Under the sea: Tax on sub-oceanic telecommunications cables
21 July 2015
Posted by: Author: Vim Zama
Author: Vim Zama (MTN)
A look at the write-off period for fibre-optic cables acquired by telecommunications companies
The Independent Communications Authority of South Africa (ICASA) started awarding licences for mobile network services in 1994. Before that, telecommunication services were only provided by Telkom using fixed lines. MTN and Vodacom were the first companies to be awarded mobile network licences, and were subsequently joined by CellC and Telkom.
During those early years of mobile telecommunications in South Africa, network operators mainly provided voice and SMS services to subscribers. Since then so much has changed in the competitive landscape. Providing data and other value-added services has become the focus point of almost all mobile networks. As a result, network providers have been heavily investing in fibre optic cables for more efficient data transmission. The industry has also witnessed increased partnerships with international role players to access greater bandwidth capacity through undersea cables.
Tax treatment of lines or cables used for the transmission of electronic communications – section 12D
The definition of "affected asset” in Section 12D of the Income Tax Act was amended in 2009 with the inclusion under (c) of "line or cable used for the transmission of electronic communications”
In terms of Section 12D, a taxpayer is allowed to deduct 6.67 per cent (or 5 per cent for cables or lines acquired before 1 April 2015) per annum of the cost actually incurred as an allowance in respect of the acquisition of any line or cable used for the transmission of electronic communications. The following conditions must however be met:
a) The cable or line must be owned by the taxpayer and used in the production of the taxpayer’s income.
b) For cables or lines acquired before 1 April 2015, the cables or lines need to be new and unused.
c) For cables or lines acquired on or after 1 April 2015, the "new and unused” requirement was deleted with the result that even second-hand cables or lines will qualify for an allowance, as long as it is brought into use for the first time by the taxpayer.
Explaining why the write-off period was reduced from 20 to 15 years, National Treasury stated that it was necessary to align the Accounting and Tax treatment of such assets. Factors such as technological improvements and the environment that affects the useful life of cables and lines must be taken into account.
The telecommunications industry as a whole welcomed the above changes made by Treasury. There are some doubts however, whether the 15-year write-off period is justifiable in view of the theft of copper cables in South Africa and technological changes affecting this industry.
Tax treatment of Indefeasible Right of Use (IRU) of undersea cables – section 11(f)
In 2008 telecommunication companies operating in Africa teamed up with bandwidth carrier companies to construct undersea cables to transmit data across the Indian, Atlantic and other oceans. At the same time, telecommunication companies lobbied for the amendments of Section 11(f) to cater for the IRUs in respect of the right of use of undersea cables.
In 2009, Section 11(f) was amended with the inclusion of (v), which allowed a deduction for an allowance in respect of premium or consideration in the nature of a premium paid by the taxpayer for "the right to use any pipeline, transmission line or cable or railway line contemplated in the definition of "affected asset” in section 12D.
In terms of Section 11(f), the deduction is limited to the greater of:
a) Number of years the taxpayer is entitled to use the cable or
b) 25 years
Therefore, if the IRU agreement is for 15 years and the taxpayer paid R30 million, the taxpayer will be entitled to an allowance of R1.2 million per annum (R30 million for 25 years). If the IRU agreement was for 30 years, then the taxpayer will be entitled to an allowance of R1 million per annum (R30 million for 30 years).
In terms of proviso (dd) to Section 11(f), no allowance can be deducted in respect of IRUs if the recipient of the income will not be including that income as gross income in their tax return. IRUs in respect of right of use of undersea cables were carved out from this proviso if the term of the right of use is 20 years or more. The majority of the undersea cables are owned by foreign companies and therefore proviso (dd) is usually applicable to most IRUs entered into by SA network providers, seeing as they pay to foreign persons not registered for tax in South Africa. In 2013, the industry lobbied Treasury for a review of the above-mentioned write-off period from 20 to a period of between 10 to 15 years.
The main argument put forward by network providers was that with international investors focusing on Africa as an emerging destination of choice, and thus increased role players, bandwidth has become cheap and IRU agreements are generally entered into for a shorter period of between 10 to 15 years.
As a result of this, in the Minister of Finance’s 2015 budget speech he acknowledged that it has become necessary for Treasury to review the 20-year term requirement in order to take into account changes in business models and international best practices. Now the telecom industry is holding its breath, waiting to hear if Treasury will align the write-off period of cables under Section 12D with the IRU’s minimum required term period under Section 11(f). It is expected that Treasury may also consider amending requirements of Section 11(o) to cater for the scrapping of cables due to theft or technological changes, which have become prevalent features in our telecommunications industry.
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This article first appeared on the May/June 2015 edition on Tax Talk.