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UPDATE 2-UAE telcos may face bigger tax bill under new formula
December 10, 2012 / 9:11 AM / 5 years ago

UPDATE 2-UAE telcos may face bigger tax bill under new formula

* Etisalat to pay 35 pct on profit, 15 pct on revenue

* Previously paid 50 pct on profit only

* Move seen to protect receipts after Etisalat profit drop

* Govt also raises royalty fees for rival telco du (Recasts, add details, analyst quotes)

By Matt Smith

DUBAI, Dec 10 (Reuters) - The United Arab Emirates has set new tax, or royalty, rates for telecom operators in a move seen designed to protect state revenues after a sustained profit slump at No.1 operator Etisalat.

UAE telecom operators are taxed via royalties under license agreements with the government, and the total amount Etisalat will be paying could rise under the new formula, which includes a levy on its revenues as well as profits.

The former monopoly, which operates in 15 countries across the Middle East, Asia and Africa, previously paid 50 percent of its annual profit in royalties, but as its profits fell so too did government receipts.

Etisalat paid 5.8 billion dirhams ($1.58 billion) in royalties in 2011, down from 7.6 billion dirhams in 2010 and 8.8 billion dirhams in 2009.

From 2012 to 2015, the firm - formally known as Emirates Telecommunications Corp - will pay 35 percent of its profit in royalties, plus a further 15 percent of revenue, according to a government statement on Monday

That means state receipts will be less affected by Etisalat’s profitability, which has waned as a rapid foreign expansion failed to offset falling market share and margins at home.

“It looks like from the government’s point of view, one aim - perhaps the main aim - of the new royalty schedule is to deal with the changing financial performance at Etisalat and in particular the fact that profits have tended to decline over the past few years,” Matthew Reed, a senior analyst at Informa Telecoms and Media in Dubai.

“The telco royalty fees, particularly from Etisalat, represent a significant part of federal government revenues.”

Etisalat’s royalties in 2010 provided more than a sixth of the 43.6 billion dirham federal budget.

Had Etisalat’s new royalty regime applied to its 2011 earnings, it would have paid around 8.9 billion dirhams in royalties, rather than 5.8 billion, according to Reuters calculations, while its royalties for the nine months to Sept. 30, 2012, would rise about 32 percent to roughly 7.8 billion dirhams.

RIVAL DU

Few details were provided in the government statement, but it seems likely that the calculations determining Etisalat’s royalties will follow the existing method used for rival operator du.

Last year, du paid 5 percent of its revenue in royalties, plus 15 percent of its profit. Crucially, the revenue royalty was not deducted from its profit before the profit royalty was calculated. This meant du effectively paid a profit tax rate of about 39 percent, according to analysts and Reuters calculations.

Du said in a separate statement to Reuters that it plans to use the same method of calculating its royalties for 2012.

The government also changed the future royalty structure for du, which has built up an estimated 47 percent share of the UAE’s mobile subscribers since launching services in 2007.

Du will pay 5 percent of revenue and 17.5 percent of profit in royalties for 2012, with this steadily increasing to 15 and 30 percent respectively in 2016. Etisalat will pay the same rates as du in 2016.

“The new schedule for Du reflects the maturing profile of that company - it’s no longer a start-up and in fact has substantial revenues and profits,” said Informa’s Reed.

The new rules also appear to end double taxation on Etisalat’s foreign operations, with the government saying the “royalty applies only on local revenues and profit.”

These units accounted for less than 10 percent of group net profit in 2011, and about 27 percent of revenue, so the introduction of royalties on revenue may negate gains from ending double taxation, and the foreign units overall may still pay more in tax. ($1 = 3.6730 UAE dirhams) (Additional reporting by Mirna Sleiman and Nadia Saleem; Editing by Dinesh Nair and Hans-Juergen Peters)

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