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Challenges of taxing the Internet of Things


Luiz Roberto Peroba Barbosa; Ana Carolina Fernandes Carpinetti

Connection of the physical world to the internet and other data networks carries deep implications

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​In recent years, much has been said about an increasing network of devices, from industrial equipment to consumer goods, which may exchange information with each other and complete tasks automatically.

This is the technological revolution already in course known as Internet of Things (IoT), which aims at developing information transmission mechanisms between equipment daily used and creating a wide data network able to foresee and fulfill in an efficient manner the most varied human daily needs. The IoT allows objects to detect (through sensors), transmit information and operate without constant human intervention.

The possible applications of IoT are innumerous: from smart refrigerators that inform the supermarket about food that has run out and needs to be acquired, cameras spread over the city that monitor the traffic and transmit signs to the vehicles' GPS systems indicating the best route to be followed, to medical devices that transmit real-time information on patients' health condition.

The possibility of connecting the physical world to the internet and other data networks carries deep implications for the society at large and the economy, in addition to bringing about a number of discussions over data privacy, information security, regulation and, in the context of this article, taxation.

Identifying the nature of the activities developed is the key point to define how these new technologies are to be taxed. This is so because, in keeping with the characteristics of the Brazilian tax system that endorses the principles of lawfulness and legal certainty, when analyzing the taxation of a new activity we need to verify in which concept it falls, that is, the sale or lease of property, the provision of services or, even more specifically, the provision of telecommunications services.

Hence, the first element relevant to this tax analysis involves the relation between the IoT and the telecommunications and information services supporting it. This feature of using telecommunications networks for data transmission was also mentioned by the existing legislation on the matter when defining IoT for the purposes of payment of the Facility Inspection Fee and of the Operation Inspection Fee (TFI and TFF, respectively): "machine-to-machine communication systems are considered to be devices that, without human intervention, use telecommunications networks to transmit data to remote applications with a view to monitoring, measuring and controlling the device itself, the environment surrounding it, or the data systems connected to it through such networks." (Decree No. 8.234/14)

Based on the operating features of an IoT system, the typical activities for its operation encompass both telecommunications services and value-added services, pursuant to the General Telecommunications Law (LGT).

Separately, such services differ from each other (sundry services versus telecommunications services).

In this context, the following question is asked: based on Brazilian legislation, can telecommunications services be separated from other services or activities involved in the IoT, or else, would this "bundling" of connectivity with other functionalities cause everything to be considered as telecommunications services for tax purposes?

The key point in answering this question concerns the way how IoT-related capabilities will be offered in the market and sold to users.

As we see it, when telecommunications services support the connection between equipment and other capabilities are offered to customers based on this connectivity between things, the respective revenues should not be treated as arising from telecommunications activities. In such cases, the telecommunications services are only inputs for the activities developed.

There are also cases where communication is not restricted to the IoT, and connectivity is offered to the users of "things." An example is a tracking system that also provides internet connection for the vehicle user's communication.

In this event, apparently a telecommunications service is actually provided to the user, and should be taxed as such.

However, it is undeniable that not all capabilities that may be offered through the IoT fit perfectly into the concepts contemplated in Brazilian legislation. Therefore, on dealing with this matter, we will inevitably face "grey areas" where traditional definitions will not suffice to provide all the answers.

We are well aware that when faced with grey areas, the Brazilian tax authorities have invariably opted for ways that increase tax revenues. This has already happened in the past with internet access providers (the outcome was favorable to the taxpayers after more than a decade of dispute). The same stand has been adopted in cases of lease of movable property related to telecommunications activities, advertising on the internet, and even provision of several value-added services. In all such situations, the tax authorities taxed the relevant revenues as if they derived from communications/telecommunications services.

Concerning this specific point, the regulatory aspect may be crucial for defining taxation on the IoT activities. In similar situations, the National Telecommunications Agency (ANATEL) stand was of the essence to clarify the roles of each player and, consequently, the taxation applicable to the revenues resulting from such activities.

A good example of the role of the regulatory body involved Vehicle Information Technology companies that provide vehicle monitoring services. There was a doubt surrounding the nature of the activities developed by such companies, i.e. whether such monitoring services should be considered telecommunications services. In its answer, ANATEL distinguished service providers that operate with their own telecommunications structure from companies that contract third-party telecommunications services, arguing that only the former actually provide telecommunications services.

ANATEL adopted the same rationale for the Mobile Virtual Network Operator (MVNO) activities, distinguishing authorized service providers (actual providers of telecommunications services to users) from designated service providers (which act as representatives of the carriers).

In both cases, the regulation of the activities by ANATEL was crucial for defining the roles of each player and, as a consequence, for identifying the taxation applicable to the revenues generated by these activities.

The Federal Government intends to launch a National IoT Plan to foster the development of IoT activities in Brazil. This topic has been recently dealt with in a Public Consultation, and may be regulated.

If this is confirmed, it would be important for the regulation of IoT activities to take into account the characteristics of the Brazilian tax system, thus providing legal certainty to market players while allowing for proper development of such activities in Brazil. This is so because, as expressly determined by the National Tax Code, the nature of a certain activity as determined by law should be mandatorily observed by the tax authorities for taxation purposes.

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