11 minute read 3 Jun 2020
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How 5G will reshape business models and drive digital taxation

By

EY Americas

Multidisciplinary professional services organization

11 minute read 3 Jun 2020

Tax departments that have grown comfortable managing digital transformation will have even more opportunities to add value in the 5G era.

The potential of 5G is staggering. Imagine intelligent infrastructure interacting with driverless vehicles to optimize traffic flow; supply chains where artificial intelligence (AI) adjusts production relative to real-time demand; and medicine, where accurate, up-to-the-minute medical histories securely “follow” each patient, and doctors are able to treat patients virtually – and even execute surgeries remotely.

5G mobile data networks are expected to deliver information packets at speeds comparable to hard-wired fiber-optic cables – a 10-fold increase on 4G (to 10 gigabits per second). This introduces a host of opportunities for businesses in every industry.

Companies need to rethink not only how their products and services relate to customers but also their fundamental business models. We’re about to enter an era of futuristic customer experiences enabled through advanced technologies, high-speed data transfer and analysis and close collaboration across an expanding digital ecosystem. Is your organization ready?

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Chapter 1

The coming surge of 5G

The technology will usher in an era of enormous business opportunities.

“Executives need to be aware that we’re entering an era of profound opportunities,” says EY Global Telecommunications Lead Analyst Adrian Baschnonga. “Industries have been investing and experimenting with the Internet of Things (IoT) for the past 10 years, and while IoT is already proving useful, its capabilities grow exponentially in a 5G environment,” he says.

 “Connected vehicles require instantaneous responses, but 4G networks have too much latency,” says Baschnonga. With the arrival of 5G, “IoT devices and sensors will have the speed, responsiveness and capacity needed to safely coordinate pedestrians, bicycles, driverless vehicles and roadside infrastructure.”

5G is not only exponentially faster than 4G, it is also compatible with a much wider range of devices, sensors and wearables. Similarly, 5G is arriving at the same moment that advanced technologies such as AI, machine learning (ML) and even blockchain are maturing to the point of ubiquity within a growing number of data-fed business processes. Add the rise of quantum computing, a key means of accelerating data processing, and it all leads, says Baschnonga, to a surge in IoT-infused products and services.

5G coverage

65%

of the world’s population will be served by 5G in 2025, according to a major carrier.

Nothing, of course, is certain regarding 5G’s precise future. Questions still to be answered include how vast networks establish enough trust and security so that all parties – including consumers – will participate.

But one way or another, “5G is coming,” says Kari Pasanen, EY Global Tax Telecommunications Sector Leader. The leading global industry association for mobile carriers, the GSMA, says that $1.1 trillion will be invested in mobile infrastructure between now and 2025, with 78% of that on 5G. One major carrier believes that by 2025, 65% of the world’s population will be covered by 5G, a figure that becomes formidable when one understands that a single 5G tower can cover only a single square kilometer. (Today, 4G covers 75% of the population.)

As for the many sophisticated 5G AI- and IoT-driven wonders to follow, “these will likely take longer to become available everywhere, because those building these ecosystems need relatively ubiquitous 5G before they can scale,” says Baschnonga.

Still, “many 5G initiatives are underway, and that will only accelerate,” he continues. And while many companies may prefer waiting until the coming future is clearer, 5G’s potential is so great, any failure to act is an invitation to disruption. In general, says Baschnonga, “companies need to begin planning now.”

Pasanen agrees wholeheartedly: “5G brings us much closer to realities such as smart cities, smart and driverless travel, remote diagnostics, instantaneous transactions – and more.”

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Chapter 2

Understanding new opportunities

As 5G enables a new digital future, organizations must begin re-engineering their businesses now.

Executives need to begin thinking about transforming their enterprises to take advantage of technologies that 5G will enable, such as AI and ML. This means identifying both opportunities to accelerate the diversification of revenue streams by, for example, monetizing the Internet of Things, as well as risks, including new concerns around cybersecurity.

It all requires looking more closely at the ways 5G changes the playing field. For starters, says Pasanen, “5G will be everywhere at all times. This is a world of mobile, instantaneous machine-to-machine communication. Leading businesses are already thinking about how to transform their operating models to prosper in this new world.”

