 I'm delighted to be in the studio today with Dr. Rao Katz. Dr. Katz is Director of Business Strategy Research at the Columbia Institute for Teleinformation and Adjunct Professor at Columbia Business School. Dr. Katz, thanks so much for joining us. We wanted to talk to you today about a very important new report that you've contributed to the Global Symposium for Regulators event that's coming up soon in Gabon. And the report is all around taxation in the digital economy. It's an extremely complex issue, a very difficult one for today's ICT regulators. And as a teaser to the GSR event, I thought we could talk to you about some of the sticking points for regulators that they're gonna have to confront as the digital economy accelerates. Taxation is a very difficult area and there are many taxes applying to the digital economy. You've outlined many corporate tax value-added tax, import duties, property tax, sales tax. And you've also looked at two main taxation approaches that governments can adopt. Approach one looks at minimizing tax collection in order to stimulate the digital economy and information flows. Tax, the approach to recognises that lower taxes can benefit consumers and stimulate growth. There are four strategies that you've looked at in over 80 economies. Could you tell us a little bit about this very comprehensive study? Yes, thank you very much. I mean, let me preface by saying that taxation is a topic for which there are no easy answers. Defining tax policy, particularly in telecommunications, is as I say, a matter of trade-offs. On the one hand, taxation is a way of collecting revenues for the national treasury, which come back to the population in terms of services of different sorts. On the other hand, taxes increase the cost of ownership and use of goods. If it were to be luxury boats, probably there wouldn't be a problem. And we're talking about a general-purpose technology like telecommunications or computers, then that's a very important issue. And along those lines, governments have chosen essentially four approaches that go between a spectrum, going between two options. One of them is reduce as much as possible the different taxes on the purchase and service of, let's say, mobile telephony because they're convinced that that reduces, and rightly so, the cost of ownership and use of the technology, maximizing the adoption of that technology which in turn has an impact on social inclusion and development of the economy. Alternatively, mobile telephony, let's say, is a very good way of collecting taxes. You pretty much have a record of who owns a mobile phone and you have a record as to where that phone is being purchased. And along those lines, you say, well, in a way, if I turn the faucet on, I can immediately start collecting taxes. And some governments go the way where they say, since it's so easy, as if it were, when you purchase gas, to collect taxes on mobile telephones, let's might as well maximize the number of taxes and duties that you can impose on that particular good because that's a way of generating income for the treasury. Now, obviously the negative impact is that suddenly you increase the cost of the good. Along that path between reducing as much as possible and increasing it as much as possible, there's a gradation. And along that gradation, probably the most noticeable fact is, governments that try to minimize service taxes while protecting a national industry for manufacturing of ICT products. So in that sense, you increase the duties on the import of mobile phones or computers or tablets coming from outside the country while you lower the taxes on service. That's sort of somewhat of a way of a compromise that some governments tend to utilize. So that's in short the kind of answer and as I said at the beginning, there's no such a thing as a single answer. It all depends on matters of public policy and what you're trying to maximize. We might imagine perhaps that some governments who are lacking enough money to pay for education or basic healthcare would see telecoms as an area where they could generate revenue in a fairly fair way because you say it's perhaps not an absolutely essential. It's a user pays type service. Well, that's an interesting question because in fact, you might say, what, how essential is a mobile phone these days? Some countries have opted to tax mobile telephony arguing that mobile phones were a luxury good. Now, it's difficult to make the analogy of a luxury good comparing mobile phone to a high-end boat, a high-end yacht in the sense that mobile penetration has reached a higher percent of the population across the world, including in emerging markets and therefore conceiving that as a luxury good when it's actually more of a necessity, when it comes to communicating with your surroundings, being included socially or even using the mobile phone to conduct your economic affairs, it's quite critical. So it's difficult to argue as to whether that should be a luxury item or a non-essential one. One of the issues you take up in your report is sales tax, and you note that some countries now exempt digital goods from a sales tax as a strategy to drive the national economy and digital take-up, but creating an enabling regime that promotes that sort of take-up of digital goods is not particularly simple. Regulators have a big headache in working out the sales tax regime, who should be paying tax to whom? The new global digital economy means content could be in one country, acquisition by a user could be in another country, consumer, third party down the line could be in another country. How do we work out this incredibly complex and increasingly complex? Painfully so. In fact, there are no easy answers. No easy answers because conceptually, it's almost the need to adapting conventional tax principles to the digital economy. The first question that one might need to ask is what constitutes a digital good? It was very easy when we were talking about goods being a tangible matter, but could we create the analogy of so? Then there's a question that you were talking about before, conventional taxation policy says you tax at the point of purchase or the point of residence of the product. But in this particular case, the product is resident on a server located outside the borders of a country. The third question is who generates the act of purchase? Is it, for instance, in the case of advertising, is it the advertiser or the consumer that is clicking on a particular sponsored ads? All those questions the industry is grappling with and there don't seem to be easy answers. Some people were arguing, well, since you have the content residing in one country, the advertiser residing in the second one and the actual viewer in a third, you tax all three countries. But what portion of the tax should be assigned to each of the three locations? Those are things that are extremely complex and governments are starting to grapple with. And I can't tell you that there's a unified philosophy to addressing those. Would we imagine in the end trying to come up with a kind of, a framework of international principles or will it be more a bilateral, each country will work at its own? I believe that it's gonna be some evolving practices or over time. And if I look at the experience of some of the countries that are a little bit more advanced just because the internet and the digital economy