Telecom Infra Report: Brazil's heavy tax load could hamper investments

With 126mn internet users (70% of the population), over 30mn e-commerce buyers and more than one smartphone per citizen, Brazil is one of the largest telecom markets in the world, with lots of potential and opportunities for the industry.

At the same time, this giant market also has the world's highest tax burden on fixed and mobile internet services, according to the 2018 Measuring the Information Society Report, a telecom services study from the International Telecommunications Union (ITU).

Brazil's average fixed and mobile internet tax topped 40% in 2017, well above the world average of 16%. Considering only the tax rate included in a standardized mobile phone plan, Brazil's 40% rate trails only Turkey's 43%. When it comes to fixed broadband, Brazil takes the crown with the same 40% rate, followed by Sudan's 35%.

The troubling result is that quality telecom services remain costly and mostly unaffordable for many people, making it harder for the country to reduce its significant digital divide.

"This tax rate represents a huge burden on the price of services, making it harder for people with lower incomes to access internet services," said SindiTelebrasil, the private telecoms association, following the report's release.

"The telecom sector has been warning of the negative impact of the tax burden on the consumer. Telecom service users annually pay around 60bn reais [US$15.4bn] in taxes, which represents 7mn reais per hour in taxes and fees. Only to supply the telecom sector funds, approximately 5bn reais were collected in 2017, while only 8% of the total were effectively applied for the benefit of users."

The industry claims it represents around 10% of the country's GDP, generates 500,000 jobs and, since the 1998 privatization of the sector, has invested 865bn reais to date, in current currency terms.  

For telecom operators, cutting taxes should be the top priority of the new government led by Jair Bolsonaro. But that could prove difficult amid a scenario of austerity.

"Reducing taxes implies increased spending for the government, and that's rather unfeasible now," outgoing ICT minister Gilberto Kassab said in May.

The problem is that the largest part of the telecom tax load comes from state taxes, such as the ICMS levy, as opposed to federal and municipal duties. Many states have increased taxes on certain services, such as telecoms, to offset declining revenue. Cutting those taxes now seems unlikely to happen.

OUTDATED LEGISLATION

Another key priority for the telecom industry is the approval of PLC 79, a bill that makes key changes to the country's 1998 general telecoms framework, which was put in place at a time when fixed telephony, rather than broadband, was still relevant.

The PLC bill is stalled and has been awaiting approval in the senate since 2016, after being passed in the lower house.

The stalled legislation would allow fixed-telephony concession-holders to migrate to the private regime and essentially redirect telecom investments from fixed telephony to broadband. For telcos, especially concession holders, it means freeing up more capex.

Both the tax issue and the bill led the telecom sector's wishlist in 2018. Telcos called for tax exemption for low-income households to acquire broadband services; slashing taxes on smartphones; exempting certain fees for the installation of antennas on highways, and tax incentives to install antennas in underserved districts

They also want exemption of taxes, mainly the Fistel fee, for IoT equipment and infrastructure.

On the regulatory front, operators called for spectrum auctions focused not on bringing in more fiscal revenue but rather in promoting investment, and equal rules for telecom services provided by OTT, among others.

The industry committed to the following goals by 2022 if these measures are approved: serving 10mn new households with broadband; installing 50,000 new cellular antennas; activating 100mn IoT devices and creating 100,000 jobs.

The country needs far more antennas to serve the increasing number of connected citizens and the growing consumption of data. For now, due mainly to bureaucratic hurdles, Brazil has 90,000 antennas installed, a third of the total in the US and far behind China, which has over 2mn.

According to telecom regulator Anatel, over 233mn lines were in service at the end of October and over 31mn fixed broadband accesses and 17.5mn pay-TV subscriptions at the end of November.

FUTURE CHALLENGE

The ICT and the telecommunications sector faces several challenges and problems that will need to be addressed by the Bolsonaro administration.

However, the new government's ICT priorities - to be carried out by the science and technology ministry headed by NASA-trained astronaut Marcos Pontes - remain unclear.

What we do know is that Bolsonaro prefers a smaller state role in the economic sectors, while carriers are seeking incentives to invest in areas with low commercial appeal and apparent low ROI.

In this sense, which instruments and mechanisms of public policies will be available? What will be the role of the Internet for All program, of state-run Telebras and of the SGDC geostationary satellite, for example?

These questions are especially relevant in a market where the private and public sector have not always collaborated to the best of their abilities to close the digital divide.