Most businesses, and telecommunications companies in particular, will be affected as 5G encourages a shift from a product-centered model to one that focuses on the customer experience. At the individual level, people will be able to make purchases and check order status while in motion. Personal devices will enable users to navigate new spaces or to identify friends or colleagues nearby.

Wearables will help users recall information about those they encounter in a CRM-like fashion – never again having to worry about remembering a face, name, or birthdate. Successful businesses will leverage 5G and related tools to improve automation and collect and analyze user data to better predict consumer demand and adjust supply chains accordingly.

Still, all of this barely scratches the surface of what is to come. “The arrival of 4G brought us disruptive new services such as Uber and fueled social media platforms,” says Tom Loozen, EY Global Telecommunications Leader. But with 5G’s exponential advances and the resultant machine-driven analytics and decision-making, “we can expect to see [similarly] disruptive advances across many more fields.”

In the consumer space, there will be many more smart products and services, many of them subscription-based. “But enterprise 5G will be even more interesting, as the technology will introduce holistic, end-to-end solutions across industry value chains,” says Loozen.

5G encourages a shift from a product-centered model to one that focuses on the customer experience.

For example, “imagine in the chemical or oil industry where you need to understand the condition of your equipment or the flow of product,” explains Loozen. “Now you’ll have real-time, connected sensors for humidity, temperature, corrosion, vibration [and more].” Then apply AI, blockchain and other relevant technology “and the system can track precise logistics, predict when maintenance is needed and initiate payments.” Even mechanical elements across entire ecosystems, says Loozen, “become digital.”

Pasanen says apportioning revenue across equipment makers, telecom companies, service bundlers and brands will look “something like the Wild West. Everything will have to sort itself out based on who moves furthest and fastest to create and control value, market position and all of the rest of the elements of competition.” Pasanen says we may not be able to predict precisely everything that is coming, but we can be quite certain that once enterprises understand all that is available and possible, profound and compelling innovation will follow. Overall, he says, “5G will enable societal, business and government advances with greatly reduced friction.”

The rise of end-to-end ecosystems

“Creating value through 5G will require more companies to work together and collaborate more closely,” explains Baschnonga. Similarly, industries will need to work more closely with government officials in areas such as determining standards for smart infrastructure, as well as clarifying and updating data privacy and security rules.

“What we’re starting to see is a more complex value chain,” says Baschnonga. “Overall, fewer, if any, entities will be able to own the customer – or all of the processes and roles that need to come together to deliver the advanced and compelling customer experiences that will be feasible through 5G.”

This end-to-end collaboration is already starting to take place in industries such as agriculture, transportation and medicine. As Pasanen explains, “what we are seeing is that in monetizing interconnected ecosystems such as smart factories and smart agriculture, certain companies are taking a leadership role.”

Businesses will need to work out where they can create value within increasingly complex ecosystems. Improving end-to-end processes will include alliances, partnerships, joint ventures and outsourced relationships. Meanwhile, adds Baschnonga, a lot of this will be unexplored territory. “Businesses will be feeling one another out in terms of who gets paid, and what in which instances. Whose data are we using? How is it being stored and secured?”

In addition, businesses need to look at the ways 5G can improve existing internal processes and business structures. Advanced and interconnected technologies present opportunities to rethink, streamline, automate or even revolutionize processes in finance, HR, compliance and tax.

“This points to competitive opportunities and disruption,” says Baschnonga. And it all hastens the rise of the workplace of the future, where routine and repetitive tasks are eliminated in favor of higher-value work. 5G will also drive improvements in remote working and learning.

As Baschnonga points out, the COVID-19 pandemic (see below) has already led to a rise in telecommuting and distance learning. Current technology has been functionally effective in enabling virtual collaboration, but 5G will deliver even more useful, immersive experiences.

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Chapter 3

The tax implications of 5G

The technology is likely to become a catalyst in the drive toward digital taxation.

To be sure, managing the tax implications of 5G-related disruption and innovation will be “business as usual” for tax departments that have grown accustomed to managing business transformation in the digital age, says Channing Flynn, EY Global Tax Technology Sector Leader.

