Marvelous Tapera 
The Telecommunications industry has been witnessing remarkable growth and transformation in the past few decades, and this trend is expected to continue in the future.
The progressing business models, efficient policy changes coupled with effective implementation are the need of the hour as they play a fundamental role in the sustenance, promotion, and growth of the industry.
In order to also maximise the gains from this growing industry, the taxman has been armed with various provisions to tax incomes and gains under the various tax codes such as e-commerce tax, income tax, withholding taxes, VAT on electronically supplied goods to mention but a few.
We have also seen a great interest by The Organisation for Economic Co-operation and Development (“OECD”) on digital taxation. This article however, motivates debate on the applicability of taxes, particularly withholding tax on interconnection fees. In the Zimbabwean perspective, if an amount is considered to be either royalty or fee, withholding taxes are generally found applicable if the payment is being made by the resident to a payee who is a non-resident person.
Telecommunications companies facilitate telecommunications services through provision of infrastructure support services to other telecommunications service providers. This may include providing access to common towers and other basic service functions. Since these services are not specifically covered under any substantive or withholding tax provisions, payments towards these services are prone to litigation on the aspect of withholding tax compliances.
Of particular interest are interconnection fees. The OECD defines interconnection fees as a charge levied by network operators on other service providers to recover the costs of the interconnection facilities including the hardware and software for routing, signalling, and other basic service functions provided by the network operators.
Payments towards connectivity charges to foreign telecommunications operators are subject matters of debate based on whether they are payments for technical services, thereby fees for technical services or towards usage of secret process or formula, thereby royalty. Others have argued that no withholding taxes should be paid at all.
Based on various judicial precedents, there are various views regarding the taxability of interconnectivity charges paid to foreign telecommunications operators. There have been contentions that interconnection fees are of a technical nature and therefore should be subject to Non-Resident Tax on Fees.
Judicial precedents have established that the meaning of the word “technical” should be interpreted in line with the interpretation of the words “managerial” and ”consultancy,” between which it appears in the legislation.
Since managerial and consultancy both involve a personal element, technical services must be interpreted as services predominantly involving a personal element. In the definition of fees for technical services, the word technical is placed between managerial and consultancy. All the three words have to be read in conjunction with each other. It cannot be read in isolation to each other. The meaning of the word technical service would take colours from managerial and consultancy services.
Likewise, in other services, the element of human intervention is necessary while rendering technical services. Interestingly, in the A.P.Moller Maersk case, Supreme Court observed that while human intervention is necessary in rendering technical services, it cannot be lost sight that modern day scientific and technological development and fully automated processes may tend to blur specific human element necessary to provide services.
The cases of G Bank Zimbabwe Ltd v Zimra S15-HH-207, M Coy vs Zimra HH 661-16] and Zimasco (Pvt) Ltd vs. The CG of Zimra 16-HH-149 all point to the effect that the services that define the applicability of NRTF namely technical, managerial, administrative and consultancy are exhaustive in nature and it is hard to find the services that are supplied by a non-resident person which not fall into these four.
However, the cases have not adequately addressed the issue of services supplied with minimal or non-existent human intervention. Our considered view is that interconnection is the provision of facility and is outside the scope of these four adjectives.
As per the Nineteenth schedule of the Income Tax Act, royalties, interalia, include consideration for the use of any patent, invention model, design, secret formula or processor trademark or similar property or for use or right to use any industrial, commercial or scientific equipment.
The issue is whether payment towards interconnectivity charges will qualify as use of equipment or process and thus, be classified as royalty. Authority for Advance Rulings (“AAR”) in Dell International Services India (P.)Ltd held that by availing facility provided by foreign company through its network/ circuits, there is no usage of equipment by the assesse.
It is a case of the foreign company utilising its own network and providing a service that enables the assesse to transmit voice and data through telecommunications bandwidth and, therefore, payment made by assesse to foreign company cannot be taxed as royalty.
However, the Madras High Court in the case of Verizon Communications Singapore Pte. Ltd13 has taken a view that the consideration received by the non-resident taxpayer from the Indian customers for provision of bandwidth/telecommunications services outside India was for the ‘use of, or the right to use equipment’ and therefore, royalty under the Income Tax.
Alternatively, the payments can also be considered for the use of process provided by the taxpayer and therefore, royalty under the ITA.
The above discussion aims to highlight the controversy behind the taxability of connectivity charges. Characterisation of payments for various types of technology-related transactions has been a subject matter of controversy nationally and globally. Other jurisdictions like India and Singapore have taken steps to include these specific transactions in the tax ambit.
The telecommunications industry may approach the ministry of Finance and seek recourse on this matter keeping in mind the larger interest and ramification of the issue mentioned.
In conclusion, it is imperative that the nature of the amount payable should be carefully considered in order to determine whether the relevant amount represents a royalty or fee. Businesses may seek expert opinion on this matter.
Tapera is the founder of Tax Matrix (Pvt) Ltd and the chief executive of Matrix Tax School and he writes in his personal capacity. Meanwhile, Matrix Tax School (Pvt) Limited will be hosting a VAT Seminar on the March 17, 2020 jointly hosted with the February 2021 Monthly Tax Update.
