1 Taxes on ICT goods and servicesMr. Carlos Funes - Mexico

2 Information and communications technology (ICT) has driven productivity growth over the past two decades in the developed world, and has been a major facilitator of growth in developing countries as well. Yet despite clear economic benefits from ICT, a number of countries persist in discouraging its use by adding extra costs in the form of tariffs and specific taxes. ICT is a driving force for productivity growth around the globe. Yet by imposing discriminatory tariffs and taxes on electronic and digital devices and services, many nations actually discourage ICT adoption by businesses and consumers. The taxes are levied with the aim of increasing government revenues and/or protecting domestic ICT producers, a move that is actually counterproductive.

3 Taxes & Tariffs for consumer ICT products and services.Reducing taxes and tariffs for consumers and the opening to competition, are the foundation to accelerate technology adoption in countries and allow accessibility of citizens, with the consequent positive impact on industry and in the country's development Encouraging this is also highly relevant to promote the use of technology in education, promote social inclusion and reduce the digital divide between countries Some economies such as China and Brazil for its protectionist model, have imposed barriers in this topic, although they are more open to companies as you can see in the next slide 1.Source: ITIF (2014) Digital Drag: Ranking 125 Nations by Taxes and Tariffs on ICT Goods and Services

4 Taxes & Tariffs for business-use ICT products and services.Economies like China behave very differently in this topic on promoting the development and attraction of companies, particularly in regard to manufacturing components and computer equipment and electronics Latin America with a strong tendency to tax the industry, has significantly affected the development of the industry in countries like Argentina and Brazil, which despite its high potential, have seen slow growth in their respective industries and commercial potential around it. Other countries such as Mexico have not reduced their rates, but supports its development strategy by signing trade agreements with countries with whom its trade has increased, which has yielded significant gains in its commercial potential in ICT products and services

5 ICT taxes & tariffs by regionThe trend of Latin American economies to increase their taxes and tariffs and protectionist regimes, cause them to be located in the third highest region in terms of tariffs and taxes, just below Southeast Asia and sub-Saharan Africa In Latin America, countries like Brazil, Argentina and Venezuela increase the average, although others such as Mexico and Costa Rica, reduce it. 51.Source: ITIF (2014) Digital Drag: Ranking 125 Nations by Taxes and Tariffs on ICT Goods and Services

6 Taxes and Tariffs: LAC vs World LeadersIndia and China show clear examples of how a policy to reduce taxes and tariffs may accelerate and strengthen significantly the potential of a country, obviously complemented by other factors such as the availability of qualified personnel, labor issues, intellectual property, among others. Source: Ernst & Young, 2014 Worldwide Corporate Tax Guide (Worldwide VAT GST and Sale Tax 2014),

7 Average applied tariffs on IT products prior to joining the ITABefore signing the ITA, India was one of the economies with higher tax rates, is an example of how a public policy strategy, supported by the government can be a key to boost the development of an industry and place it in the world arena as a world power, because once signed virtually eliminated all its taxes. Another important point is that India was not alone on issues related to HW and Software contained on optical devices and disks since they decided to step further and applied the same policy to the industry of IT services and software development complemented by a talent development strategy, which is what actually led them to take off internationally. Source: WTO Secretariat, based on Integrated Data Base (IDB) data

8 India, no taxes and low tariffs driving industry growthSTPI India 100% Condonation of the Income tax 100% Condonation of the Customs duty 100% Condonation of the Service Tax 100% Condonation of the VAT Reimbursement of the Central Sales Tax Free provision of basic infrastructure (as connectivity) 1990 to date 100% Condonation of the Income tax for 5 years and 50% other 5 years more. 100% Condonation of the Customs duty Debt allowance for up to US$500M without time restrictions. 100% Condonation of the Service Tax 100% Condonation of the VAT Reimbursement of the Central Sales Tax Condonation of state taxes over sales in where the SEZ is located. SEZ India To perform the mentioned before India carried out different strategies, first encouraged the development of industrial technology parks (STPI), which in one hand drive the creation of clusters and on the other encouraged the creation of special economic zones (SEZ), which led them to generate an industry focused on those parts of the country where it was producing high talent and the right conditions thus facilitating social and economic development of entire regions. 2005 to date

