Background, Pricing and Case Study of Taxing the Telecom Companies

 Commitments in telecommunications services were first made during the Uruguay Round ( ), mostly in value-added services.  In post-Uruguay Round negotiations ( ), WTO members negotiated on basic telecommunications services.post-Uruguay Round negotiations  A total of 108 WTO members have made commitments to facilitate trade in telecommunications services.

 Commitments representing 69 WTO member governments was agreed to On 15 February  Commitments took effect on 1 January 1998  These schedules were annexed to the Fourth Protocol to the General Agreement on Trade in Services.

 Governments agreed to set aside national differences on how basic telecommunications might be defined domestically and to negotiate on all telecommunications services.  Value-added services were not formally part of these negotiations Examples include on-line data processing, on-line data base storage and retrieval, electronic data interchange, or voice mail.  Value-added services are already included in 44 schedules (representing 55 governments) that are in force as a result of the Uruguay Round.

 The results of these negotiations are to be extended to all WTO members on a non- discriminatory basis through the "most- favored-nation" (m.f.n.) principle.  At the end of the negotiations on 15 February 1997, 9 governments filed lists of m.f.n. exemptions. (Antigua & Barbuda, Argentina, Bangladesh, Brazil, India, Pakistan, Sri Lanka, Turkey, and United States)

FEDERAL COMMUNICATIONS COMMISSION’S IMPACT IN THE INDUSTRY

 The Commission has established various rules and policies regarding international settlement rates.  U.S. carriers negotiate operating agreements with foreign carriers that establish the terms for exchange of telephone traffic between countries. This agreement normally includes a rate for termination of each other’s traffic.  In traditional arrangements, U.S. carriers negotiate “accounting rates” with the foreign carrier. One half of the accounting rate represents each carrier’s obligation to the other for termination of traffic and is termed a “settlement rate.”  U.S. and foreign carriers charge each other to terminate the other’s traffic, but carriers only pay on the imbalance ( i.e., the carriers credit each other for traffic exchanged and pay on the difference).

 The ISP contains three elements designed to ensure a competitive playing field among providers:  U.S. carriers all must be offered the same effective rate and same effective date (nondiscrimination). This means that if a foreign carrier offers a U.S. carrier a reduced settlement rate starting on a given date, it must offer that same rate to all U.S. carriers beginning on the same date.  U.S. carriers are entitled to a proportionate share of return U.S.- inbound traffic based upon their proportion of U.S.-outbound traffic. This means, for example, that if U.S. carrier traffic on the U.S.-France route accounts for 15% of the U.S. carrier’s traffic to a French carrier, that French carrier must send 15% of its calls to the U.S. through the U.S. carrier.  Settlement rates for U.S. inbound and outbound traffic are symmetrical (i.e., the accounting rate is divided between the U.S. carrier and the foreign carrier).

 In an effort to drive settlement rates closer to cost, the Commission exercised its jurisdiction over U.S. carriers in 1997 and prohibited them from paying inappropriately high rates to foreign companies to the detriment of U.S. consumers.  The benchmarks policy requires U.S. carriers to negotiate settlement rates at or below benchmark levels set by the Commission in its 1997 Benchmarks Order.Order

 While the policy is designed to address concerns of anticompetitive behavior, it has shortcomings in competitive markets. Specifically, the requirements of the ISP prevent U.S. carriers from negotiating flexible, individualized rates and terms that are responsive to changing market conditions and beneficial to U.S. customers. Thus the Commission, in its 2004 ISP Reform Order, reformed its rules to remove the ISP from benchmark-compliant routes, giving U.S. carriers greater flexibility to negotiate arrangements with foreign carriers on certain international routes.ISP Reform Order

 The Benchmarks Order divided countries into four groups based upon economic development levels as determined by information from the ITU and World Bank. As such, the following benchmark rates apply:  1. - Upper Income - 15¢  2. - Upper Middle Income - 19¢  3. - Lower Middle Income - 19¢  4. - Lower Income - 23¢

 In the 2004 ISP Reform Order, the Commission reformed its rules to remove the ISP from U.S.- international routes for which U.S. carriers have negotiated benchmark-compliant rates.  A carrier that seeks to add a route to the list of routes exempt from the ISP may do so by filing an effective accounting rate modification showing that a U.S. carrier has entered into a benchmark- compliant settlement rate agreement with a foreign carrier that possesses market power in the country at the foreign end of the U.S.-international route that is the subject of the request.

Belize - Belize Telecommunications Ltd. Costa Rica - Instituto Costariccense de Electricidad (ICE) El Salvador - Compañía de Telecomunicaciones de El Salvador Guatemala - Telecomunicaciones de Guatemala (Telgua) Honduras - Empresa Hondureña de Telecomunicaciones Nicaragua – Enitel Panama - Cable & Wireless Panama S.A.

 U.S. international carriers generally do not correspond directly with foreign mobile operators. Rather, they negotiate for mobile termination through a foreign fixed carrier.  Calls that originate in the United States and that are bound for foreign mobile networks are generally sent to a foreign fixed carrier in the destination country, which then transmits the calls to the foreign mobile network operator.  The mobile network operator may or may not be affiliated with the foreign fixed carrier.

 The manner in which payments flow between carriers depends upon whether the destination country follows a calling party- pays (CPP) or receiving-party-pays (RPP) regime.  In countries that follow the CPP regime, the calling party’s network operator generally pays a call termination fee to the mobile network operator that terminates the call. In the case of a fixed call from the United States to a foreign mobile network in a country that follows the CPP regime, the charges attributed to termination on a foreign mobile network, generally, are as follows: the foreign mobile network operator charges the foreign fixed carrier a mobile termination rate; the foreign fixed carrier charges the U.S. international carrier a mobile settlements rate; the U.S. carrier, in turn, charges U.S. customers a mobile surcharge.

