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Tech Roundup: Supreme Court makes landmark decision on software taxation

. Nov 06, 2020
Supreme Court software tax Image: Teguh Jati Prasetyo/Shutterstock

You’re reading The Brazilian Report’s weekly tech roundup, a digest of the most important news on technology and innovation in Brazil. This week’s topics: Brazil’s Supreme Court decision on software taxation, Disney+ and Globoplay partner up in the local streaming market, and the rise of mobile phone contracts in Brazil. 

A landmark Supreme Court decision on software taxation

The Brazilian Supreme Court has reached a majority

against charging state goods and services tax (ICMS) on software products. The trial will continue throughout next week, but the six-justice majority makes the <a href="https://www.conjur.com.br/2020-nov-04/maioria-stf-incide-iss-operacoes-softwares">landmark decision</a> all but a certainty, ending a decades-long dispute. Sector players say the ruling paves the way for more investments and legal security for emerging technologies, such as cloud computing and artificial intelligence.</p> <p><strong>Understanding the case. </strong>Brazilian law considers the development and licensing of software as <a href="http://www.planalto.gov.br/ccivil_03/leis/lcp/lcp116.htm">services</a> and, therefore, subject to municipal services tax ISS. Some states, however, say software is a product — which would force companies to pay the state-level ICMS, which charges a higher rate. In São Paulo, local courts considered this move <a href="https://computerworld.com.br/negocios/distribuidoras-de-ti-tem-vitoria-contra-icms-sobre-softwares-distribuidos-digitalmente/">unconstitutional</a>, and the Supreme Court will now establish a rule for the entire country.</p> <ul><li>Justices heard <a href="http://www.e-auditoria.com.br/publicacoes/stf-inicia-julgamento-sobre-incidencia-de-icms-no-licenciamento-de-software-2/">two similar lawsuits</a> challenging ICMS charges by the states of Mato Grosso and Minas Gerais. The first was filed in 1999, when software was still sold on physical media such as floppy disks or CD-ROMs.</li><li>The decision should deliver a blow to states&#8217; strategy of boosting revenue by charging ICMS on software and other licensed products such as streaming services — sometimes even imposing double taxation.</li></ul> <p><strong>Consequences.</strong> Sergio Paulo Gallindo, president of the Brazilian Association of ICT Companies, says the ruling will be pivotal for future tech investments.</p> <ul><li>“Artificial intelligence is software, but without this decision no one would be able to say how the tax law would treat it,” he tells <strong>The Brazilian Report</strong>.</li></ul> <p><strong>Investments. </strong>Investments in digital transformation are estimated at BRL 465.6 billion (USD 83.9 billion) until 2023, with software-based technologies accounting for 25 percent of that total.</p> <hr class="wp-block-separator"/> <h2>GloboPlay and Disney+ join forces in Brazil&#8217;s streaming wars</h2> <p>Ahead of its November 17 Brazilian launch, the Disney+ streaming service <a href="https://link.estadao.com.br/noticias/geral,disney-e-globoplay-anunciam-parceria-para-pacote-de-assinatura,70003498683">announced a local partnership</a> with competitor GloboPlay, operated by the country&#8217;s leading TV network, Globo.</p> <ul><li>Brazilian customers will be able to sign up for both services, paying between BRL 37.90 and 43.90 per month. For BRL 69, users may also opt for GloboPlay live streaming — including cable news channel Globo News and sports channel SporTV.</li><li>Customers who subscribe to the services will also have discounts in services with private bank Bradesco, telecom provider Vivo, and e-commerce marketplace Mercado Livre.</li><li>Alone, a Disney+ subscription will cost BRL 27.90 per month.</li></ul> <p><strong>Why it matters. </strong>Paid TV companies such as Claro (part of America Movil Group) and Sky have been hemorrhaging customers for years, amid the economic crisis and the advance of <a href="https://brazilian.report/tech/2020/06/08/streaming-services-surpass-pay-tv-latin-america-2020/">streaming services</a>.&nbsp;</p> <p><strong>Legal security. </strong>The deal was announced months after telecoms regulator Anatel cleared Fox+ for operation in Brazil. In 2018, Fox was barred from selling its streaming service for users that did not subscribe to pay-TV packages, as operators filed a complaint saying they should follow Brazil’s pay-TV regulations.&nbsp;</p> <ul><li>As of September, Anatel <a href="https://olhardigital.com.br/noticia/anatel-autoriza-comercializacao-online-de-fox-sem-vinculo-com-operadoras/106744">decided</a> online streaming services should not be subject to the same rules as pay-TV channels.</li></ul> <hr class="wp-block-separator"/> <h2>For the first time, phone contracts outnumber pay-as-you-go in Brazil</h2> <p>Data provided by Anatel shows that Brazil has 114.7 million postpaid mobile phone contracts, outnumbering pay-as-you-go subscriptions for the very first time. With this growth, Brazil reached a total of 228 million phone numbers — or 94.8 for every 100 people — and 88 percent of devices have broadband access.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/4260908"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p><strong>Why did this happen? </strong>The agency lists a few reasons for this change:</p> <ul><li>Phone companies no longer charge more for calls to different operators — which led low-income users to own multiple prepaid lines as a cost-reducing strategy.</li><li>Recent recessions lowered the purchasing power of poorer consumers, many of whom abandoned their pay-as-you-go altogether.</li><li>Connectivity is more and more important, and monthly phone plans offer more data for lower prices, compared to the need for constantly topping up credits.&nbsp;</li></ul> <p><strong>Why it matters.</strong> As we explained in our <a href="https://brazilian.report/tech/2020/11/01/rural-population-hit-worst-by-latin-america-digital-divide/">last Tech Roundup</a>, most Latin Americans access the web through their phones, as many cannot afford computers. The fact that Brazilians are opting for plans that offer more data may help them to access better services, as well as study and work opportunities.</p> <hr class="wp-block-separator"/> <h2>Take note</h2> <ul><li><strong>5G DSS.</strong> Claro will <a href="https://canaltech.com.br/telecom/claro-leva-5g-dss-a-mais-12-cidades-do-brasil-veja-quais-174065/">expand</a> its 5G DSS technology to another 12 Brazilian cities, including the capital Brasília. The technology allows customers to have access to faster broadband using 4G channels, as the actual 5G spectrum is yet to be auctioned. </li><li><strong>Logistics.</strong> Online marketplace Mercado Livre now has its <a href="https://economia.ig.com.br/2020-11-03/mercado-livre-adquire-propria-frota-de-avioes-para-entregas-no-brasil.html">own airplane fleet</a>: Meli Air. The four aircrafts were delivered just in time for Black Friday, allowing the company to deliver products stored in its warehouses in Bahia and São Paulo one day after purchase. The fleet is part of a BRL 4 billion investment the company made in Brazil in 2020, which is expected to be bigger in 2021.</li><li><strong>Payroll exemptions. </strong>Brazil’s Congress <a href="https://www.convergenciadigital.com.br/cgi/cgilua.exe/sys/start.htm?UserActiveTemplate=site&amp;infoid=55353&amp;sid=9">struck down</a> President Bolsonaro’s veto on extending payroll tax exemptions to 17 industries, including IT and call centers. Now, IT companies will be able to replace pension contributions — charged at a rate of 20 percent — for a 4.5 percent contribution on gross revenue for another year.

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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