has been developing over a number of years and it's generally industrialized countries, there has been a process where, let's say if I take the case of the United States, some states have started applying some principles that were later adopted on a federal level. So I would expect that there would be some sort of a diffusion of a policy that is somewhat more uniform. But again, we're trying to address these matters conceptually and going back to the first issue, we're trying to deal with this from a point of view of the trade-offs, the public policy trade-offs that that entails. One other issue I think that will come up at GSR, it's a very interesting one, is the issue of tax on telcos versus ISPs and new kinds of digital players. It seems that the traditional telco at the moment bears a heavier tax burden, but then it does get more complicated when you bring in issues like broadband, access, ISPs claim that a heavier burden on them would start restricting broadband. You've also picked up on the issue that broadband is increasingly being seen as a basic infrastructure or utility just like roads, transport networks, water networks. And we don't want to put that out of the reach of poorer communities. Your report also picks up on net neutrality and pointed out that it hit itself a tax snag around this issue. Could you tell us a bit about that? I think the telco versus ISP opposition that you were pointing out is just a matter of historical tradition. The fact is that telecommunications industry has been in existence for over 150 years and therefore it is somewhat based on the deployment of physical infrastructure in a given country, and therefore the principles of taxation are very easy to apply. The internet per se is a new phenomenon and as you pointed out, it writes on the existence of an infrastructure. So you could say, in fact, the delivery is somewhat of an intangible. You can be an ISP without necessarily be a provider or an operator of physical infrastructure if you rely on a telco, let's say. So both from a historical and from the structure of the delivery stream, both sectors differ. Now, then you get into the point of in recent years and particularly in the United States, when the internet started developing, policymakers adopted the principle that because the internet was so important for social inclusion and economic development, they weren't going to tax it. And there's an internet trade freedom act in the United States that was enacted at the end of the 20th century that basically stated that taxes weren't going to be applied on ISPs. Now, then the discussion on network neutrality came in and network neutrality basically stated that in order to ensure equal treatment on content being delivered to users, you had to treat ISPs as a utility. Now, if that happens, then you have to start taxing ISPs the same way you were taxing telecom operators. And that created the snag in the United States where in fact the taxation issue emerged suddenly as a consequence of the discussion of network neutrality. And if you were taxing broadband services when provided by an ISP, one could assume rightly so that a portion of that tax was going to be passed through to the consumer for which then the prices that consumers paid for broadband services was going to increase. And therefore the original intent of the law which was to make internet affordable to maximize its penetration was going to be neutralized or canceled out. In the end, Congress in the United States tried to adopt a compromise saying we will declare you a utility but we'll still preserve the notion that taxes cannot be imposed. But this is still in the process of being sorted out, so to speak. Your paper has a very interesting discussion on market distortion that can be caused by taxation. Could you give us an example of what that means in a digital environment? Well, in the digital environment, the primary element of distortion is the fact that when you look at the ecosystem as a whole, the digital ecosystem, and you include in that ecosystem telecommunications, digital platforms, manufacturers of equipment, manufacturers of terminal, and even producers of content, the level of taxation or put it another way, the effective tax rate applied to each of these players within the ecosystem varies. And some of the players of the ecosystem are arguing, rightly so, that while they are contributing a large portion of the contribution of the ecosystem in terms of taxation, other players are so-called writing free on that potential contribution. Now, that is not a very easy answer, it's not a very easy question to address. And let me give you an example. Right now we are in the process of outlining what the policy principles would be for taxation of global digital providers in Latin America. Very similar situation to what the European commission is grappling with. So should we tax, Google, should we tax Facebook, should we tax Netflix the same way? So these are over the top, what they call over the top players that are offering services outside their country, often paying almost no tax outside their own country? Precisely so. And the issue we are confronted with, it goes back to the original trade-offs that I was mentioning at the beginning of the interview, is that to some degree, these over the top providers, and I'm mainly talking about Facebook, Google, that are quite important platforms, have been instrumental in the development of the internet. The point of entry of the internet in many emerging countries today is Facebook. So the one question that everyone, including me, is trying to grapple with is to what extent in an emerging country context should we deal with the taxation of the over the top players, considering that the over the top players are so critical in stimulating the demand for the internet. Because you see the notion here is what are we trying to maximize in that particular case? As a matter of fact, if you look at the actual amounts of money that we would be collecting, they're not that important. But increasingly, that would mean that they would raise a point of contention with one of the key elements, or the one of the key levers in driving demand for internet, which everyone in our sector, in our countries, is considering that it's a critical element for our future. So we could end up widening the digital divide simply by readjusting the tax framework to a negative effect in the end. I don't know exactly how the causality would translate because ultimately, as you know, in taxes, the issue is who pays for the tax. But if we were to tax these digital platforms, would the consumers end up paying? Maybe not, but for instance, I would say that if we were to increase taxes on Google, advertisers increasingly will end up paying. And I'm concerned not maybe so much about multinational corporations advertising on Google, but more so the local small and medium enterprises that suddenly see their cost of advertising and therefore selling their goods rise, considering that that's the side of the platform that is actually affording the cost of operating Google. So that's an issue that's at the center of our discussion. How much are we gonna push for taxation of over the top? Dr. Katz, it's an extremely interesting discussion. We look forward to hearing more about it during GSI and to seeing you again in Gabon in just a few weeks. Thank you very much.