Peru: Telecoms trials
A tax dispute between Spanish telephone operator Telefonica and the Peruvian state coupled with delays in renewing Telefonica’s mobile operating licence for Lima and Callao has led many to speculate over major changes for Peru’s telecoms sector in the coming months. These concerns are now becoming elevated in the weeks leading up to the renewal of Telefonica’s operating concession.
Though the company recently paid $50m in back taxes to the state, the Peruvian tax authority (Superintendencia Nacional de Administracion Tributaria, SUNAT) has said the company still owes it another $800m in taxes and interest. If Telefonica’s operations in Peru were to cease more than 20m lines would be affected, a major impact on the sector. However, despite continuing drama surrounding the renewal and tax dispute, events over the last few weeks make this outcome seem less likely.
On November 23 Cesar Alierta, the executive president of Telefonica, met with Ollanta Humala, Peru’s president, to discuss the dispute. Immediately following the meeting, Alierta stated affirmatively to the press Telefonica’s commitment to abide by Peruvian law.
Carlos Paredes, Peru’s minister of transportation and communications, has further told the press the tax dispute will not play a major role in the ministry’s decision to renew Telefonica’s concession agreement for another 20 years. However, Humala has not made a similar statement and several members of congress oppose Paredes on the issue.
The tax dispute began in 2010 when SUNAT charged Telefonica with owing more than $727m resulting from taxes on 2000-01 profits and interest. Telefonica disputed the debt, taking the issue to Peru’s tax court. Contrary to Telefonica’s expectations the firm ended up owing even more money – roughly $775m.
Telefonica then proceeded to plead its case in Peru’s judicial system, with Judge Carlos Cueva Anduviza assigned to the case. Cueva passed a measure reducing the size of the debt and preventing SUNAT from holding Telefonica liable for payment.
Meanwhile, in early 2010 Telefonica worked with the government of Alan Garcia, then Peru’s president, to outline a preliminary renewal agreement for the mobile operating licence in Lima and Callao – one which would oblige Telefonica to invest $500m in the country over the next five years.
Under Humala, plans for the agreement were shelved, the tax dispute is ongoing and Judge Cueva, who has been warned in the past due to negligence in procedures and irregularities, is now part of an investigation, begun by Peru’s office of judicial control (Oficina de Control de la Magistratura) on November 17.
There are rumours that Telefonica has taken its case to the World Bank’s International Centre for Settlement of Investment Disputes (ICSID), but the company firmly denies these accusations. At the time of writing the case did not appear on the ICSID website.
Prior to meeting with Alierta in November, Humala openly expressed his concerns about Telefonica’s decision to pursue legal action. At the Iberoamerican Summit in Paraguay in late October, Humala broached the topic with both the king and prime minister of Spain, claiming he was disappointed to see a Spanish company with such a long history in Peru decide to pursue legal actions regarding a tax dispute. Telefonica signed its first concession agreement in Peru in 1991.
For Telefonica’s part, the firm claims its presumed tax-deductible investments in the country, which far exceed those of other telecoms companies operating in Peru, far outweigh the alleged tax debt. Telefonica also claims it is being charged taxes on unpaid Peruvian customer accounts.
SUNAT’s attorney, Jose Escalante, told local press, “This is not a matter of who pays the most, rather what one must pay according to the law.”
Some Peruvian lawmakers are firmly opposed to signing a concession agreement with Telefonica before the debt is resolved. One congressman has even suggested Telefonica is to blame for Peru’s relative lack of telephony infrastructure, demanding the concession for Lima and Callao be awarded to another operator via an international bidding process.
Any compromise in this dispute will be hard won. Humala has defined a tough investment agenda for the country, which requires his government to delicately balance its desire to attract foreign investors but not be controlled by them.
Telefonica, which was recently voted one of Peru’s best employers, has a long history in Peru, a country which plays a key role in the firm’s fastest growing market – Latin America.
While the rights and wrongs on either side of this case are debatable, it is clear there is a lot at stake for all parties – including the Peruvian people whose continued economic progression relies on a growing mobile network and international investment.