Telecom tax system for the digital future

This article addresses tax constraints that encumber the desired expansion of telecommunications (telecom) services in Brazil, as well as possible changes to applicable rules that would be necessary and could be sought in order to rationalize taxation on the telecom sector and thus expand access to broadband connection and digital inclusion in the country. Reform involving taxation in this sector is paramount to foster access to high-quality communication services at competitive prices, thus enabling connectivity and an inclusive digital transformation.

Tax issues concerning telecom services that deserve special attention involve (i) the State Value Added Tax/VAT applicable to telecom services (ICMS), (ii) contribution to the Fund for Universalization of Telecommunication Services (FUST), (iii) taxes charged to finance the Telecommunications Inspection Fund (FISTEL); (iv) contribution to the Fund for Technological Development of Telecommunications (FUNTTEL), (v) social contributions on gross revenues (PIS and COFINS), and (vi) the Municipal Services Tax (ISS).

We herein comment on reform measures that would be advisable in relation to the above levies to foster connectivity, digital inclusion and digital transformation in Brazil. We have suggested some of these measures in the context of a project via United Nations Development Programme (UNDP) for the Ministry of Economy, with the support of the Ministry of Communications and of the national regulatory agency for telecom (ANATEL), which opened space for discussions about reform measures and strategies for the abovementioned purposes.


ICMS is the most representative tax levied on telecom services in Brazil. The main problem concerning this taxation is the excessively and disproportionally high rates applied to these services which are clearly essential. The reason for this is that selectivity of this taxation in accordance with the essentiality of goods/services is only optional for ICMS under the current Constitution.

Mandatory selectivity. A first suggestion concerning ICMS would be an amendment to constitutional and legal rules making selectivity mandatory mandatory in relation to this tax, in accordance with the essentiality of the relevant goods and services, as is the case with the Industrialized Products Tax (IPI).

As telecom services are undoubtedly essential, the ICMS tax rate for these services should be low according to the selectivity principle, but they are generally higher than usual ICMS rates for other transactions. In the State of São Paulo, for instance, the general ICMS rate for intrastate transactions is 18%, while for telecom services the rate is 25%.

To avoid doubt and undesirable litigation, amended infra-constitutional rules could also expressly state that telecom services are considered essential.

The mandatory nature of such selectivity even in the absence of further legislative change has just been discussed in a judgment of the Federal Supreme Court (STF).

The Court decided that, based on the Constitution and on the essentiality principle, ICMS rates on telecom services should not be higher than the rate applied to other transactions in general. Regardless of the tax-paying capacity, the ICMS rate, when not uniform, should be increased in a manner that is inversely proportional to the essentiality of the relevant goods or services. In other words, the more essential a service is, the lower the tax rate should be; never the contrary.

Although this decision binds all other lower courts in Brazil, companies wishing to be subject to lower rates still need to file lawsuits and wait years for a final resolution, which will also depend on courts' interpretation of the STF decision. Hence, legislative amendments are still desirable to prevent additional litigation and misinterpretations.

Maximum rates to inhibit abuses. A second suggestion concerning ICMS, related to the previous one, would be a constitutional amendment to allow the Senate to set forth maximum ICMS rates to inhibit abusive/inadequate rates.

This amendment would allow the Senate to determine maximum rates for intrastate transactions, via resolution, to inhibit the imposition of rates that do not consider selectivity and/or discourage the economy, digital inclusion and access to broadband connection.

The decrease in ICMS collection on telecom services caused by a reduced tax rate may not be so significant and, considering the potential expansion of the sector and economic growth, there could be a global increase in tax collection as a result of an increased taxation basis in a few years.

Of course it would be very difficult to have the support of the States for any such changes without some form of compensation, as they would or could impact ICMS collection.


Reduced tax collection. First and foremost, there is room for reducing the amounts collected to FUST and FISTEL, and therefore the rates of the contributions to these funds, without jeopardizing their intended purposes, on one side, but partially relieving the telecom sector, on the other.

According to data provided by ANATEL, the tax burden on mobile telephony in Brazil in 2019 – of 40% – was the fourth highest worldwide. The tax burden on fixed broadband – of 40.2% – was the highest in the world .

