The Telecommunications industry has undergone significant transformation over the past decade, driven by technological innovation, changing consumer expectations, and regulatory developments. These changes have reshaped the competitive landscape, business models, and strategic priorities of telecommunication companies, setting the stage for further evolution and disruption in the years to come.

5G technology, the shift to digital services, and the convergence of telecommunications and media made a lot of changes in everyday life and various sectors of everyday life. The Telecommunications industry has experienced a gradual shift from traditional voice and text services to digital services such as video streaming, cloud computing, and Internet of Things applications. Data has become a valuable asset for telecom companies, providing insights into customer behavior, network performance, and market trends. Telecommunication operators are increasingly leveraging data analytics, machine learning, and artificial intelligence to improve network efficiency, personalize services, and enhance customer experience.

Mobile Financial Services

The operators are increasingly offering Mobile Financial Services (MFS) in a wide variety of countries, thereby expanding financial inclusion efforts in developing regions. These MFS operations are usually overseen at the local level by a specialized related entity with a banking license, operating under the regulatory oversight of a distinct competent authority. However, both the MFS entity and the telecom operator may rely on each other, collaborating on services, granting customer access, and sharing network infrastructure. Consequently, telecom operators must establish pricing for these intra-company transactions to accurately assess the costs and revenues associated with both entities.

In such cases, Transfer Pricing analyses are made to help companies identify the activities, assets, and related risks that help the development of the MFS business. Due to the situation of every company, arm‘s length prices are settled for transactions between the telecommunication operating company and MFS company. It is also applied to shared international trademarks, services, or platforms.

TV content change

The boundaries between telecommunications and media companies have become increasingly blurred, with telecom operators expanding into content creation and distribution, and media companies offering bundled telecom services. Often telecommunication operators offer TV subscriptions as well. Content is frequently acquired from external sources, although telecommunication operators also have the option to develop their channels internally. Consequently, Telecom operators must establish suitable compensation for access to content, including proprietary TV channels, within the intra-group operations at the local level. This ensures that all parties involved in creating value within the transaction receive fair compensation by the arm’s length principle.

Data centre solutions

In the current digital era, there is a growing demand for data storage solutions. Telecom operators are adapting to this demand by creating service packages that include data storage as part of comprehensive solutions, offering opportunities for upselling. These solutions may encompass cloud-based services, IT “as a service” solutions, and managed services. Many Telecom operators operate data centers hosted by a group member. These data centers are used by affiliated entities for internal operations and are also used to provide data-related services to local businesses.

Product digitalization

The increasing globalization and digitalization of the telecommunication industry have led to greater competition and market consolidation. Telecommunication companies are expanding their operations internationally, which can result in complex Transfer Pricing structures to manage cross-border transactions effectively. It is important to indicate, which functions create the value, what is proper compensation for these functions, or which jurisdiction has the right to get the returns from the delivery of digital services.

Centralized services and localization

In various scenarios, Telecom operators use central and regional teams situated in one or multiple locations to deliver both industry-specific (such as commercial services in mobile and technical network services) and non-industry-specific (such as HR, Legal, and Treasury) services. Telecom operators face the task of devising compensation structures that accurately reflect the diverse nature of these services and distribute the arm’s length charge across different jurisdictions. Industry-specific services pose particular challenges as they generate value for operations that cannot be easily benchmarked and may not be suitable for a cost-plus remuneration model.

Many countries have implemented data localization and privacy regulations, requiring telecommunication companies to store and process customer data within specific jurisdictions. Compliance with these regulations can impact Transfer Pricing arrangements, as companies may need to establish separate entities or data centers in different countries, leading to additional Transfer Pricing considerations.

Transfer pricing in the telecommunications industry presents unique challenges and considerations due to its complex value chain, technological advancements, regulatory environment, and global operations. Given the diverse range of functions, assets, and risks involved in telecommunications operations, conducting thorough functional and comparability analyses is crucial. This ensures that Transfer Pricing policies accurately reflect the economic substance of transactions and comply with the arm’s length principle.

Sources:

http://ojs.stiesa.ac.id/index.php/jtar/article/view/1218

https://www.sciencedirect.com/science/article/abs/pii/S1045235410000481

https://copenhageneconomics.com/wp-content/uploads/2022/05/telco.pdf

https://heinonline.org/HOL/LandingPage?handle=hein.journals/intaxjo28&div=17&id=&page=