MALAWI REVENUE AUTHORITY MANAGING VAT COMPLIANCE AND AUDIT OF TELECOMMS INDUSTRY Case for Malawi

CONTENTS LTO Audit structure Overview of Telecom Industry Taxation of the industry VAT Managing compliance VAT contribution from the sector Audit issues Challenges Way forward

LTO AUDIT STRUCTURE Manufacturing sector Retail sector & Wholesaling sector Mining sector Financial sector International Taxation Unit Excise Unit Service sector – deals with Telecoms companies

OVERVIEW OF THE INDUSTRY The telecommunications sector is fast-growing but still underdeveloped in Malawi. Telephone penetration rates in Malawi are the lowest in the Southern African Development Community (SADC) region. Mobile phone penetration in Malawi is 38%.   Existing mobile phone companies have a combined customer base of about 5 million Malawi’s population is over 17 million.

OVERVIEW OF THE INDUSTRY cont….. The Industry in Malawi is regulated by the regulatory body- Malawi Communications Regulatory Authority(MACRA) The body grants licenses according to classification ( e.g. network operators and radios) MACRA regulates and monitor usage of licenses

THE FOUR PLAYERS Airtel Malawi Limited – Biggest Telekom Network Malawi (TNM) – Second biggest Malawi Telecommunication Ltd (MTL) – Third and Oldest Access Communication Limited – Smallest

TAXATION OF THE INDUSTRY VAT Income Tax Excise Tax PAYE Withholding Tax Non Resident Tax (NRT)- Charged on management fees, interest on foreign loans and any payments made to Non-resident service providers

LEGAL FRAMEWORK Income Tax Act VAT ACT Customs and Excise Tax

VALUE ADDED TAX Standard rate of 16.5% Based on service utilization i.e. Voice Calls, Internet Data and Sale of hardware & equipment 0 % on international incoming calls

MANAGING VAT COMPLIANCE Four main approaches are used to manage compliance of the players in the industry Use of Self assessment returns Use of tax audits Use of Client Relationship management approach Advisory visits

MANAGING VAT COMPLIANCE Use of self assessment return The adoption of self assessment has resulted in enhancing compliance in return filling not only for this sector, but other sectors as well. Return submission for the sector is excellent Use of tax audits Traditional way of checking the accuracy of the submitted information Audit cycle for the sector is every two years

MANAGING VAT COMPLIANCE Client Relationship management approach Only one officer from the Taxpayer Service Unit of the LTO is used as a point of contact with the Taxpayer. The approach has been very effective and efficient in managing the compliance of the industry both on payments and return submission Advisory visits To advise on compliance issues expected from the taxpayers Cementing on their existing compliance practices Availing ourselves to them in case they have issues

VAT CONTRIBUTION FROM THE SECTOR Months VAT from Telecom Total vat remitted % of Total VAT remitted June 2017 1,213,265,271.27 6,798,747,677.4 18% May 2017 1,025,971,957.53 5,885,383,414.65 17% April 2017 739,778,807.07 6,267,162,538.75 12% March 2017 1,189,555,018.61 6,255,765,150.06 19% February 2017 1,127,944,898.31 6,007,402,060.98 January 2017 1,704,100,733.04 7,889,192,661.82 22% Totals 7,000,616,685.83 39,103,653,503.66

AUDIT ISSUES Manipulation of call data records (CDRs) Transfer pricing through services and goods sourced from related parties Prepaid customers may be configured in the billing systems as postpaid Claiming of provisional input VAT Bonuses and promotions distort pricing

CHALLENGES Complexity of IT systems i.e. Highly sophisticated IT system installed in Telecom Companies, such as the billing system - difficult to audit Huge volume of transactions-challenge to verify declarations & claims on VAT return Inadequate resources such as IT specialists, to get and analyze information from telecommunication industry. Changing market focus through diversification - mobile money banking services

WAY FORWARD Capacity building of tax officials to unpack/understand the operations of this industry i.e. organizing meetings with the industry participants and recruiting experts from the industry. The introduction of Consolidated Information Regulatory Management System (CIRMS) by MACRA will help MRA in having quality information regarding revenues since the machine will be able to read and analyze Customer Dialing Records (CDR) and come up with how much revenue should have been reported. It will bring independent verification of information

WAY FORWARD CONT… To improve the capacity of data analysis by auditors, MRA has procured IDEA and ESKORT tax audit tool. Training for both tools are underway. MRA is working on establishing an MOU with regulatory authority (MACRA) for purposes of information sharing. Sharing experiences among the VADA countries is vital to control transfer pricing issues of MNEs

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