The 2021 budget bill passed by the House of Representatives came with some surprise changes. Among them was the reinstatement of levies on a series of electronic goods, most notably cell phones, whose internal taxes went back to pre-2017 levels. This will raise the cost of buying new equipment, in a country whose cell phone fleet has already shown strong signs of ageing due to a plunge in demand since the start of the recession.
No longer a luxury good
The reform would not only interrupt the ongoing gradual reduction of the tax, currently at 0 percent for products assembled in Tierra Del Fuego Province (the hub for local production) and 7 percent for imported phones, which were also due to fall to zero by 2024. Instead, Tierra Del Fuego phones will now pay 6.55 percent, and those from abroad will see their special taxes soar to 17 percent, as was the case in 2017.
The original 2017 reform was a logical one. Internal taxes on mobile phones were created in the 1990s, as part of a series of special taxes on luxury goods, which then got extended to other products such as alcohol and cigarettes to rack up more cash for the taxman.
But it’s been very long since cell phones ceased being a luxury good, soaring from only 1 million lines at the time of its creation to more than 45 million today, higher than the total Argentine population. Cell phones are now a basic, massive consumer staple, as essential as food and clothing in today’s society.
Local lobbies or taxman thirst?
At first sight, the reform seems to favor Tierra del Fuego producers over foreign importers, but it is not obvious that even that is the case.
Although it is true that, if these changes to the tax code are confirmed in the Senate, the gap between internal taxes and taxes on imports will jump from 7 percentage points to 10, what’s also true is that imports barely amounted to 4 percent of Argentina’s cell phone buys in 2019, as numerous other tax benefits and restrictions on imports already protect that market immensely.
What’s more likely is that, after what has already been a very poor year in sales for Tierra del Fuego phones (with plant closures, problems to import spare parts, lack of financing for retail buyers, and a general stagflation crisis in the country, all affecting the sector), the new taxes are also only going to make things worse for local producers, making their products more expensive in a context of depressed purchasing power.
As it is, the main beneficiary of the reform will actually be the State. In the search to plug fiscal holes, the taxman is risking deepening the recession in the sector by siphoning resources away from consumption.
The government is also engaging in quite a contradiction if one consideres that, a mere few months ago, it declared internet access as a human right, an essential service and a public service. Despite that, both mobile service and mobile phones now have additional taxes and are being treated as luxury goods. Argentina has the curious oxymoron of declaring something as “essential” but taxing it as a luxury.
The crisis and the pandemic have cut yearly phone sales down by half since 2017, forcing consumers into a longer renovation cycle for their equipment.
Stats show that the fight with recession, inflation and devaluation has sent phone purchases way down in people’s priority lists. Between 2011 and 2017, 13 million cell phones were being sold in Argentina per year. The estimate final number for 2020 is barely 6.7 million.
A data point that captures the magnitude of the crisis is that the year of the pandemic will have the lowest sales level since 2004, when the service was barely starting to become massive in Argentina. The fact that we are dealing with barely half of the historic yearly sales volume says a lot about the state of the sector (and the country).
This lower renewal speed, in a market that already has almost full penetration, means that consumers are squeezing more life years out of their cell phones. The average age of an Argentine’s phone has gone from 18 months during the boom times of the sector to 30 months currently, a clear sign of an ageing fleet.
In addition to the three-year recession, Argentina’s sluggishness to adopt the latest global technology standards has also contributed to a general lagging-behind effect. Argentina took its time to adopt 4G technology, which only really started arriving to the country in 2015, and consumer trends show that it’s only the search for better cameras which are attracting purchases of the latest models.
The overall ageing fleet means that old phones are sometimes not compatible with some of the new spectrum frequencies added for phone telecommunications as of late, especially in the case of those that were re-assigned from landline to mobile usage.
Despite this, the technological lag is so significant at this point that the arrival of 5G will not necessarily be needed to spark a recovery in demand. A mere small bounce in economic growth after these three tough years should be enough for consumption to recover, and thus result in significant renewal of the sector.
(Spanish version originally published in Comentarios.info, from Carrier y Asociados)