Total funds collected by FISTEL in 2020 amounted BRL 813.5 million, of which BRL 205.83 million (25.30%) are related to grants, 31.32% from inspection taxes, 43.34% from fines, and 0.04% from its own-sourced revenues, according to ANATEL’s 2020 Annual Management Report. The funds collected in exchange for grants alone are sufficient to cover the budget for ANATEL’s tactical management , which in 2020 was BRL 187.3 million.

In addition, a very substantial part of the collected funds is not given the destination it was meant to have, as pointed out by the Organisation for Economic Co-operation and Development (OECD) Telecommunication and Broadcasting Review of Brazil 2020 and also by a decision rendered by the Federal Union’s Audit Court (TCU) in 2017. From 1997 to 2016, only 5% of FISTEL funds were employed towards the activities it was created for (inspection of telecommunication services); the National Treasury used up 81% of FISTEL proceeds for other purposes (most not mappable), including payment of social security benefits and social assistance; and different funds received 14% of the proceeds (i.e. National Culture Fund, FUST, and National Fund for Scientific and Technological Development).

Also according to ANATEL’s 2020 Annual Management Report, in 2020 the funds collected to FUST amounted to BRL 900 million, of which BRL 620.94 million (68.99%) derive from the contribution levied on gross operational revenues from telecom services. However, according to the 2017 TCU decision mentioned above, less than 0.002% of funds collected to FUST since its creation until 2016 were effectively used to fulfill its declared purpose, which is the universalization of telecom services.

We note that a recent Law enacted in 2020 allowed funds collected to FUST, the use of which was restricted to the universalization of the Public Switched Telephone Network (STFC) at the time, to also be applied in different telecom services. Recent amendments to the statute creating FUST also allowed telecom service companies to apply their own funds (as non-reimbursable support) directly in the execution of projects, plans, programs, activities, initiatives, and actions approved by FUST’s Management Council, in which case their contributions to FUST are reduced by the approved amount, limited to a certain percentage of the collectible contribution to FUST. Therefore, hopefully FUST funds will be better employed and distributed in the following years.

Alternative collection mechanism for FUNTTEL. An alternative collection mechanism could save time and resources and perhaps ensure a more effective employment of FUNTTEL funds to its actual purposes, without the typical purpose deviations that take place with funds contributed to the Public Treasury.

As per this proposal, telecom companies would be granted the choice to invest directly in the activities to which FUNTTEL funds are meant to be applied, similarly to the option granted recently in relation to FUST, as mentioned above. In making this choice, the company would be entitled to a discount in its contributions due to FUNTTEL. If the company chooses not to make any direct investments, it would continue collecting the amounts due to FUNTTEL.

According to the law that created FUNTTEL, the purpose of this fund is to stimulate the technological innovation process, encourage human resources capacitation, create employment, and promote access of small and medium-sized companies to capital resources, so as to increase the competitiveness of the Brazilian telecom industry. FUNTTEL’s revenues mainly stem from contributions of 0.5% on gross revenues of telecom service companies and 1% on the gross collection of fundraising events via telephone calls.

Exclusion of revenues from the calculation basis of FUST and FUNTTEL. The law that created FUST states that this contribution is not levied “on transfers made by one telecommunication service company to another and over which FUST has already been paid by the company that issued the invoice to the customer”. Telecom companies typically partner to enable their respective clients to connect using their networks.

Nevertheless, a 2005 precedent from ANATEL disallows the exclusion, from the calculation basis of FUST, of revenues transferred to/received from telecom service companies as compensation for interconnection and for the use of resources that integrate their networks. Interconnection refers to the use, by a telecom company, of the networks of other telecom companies so that a certain telecom service can be concluded. The telecom company that uses the networks of other telecom companies (interconnection) receives the entire payment from its clients and then transfers the revenues attributable to the other telecom companies that took part in the interconnection.