9 Taxes as a barrier in Closed economiesVENEZUELA Infogovernment law (published on October 17, 2013) i. starts August 17, ii) prohibits the purchasing of comercial or licensed software to all public corporations and branches; ii) Forces the public sector to use free software iii) centralize the competences in the selection of the free software to the public service; iv) establish an authorization for the exception of hiring a licenced software in case it does not exist as free.; v) 2,5% tax to all the net utility of the manufacturers and sellers of the software in the public sector vi) between 5% to 10% tax over total amount of contracts with public organisms. ARGENTINA Basic rent 35%, VAT 21%, Taxes depending on the Company origin country. Contrary to the case of India there is Latin America where economies are looking to put barriers to commercial software, such as Venezuela, thus limiting the possibilities of growth and access to the latest technology within the country. The case of Argentina is also remarkable, because some time ago was one of the economies with greater focus on reducing tariffs and taxes in this industry, nowadays current policies are going in the opposite direction, limiting exports and imports, affecting their economy.

10 Return to the growth path through a new taxes strategyBRAZIL Brazil’s government apply zero taxes to the industrialized products of the IT sector, as a way to compensate the problem of the lack of fiscal incentives previously proposed in the informatics law. The federal law was approved so it allows the companies to deduct from the base of the rent tax, for the double of its value, all the investments in training and qualification of labor force. It was approved by the national government the reduction of payroll taxes in some special sectors of the industry, including software, exchanging 20% of employer contribution to employee retirement funds for 2% of the income of the Company. The government started to discontinue this benefit in March 2015. Brazil today has a strategy to return to the path of growth, which has begun by implementing policies of lower taxes in the ICT industry, however, as seen in the last point, there is still uncertainty, which has not allowed that the results to show so fast and probably force the government to be more clear on its decisions on the matter, so they can regain the confidence of investors, through the focus on the domestic market, generating investment forces within the country to boost growth.

11 The world is working to eliminate ICT taxes & barriersWTO: Information Technology Agreement After 17 rounds of negotiations, at a meeting on 24 July 2015, nearly all the participants agreed to expand the products covered by the Agreement and eliminate tariffs on an additional list of 201 products. Annual trade in these 201 products is valued at over $1.3 trillion per year, and accounts for approximately 7% of total global trade today Computers: Main frames; PCs, laptops; Peripherals (keyboards, scanners, monitors) Software: Unrecorded media (discs, memory); Pre-recorded software Telecomm Equipment: Cell phones, corded phones, answering machines; Routers, hubs, switches Office Machines: Calculators, ATMs, Certain photocopiers; Postal machines Semiconductors: Microprocessors, Integrated circuits, Memory chips (sram, dram, etc.) SME: Lithography, dry-etching machinery, Vapor deposition, dryers, sawing/cutting machines Scientific/Measuring Devices: Chromatographs, spectrometers, flow Meters; Capacitors, resistors, certain electronic connectors Other: Indicator panels; Silicon wafers; Electronic parts; Translation devices Contrary to the direction that we see many Latin economies, the world is focused on the reduction and / or elimination of taxes on ICT products, for which a large number of countries have joined the ITA, which makes our region even less competitive against Asians and North Americans, even in economies such as Mexico and Costa Rica, who have put focus on competitiveness through trade agreements in the case of the first and ITA in the case of the second. However, the big problem of the ITA is that has focus on IT products and does not take into account the services and software that does not come preloaded on storage devices, which goes right against the current trend of this industry, in which today everything is beginning to be offered as a service.

12 WITSA is an active promoter of this global agreementSignatories of the ITA WITSA is an active promoter of this global agreement

13 ITA focusing on goods… and services?The actual economy is rapidly moving from acquiring goods for the needs of the moment to contracting services for a long periods of time expecting them to evolve constantly to always have state of the art service. The ITA is a great achievement for the manufacturing businesses but it deploys the service sector in opposite to the worldwide economy trends. ITA tariff liberalization was a catalyst for rapidly rising and resilient trade in ICT products and could it be more to the services industry in the future. Increasing diversification of ITA members, rising participation by developing countries generates a solid environment for raising opportunities in the service sector. ITA expansion to services will further increase the diffusion of technology and production opportunities worldwide. In this context, it is important that WITSA becomes a driver of policies supporting the reduction or elimination of tariffs and taxes to software and services, as this will open the door to new trends experienced by the ICT industry in the world and will in turn allow different economies to become more competitive.

