Changes in the distribution of radio frequency spectrum in telecommunications. What influences this and who uses it?

The conditions of military turbulence, financial hunger and economic instability pose extremely significant challenges to the authorities that require prudence, consistency and strategic thinking. In such times, it is important that lawmakers remain consistent in their decisions and create the most favorable conditions for post-war reconstruction, support and business development.

In this difficult period for all, the government is expected to show a high level of flexibility, compromise, understanding, and consolidation with the business community for a common goal, a common victory.

On January 22, 2024, the government submitted to the Verkhovna Rada of Ukraine a draft law on amendments to the Tax Code of Ukraine regarding the rent for the use of the radio frequency spectrum (radio frequency resource) of Ukraine, which is registered under number 10423.

The draft law provides for changes to the rules for mobile operators regarding rent taxation, licensing and other aspects of doing business as early as 1 April 2024. These rent taxation rules were introduced in early 2017 and apply only to a certain number of licenses issued by the state before January 1, 2022, on a tender basis. The term of these licenses varies, but is generally up to 15 years. The latest ones expire in 2033 and provide for the possibility of applying spectral coefficients as a condition for the effective development of a limited radio frequency resource and a certain state guarantee for operators in the development of new generation networks.

Currently, the draft law proposes to abolish the reduction and increase coefficients at once, without a transition period, without taking into account the interests of investors and businesses, and with low budget revenues planned for this. This will cause an uneven tax burden among mobile operators, which will destroy the competitive balance in the electronic communications market and make it difficult to attract new investments in the cellular communications sector.

According to the explanatory note to the draft law, the planned benefit to the budget from the "new" rent without coefficients will be about UAH 4.7 million per month (or UAH 56.3 million per year), so the choice of this new strategy makes us wonder what it is about and whether it is effective enough for the government itself and for the electronic communications market.

The need for stability and predictability in terms of taxation was also noted by the Verkhovna Rada Committee on Digital Transformation at its meeting on February 22. According to the committee members, such drastic changes could negatively affect the ability to restore and further develop digital infrastructure in Ukraine.

In the conclusion to the draft Law of Ukraine on Amendments to the Tax Code of Ukraine, the Verkhovna Rada Committee on Digital Transformation also emphasizes the need to implement the changes envisaged by the draft law no earlier than the beginning of the new budget period.

The fact that it is unacceptable to abolish spectrum coefficients abruptly and simultaneously (without establishing a transition period or phasing) is also confirmed in the STI's opinion to the draft law. In their opinion, the proposal to completely abandon the mechanism of applying incentive coefficients to the rental fee for the use of radio frequency spectrum in the mentioned band requires additional justification in terms of the impact on stimulating the deployment of next-generation cellular networks in Ukraine.

Obviously, in times of war, such a proposed legislative initiative would have a highly sensitive impact on the financial performance of operators, and unpredictable changes could negatively affect the stability of their operations and the formation of prices for end users.

The abolition of spectrum coefficients cannot be effective without a sufficient transition period. The understanding by lawmakers that any financial decisions require time to be implemented effectively is key. Production and business processes cannot adapt instantly, and it is therefore important to take into account the necessary transition period for businesses and the Ukrainian economy as a whole. Changes should be phased in, with sufficient time to adapt and address possible challenges.

The lack of a sufficient transition period reduces the ability of mobile operators to restore and further expand digital infrastructure in the frontline and de-occupied territories, purchase generators, strengthen cybersecurity measures, and make preparations for emergencies, which is extremely important in the context of the ongoing full-scale invasion.

Now it is extremely important to pay attention to the stability of the business environment and try to avoid abrupt changes at the legislative level that could put pressure on the electronic communications market. Reliable and clear rules of the game, consistent regulatory decisions, and stable tax legislation that does not foresee turbulence, especially during the ongoing martial law, give operators the opportunity to calculate and plan their investments to ensure communication and maintain 24/7 network operations.

There is a clear discrepancy between the draft law and the Tax Code of Ukraine, which states that tax changes cannot be made later than six months before the start of the new budget period in which the new rules and rent rates will be in effect. Taxes and duties, their rates, and tax exemptions cannot be changed during the budget year.

At the same time, the multiplier coefficients are canceled, which are likely to be more cost-effective for the budget than their "urgent" abolition in the current budget year.

The mechanism of applying spectral coefficients should be abandoned gradually over a certain period of time. For example, within six years from the date of entry into force of the relevant law, the value of both the upward and downward coefficients should be gradually adjusted in three stages in the direction of their gradual decrease.

Such a "postponement" and gradual abandonment does not become critical for planned and strategic budget revenues and, at the same time, will allow operators to gradually adapt to new conditions and plan their costs, and the market to mitigate the risks of unfair competition. This approach will also enable the state to better analyze and predict the risks and negative consequences of the radio frequency spectrum taxation reform.

After all, the main objectives of the introduction of spectrum coefficients in 2017 as a mechanism for optimization and economic feasibility were equal conditions for spectrum users in all promising bands and support for market mechanisms to eliminate unjustified spectrum concentration.

When a decision is made to abandon all coefficients, these tasks should be supported in the market, obviously, by other mechanisms that are predictable and adaptable in the course of gradual abandonment.

Therefore, of course, the business expects amendments to this draft law that will correct the deadline for the document's entry into force and provide for its gradual (phased) implementation and, of course, correlations with the actual martial law in the country and the dynamically growing financial costs of operators for defense obligations.