Monday, February 06, 2006

UAE Tax of the Day II

EITC will pay Dh124.5 million for the licence ending Etisalat's monopoly on telecom services in the UAE. Etisalat does not have to pay any licence fee but both operators will have to pay Dh1 million as renewal fee annually.

Both operators are also required to pay royalty to the government.
. . .
Etisalat pays half of its profits as royalty. "For the second operator it is yet to be finalised and it depends on its roll out plans. It could be on a gradual, step-up basis."
. . .
The Telecoms Regulatory Authority (TRA) will ensure that competition is healthy but will not allow any price war, the chief said. "We will have a say in terms of monitoring prices to ensure that no unhealthy competition takes place. It is not fair to introduce a second operator and let them die," Mohammad N. Al Ganem said.
Economic theory tells us that a profits tax or a license fee (when the number of licences is fixed) will not affect the prices that consumers pay - all other things equal. Whatever level of sales maximizes profits also maximizes half of profits, or half of profits less the license fee.

But that assumes that the firms are free to choose their own level of sales or to compete on price. What we have here is the government milking the telecom cash cows. To make sure the cows have plenty of milk they are not allowed to compete on price - so, semantics aside, a profits tax with a limit on competition does affect the prices firms and households pay for telecom services.

Secret Dubai covers another angle on this story.



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