Tax credits and incentives in particular will require the tax team’s attention. As nations increasingly see investment in 5G as a necessity for their economies, they will look to accelerate the buildout. That growth will include 5G-specific tax grants and incentives, and it will be important for tax teams to assist with identification, qualification and compliance.

Launching 5G also requires financing. Tax teams can add value by becoming more active in helping to identify, obtain and comply with 5G-related tax incentives. Seven nations already offer emphatically 5G-focused incentives: China, Italy, Japan, Luxembourg, Malaysia, Portugal and South Korea.

Tax teams can add value by becoming more active in helping to identify, obtain and comply with 5G-related tax incentives.

The form and function of these incentives are country-specific. China, for example, offers subsidies for 5G R&D projects of RMB 3 million (approximately USD $430,000) and up. Also, for specific investments in 5G industrial integrated circuits, the nation will fund 30% of the direct cost for purchasing intellectual property, up to a maximum of RMB 2 million.

In South Korea, beyond 5G itself, tax officials deem self-driving cars and virtual/augmented-reality devices as related technologies – which receive the designation of new growth engines and source technologies. Participants in these categories can apply for a range of incentives. For example, investment in facilities for commercializing these technologies can yield deductions of 5-10% (5% for large businesses, 7% for mid-sized firms and 10% for start-ups) of the amount invested from corporate tax. The nation is also offering accelerated depreciation for investments in these sectors.

Separately, but often in addition to 5G-specific incentives, many nations offer a range of tax grants, holidays and related benefits with a more general focus. For example, UK officials are incentivizing investment in innovative projects in science and technology. Companies there can claim a credit for 12% of qualifying research and development expenditures.

A catalyst for digital taxation

Another consideration for tax teams is 5G’s potential to become a catalyst in the drive toward digital taxation. A 5G-enabled world will further fuel progress toward digital tax administration. As Flynn explains, “more and more jurisdictions are already moving toward digital reporting of VAT and GST.”

But now, as 5G enables more sensors, IoT devices and even smart contracts within a blockchain, tax “events” can be systematically detected, triggering reporting and payment. Overall, says Flynn, “the pace of digital taxation will accelerate.”

One possible concern is how the digital focus within the OECD’s BEPS 2.0 initiative might affect 5G-enabled digital processes. BEPS 2.0 seeks to implement concepts such as digital services taxes.

“For now, their focus is on consumer-facing businesses,” says Flynn. “So large, 5G-infused ecosystems and supply chains will be exempt from changes to the determination of nexus and redistribution of profits,” says Flynn. “But as digital services taxes take hold for consumers, there’s a risk that businesses could be subject to the same formulas in the future.” 

  • How the COVID-19 pandemic could spur 5G

    The COVID-19 pandemic demonstrates the value of digital interconnectivity and virtual workforce capabilities. While 4G and hard-wired connections are mostly sufficient today, the coming shift to a significantly more virtual society suggests the necessity of 5G.

    Pressure may continue to build from the private sector for more 5G infrastructure “as executives gain greater experience and comfort with videoconferencing and related aspects of a remote workforce, even as workers themselves experience quality-of-life improvements [from teleworking],” says Pasanen. “COVID-19 will subside, but telecommuting will become much more commonplace.”

    Education is also relying heavily on digital tools. “Amid the crisis, we’re seeing how many schools have been able to rapidly shift to e-learning,” says Pasanen. “Again, that will have ripple effects as [society] will begin to want more of it.”

    Further, he adds, “more medical services are seeing patients virtually – and even movie studios are responding to empty theatres by offering more of their new releases for streaming. These experiences will drive demand for more digital tools, services and then ultimately bandwidth – which 5G can deliver.” 

    There is, however, a caveat. The spike in digital versus physical interaction throughout society increases cybersecurity risks. “With more people working from home, issues such as weak wifi passwords present a rich target for hackers,” says Pasanen. “We’ll need to develop far stronger cybersecurity measures.”

Summary

The effects of 5G technology will be nothing less than transformative. New businesses will rise—and laggards will perish—in its wake. The human consequences will be equally profound as remote working, learning, medicine and more become more fully realized.

About this article

By

EY Americas

Multidisciplinary professional services organization