed tax legislation, nevertheless Geocell has been closely following up related legislative developments and discussions regarding the new taxes, including meetings with audit companies, business associations, and public discussions with the Government,” declared Tskitishvili.
“For me, as President of AmCham, one of the things that is negative about this idea, is that you are taking a single sector and imposing a special tax, you are not treating everyone in the same way. Everyone would agree that this sector is one of the most highly invested, highly technological sectors. It is not a sector which people would say has not evolved or developed, they would not say it is old fashioned or not working properly.
Another thing that is very negative about the proposal is that the companies involved in this sector are international and are an example of FDI in Georgia and its very best; hundreds of millions of USD investments. Its expertise, its partners are the best in the world – Cisco Motorola and Ericsson. Yet you are suddenly selecting these foreign investors for a special tax which is about to have significant implications. For example if another foreign investor is planning to invest in any sector, they do not know whether this precedent will apply to their sector. If they are going in to agriculture, tourism or wind generation, does this mean that in the future the Government will be able to do exactly the same because they suddenly decide they can get money from the sector? This is not a positive message to send. Moreover, as the companies involved are foreign, the information will be displayed on stock exchanges around the world, in America and Europe,” said Lee.
“From the Amcham point of view we are working with the Government. We completely understand that it is necessary for the Government to raise tax but in the new tax code we have been working with the Government so that tax can be as efficient as possible. It’s not true that business associations simply want the lowest taxes possible, what we want is what Georgia is building, the 11th best place in the world to do business. What we want with taxes primarily is to know what they are, for them not to change much and be clear. That is what we are looking to achieve with the Government, that the tax legislation should be understandable and not change too frequently. That’s what makes it easier to do business in Georgia and hopefully the Government will listen to these arguments.
The last point when speaking about the predictability of investment is another area that is of great concern – when you consider imposing something halfway through the year. The way that business works is that we invest over the long term but certainly over a year so we have the business plan for the year. One never anticipates that something will change in the middle of the year. So again we find this very unusual and think it is negative not only for the country but the entire community in Georgia, including foreign investors. We are trying to be positive, we are not saying we won’t pay tax, but we do not want to be singled out for a special tax that will be destructive for the whole business climate,” declared Lee.
Magti recently introduced its new brand Bani, with low tariffs. Low prices and simple service are what differentiates Bani from others.
“The growth iof Bani has been faster than the growth of MagtiFix, and it’s faster than Bali was at that same stage. Bani is targeted at people who want low costs and people who want simple service and is a good example of how all the telephone companies are constantly competing with each other to find ways of keeping the tariffs low.
Bali is really now a date service, if you really look at what kids are doing with Bali they are spending more time on the internet than they are on the phone, so what we see is that we have invested a huge amount of money into our date network and we are constantly upgrading it, we are finding out that young people are now using date services more and more. It used to be SMS, but now its Facebook, and now its email, chat, basically using your telephone as a computer.
For all our brands the quality is the same, what specific services you want allows you to play with the prices. Bali is for people who want fun, good prices for voice calls and excellent date services. Bani is a very simple service and for people who want reasonable prices. Magti is for those who want the whole package; perfect customer service, perfect coverage. And MagtiFix is simply a dream telephone,” said Lee.