 By contrast, in countries with an RPP regime, the mobile network operator collects termination charges from the mobile subscriber with some charges collected from the caller’s fixed network.

 2008 annual report compiling data on telecommunications service between the United States and international points.  The data are compiled from reports submitted to the FCC by U.S. carriers.

 facilities-based traffic refers to services provided using international transmission facilities owned in whole or in part by the carrier providing the service  Facilities resale traffic refers to services provided by a carrier utilizing international circuits leased from other reporting international carriers

 U.S.-billed traffic includes all traffic billed by U.S. carriers, and includes calls that originate in the United States, calls that are placed collect or “caller toll-free” to the United States, U.S. carrier “country-direct” and “country- beyond” calls, and U.S. carrier re-origination traffic  Country-direct and country-beyond services are U.S. carrier offerings that allow customers in foreign locations to route calls through U.S. carrier facilities to reach the United States (country-direct) or any world point (country- beyond). Country-direct and country-beyond services rely on alternative billing arrangements, such as credit cards, and enable the customer at a foreign point to be served by a U.S. carrier rather than by a foreign carrier. Note that U.S. carriers or their affiliates may operate in many foreign countries as foreign carriers.

 Re-origination traffic is traffic of a foreign carrier that transits a U.S. carrier’s facilities and terminates with another carrier in a foreign point. The carrier terminating the traffic in the foreign point views the traffic as U.S. traffic. Re-origination allows the originating foreign carrier to take advantage of the U.S. carrier’s accounting rate agreement with the carrier in the terminating country. The U.S. carrier treats re-origination traffic like U.S.-billed traffic when it settles with the carrier in the country of termination, and it reports this traffic as U.S.-billed traffic for filing purposes.

 Foreign-billed traffic is all traffic billed by a foreign or correspondent carrier and includes most calls that originate at foreign points as well as collect and caller toll free calls placed by U.S. customers to foreign points. Foreign-billed calls do not necessarily originate in the country for which the traffic is reported. In some cases, foreign carriers re-originate traffic for other foreign carriers. U.S. carriers may not know which calls are re-originated.

 Transiting traffic is traffic of a foreign carrier that transits a U.S. carrier's facilities and terminates with another carrier in a foreign point. Unlike re-origination traffic, transiting traffic is settled based on the settlement rate between the actual countries of origination and destination. Transiting traffic is billed by the originating foreign carrier, and settlement payments are reported by U.S. carriers for the country in which the service is billed.

 Traditional Settlement Arrangements consist of traffic settled pursuant to the Commission’s International Settlements Policy (ISP). The settlement is based on the accounting rate, which is part of a compensation agreement negotiated between a U.S. carrier and its foreign correspondent on a particular international route. The ISP requires nondiscriminatory accounting rates among U.S. carriers on a given route and that the U.S. carrier and its foreign correspondent share the accounting rate on a 50/50 basis. The ISP also requires that the U.S. carrier agree to accept no more than its proportionate share of return traffic from the foreign carrier.

 Non-Traditional Settlement Arrangements consist of all traffic other than traditionally settled traffic.  Currently, 165 routes are exempted from the ISP.

 U.S. Billed Traffic Billed revenues  - Settlements owed to foreign carriers  = U.S. carrier retained revenues  Foreign Billed Traffic Settlements due from foreign carriers  = U.S. carrier retained revenues  Transiting Traffic Transit fee and settlements due from foreign carriers  - Settlements owed to foreign carriers  = U.S. carrier retained revenues  Total Retained revenues for U.S. billed  + Retained revenues from foreign billed  + Retained revenues from transiting  = Total U.S. carrier retained revenues

A phone call made from Central America using a Central American phone company calls the United States and is charged $100 by the local company, but has to pay Sprint (a foreign company) $50 for using their lines from some connection point to the final destination. What would be the taxable income in your country? Would there be any tax withholding from the $50 payment to Sprint? Since payments are netted, does this affect taxation in your country?

 The tax agency says the local company should withhold 10% of the 50 they paid to Sprint. These withheld amounts are reported on an “income tax” return filed yearly and they file a schedule showing what foreign carriers they paid and how much was withheld. The phone companies dispute the law stating there is an international agreement that exempts them from withholding. The tax agency says the country signed the agreement, but never submitted them to Congress for passage.  What happens if there is no tax treaty with the US?  If the withholding is the result of an audit, does Sprint get to deduct the 10% withheld from $50?

 Congress enacted new rules for this industry in 1986 because prior treatment as foreign source caused an inflation of the foreign tax credit limitation.

 Reg. Section (b) – Source of International Communication Income – (1) International communication derived by US person. …one-half from sources within the US and one-half from sources without the US.  (2) International communications income derived by foreign persons – (i) In general International communications income derived by a person other than a US person is, except as otherwise provided in this paragraph (b)(2), wholly from sources without the US.

 (ii) International communications income derived by a controlled foreign corporation… within the meaning of section 957 (CFC) is one-half from sources within the US and one-half from sources without the US.  iii) International communications income derived by foreign persons with a fixed place of business in the United States. International communications income derived by a foreign person, other than a CFC, that is attributable to an office or other fixed place of business of the foreign person in the United States is from sources within the United States.

 iv) International communications income derived by foreign persons engaged in a trade or business within the United States. International communications income derived by a foreign person (other than a CFC) engaged in a trade or business within the United States is income from sources within the United States to the extent the income, based on all the facts and circumstances, is attributable to functions performed, resources employed, or risks assumed within the United States.

 How is the call from Central America taxed in the U.S.?  What if the foreign phone company in Central America is a CFC of the U.S. company?  What if it is an unrelated company?