According to ANATEL, the abovementioned legal rule would not be applicable in case of interconnection as opposed to the transfer mentioned in the statute creating FUST. This is because transfer payments concern amounts paid by the final user to a provider/operator and then transferred to another provider/operator to repay a particular service provided for said user. The interconnection amounts, on the other hand, are paid from a provider/operator to another in order to remunerate services rendered to the former provider/operator itself.

This position from ANATEL causes double levy on the same revenues and violates the law. Accordingly, this matter has been subject to litigation, not yet settled by higher courts.

Although the 2005 ANATEL precedent does not specifically address FUNTTEL, ANATEL’s position is that this contribution is also due on the abovementioned revenues, since its taxable event and calculation basis are similar to FUST’s. FUNTTEL regulations equally provide, however, that “FUNTTEL is not levied on transfers made by one telecommunication service company to another and over which FUNTTEL has already been paid by the company that issued the invoice to the customer”. Hence, the same conclusions above referring to FUST should be extended to FUNTTEL.

For this reason, in order to avoid double taxation as intended by the legislation, and to prevent additional controversies and litigation on this matter, the laws regulating FUST and FUNTTEL should be amended in order to include express and clear provisions stating that these contributions should not be levied on transfers of revenues stemming from interconnection due by one telecom service company to another.

Also with the purpose of avoiding unwanted controversies and litigation, amendments to those laws could also include express and clear provisions stating that FUST and FUNTTEL should not be levied on revenues from activities that do not fall within the legal definition of telecom services, such as those stemming from rentals of “dark” optical fiber cables (i.e. those which do not transmit signals and data) and any value-added services (this is currently provided for only in a resolution from ANATEL).


PIS and COFINS are also charged on gross revenues of telecom companies, including revenues relating to interconnection and roaming transferred to other telecom companies. This causes the same amounts to be taxed twice and has been subject to litigation. Unlike FUST and FUNTTEL, PIS and COFINS legislation does not contain a provision intended to avoid this, as discussed above.

In a recent unprecedented and unanimous decision, the Superior Court of Justice (STJ) held that a telecom company may exclude from the tax basis of PIS and COFINS amounts relating to interconnection and roaming transferred to other telecom companies. The company claimed that, after a decision of the Federal Supreme Court (STF) allowing ICMS to be excluded from the tax basis of PIS and COFINS, it became clear that revenues belonging to third parties cannot integrate the tax basis of these social contributions. The company also argued that amounts relating to interconnection and roaming should be excluded from the tax basis of PIS and COFINS because they are transferred to other telecom companies on account of legal and contractual obligations, set forth by Law No. 9.472/97 and by ANATEL resolutions. Tax authorities’ position, on the other hand, is that these amounts integrate the gross service revenues of the telecom company and should therefore be taxed by PIS and COFINS.

In order to avoid this double levy and to prevent additional controversies and litigation on this matter, the laws regulating PIS and COFINS could be amended in order to include express and clear provisions stating that these contributions should not be levied on interconnection and roaming revenues transferred by one telecom company to another. Companies of certain other sectors that transfer amounts to third parties, such as those of the tourism sector, already have the recognition that such third party revenues are not taxable by PIS and COFINS, but the logic is the same.


Exoneration for rented cables. The Municipal Service Tax (ISS) is currently charged on rentals of optical fiber cables, based on provisions of the ISS legislation.

However, rentals of moveable assets are not characterized as services, as already determined by a binding precedent from STF, and are therefore not subject to ISS.

Therefore, such provisions of the ISS legislation should be amended in order to exclude rentals of cables that do not involve the rendering of any services from the taxable event of ISS.

The Brazilian telecom sector is expected to undergo significant progress in the near future, especially considering the expansion of the Internet of Things (IoT) and 5G networks. But these new technological developments require a stable and fair business environment to deliver their full capabilities.

The above suggestions would certainly help attain such environment by implementing a more adequate and reasonable tax system. Eliminating excessive burden and uncertainty of taxation of the telecom sector would foster the provision of high-quality services and connectivity to a wider population, thus enabling a true and inclusive digital transformation in the country.

L&S Authors

Fernando Hamú Alves

Fernando Hamú Alves

Isabela Schenberg Frascino

Isabela Schenberg Frascino


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