14 ITA’s next steps. HardwareKey benefits to manufacturers and big consumers. Includes up to 97% of the world market Software and Services McKinsey mentions a growing market up to $500 BUSD for 2020 that needs to be exploited not only by the leaders of the industry but also for the developing countries. There is a need for the creation of working groups towards the recognition and promotion of software and services as the IT industry worldwide trends. Additional tax public policies needed to promote the creation, author rights and development of local and regional software hubs. TELECOM Local model (from each country) to enable the right policies and tax reforms needed to expand the infrastructure to better the business and social environment for the countries. Hardware: It is the most advanced topic regarding the elimination of tariffs and taxes, the ITA represented a breakthrough for the signatory countries, however the manufacture of the same is highly concentrated in certain countries, which are most benefited by export growth, while high plaintiffs as Europe or USA, enjoy lower rates, so that countries that are not in either of these two groups receive less benefit, being now pending develop other internal factors that lead to attract investment and manufacturing countries, which can be seen reflected in job creation and increased exports. Services: This is the category where the focus should be higher, there is an export market that McKinsey estimated at $ 500 BUSD by 2020, just in terms of software development, if you add that new technological trends are based on services, this market can be much larger, which is dominated by two countries currently under the Off Shore model, but it certainly has potential for other countries to be integrated, either under the same scheme or under model nearshore. In this respect, tax policies should be encouraged particularly from the countries that are represented unilaterally, as the main asset and in turning the higher cost in this line is human capital, so promoting adequate labor laws, facilitating processes of hiring and firing people, establishing reduction schemes on the grounds that such reductions are reinvested in the country through training and development of human talent or the creation of research center development and local taxes, should be key to the momentum of this segment as well as for the development of local conditions in each country to enable them to be competitive, and to achieve it, we must establish comprehensive public policies, including tax, but accompanied by a whole plan for the sector, such as it has India. Software: Software despite being within the treaty ITA presents a major limitation, as only the case of software stored on optical or storage devices mentioned, so the sale of traditional licensing remains outside limiting and all applications that are not traded on a physical device. This is even more important if we consider that now as much of licensing is sold through the cloud, whether under a scheme on premise or as a service, which in both cases would be considered either in the ITA. Nor is it clear whether the software embedded in other devices other than storage or optical would be considered in the ITA or this is outside the treaty, so again, there are many open windows that do not allow adequate clarity in the tax rates software, allowing each country to set different conditions of their overall marketing and promotion of local creation of the same, which is counterproductive for countries like Mexico and many others, who are users rather than creators of software. It is important this promotion through tax policies that encourage local development, local tax policies to facilitate export and import, and the accompaniment of a local, regional and even global comprehensive plan and public policies that really take to make the software creating a global and accessible to most industrial countries. Telecom: The telecom issue may perhaps be the most complex, the ITA provides everything that has to do with trade and production of devices for the industry, however, the issue is outside services. This situation is logical and becomes very complex to influence, since in different countries telecommunications are considered a matter of national security and industry regulatory policies are most often a matter 100% locally. What is also true is that today we should be able to generate support proposals that encourage the development of telecom infrastructure, accelerate the competition and that is reflected in greater access of citizens to telecommunications world, because without them basically we would be left isolated in an increasingly connected world. That would be good to move some of the policies developed for the IT industry, such as reducing or removing tax against local investments in infrastructure or training programs and access to the population and the gradual elimination of barriers to competition, which will undoubtedly help position each country in a more competitive position in the world of technology.

15 What is needed next? Documentation of the success public policies applied in countries like India, oriented to strengthen the local industry and the global trade. Aim for comprehensive treaties that integrate software, services, cloud and new delivery models that are not in the current agreements.

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