Item 4. Information on the Company
A. History and Development of the Company
Basic Information
TIM Participações S.A. is a publicly held company (sociedade anônima) organized under the laws of the Federative Republic of Brazil. The Company was incorporated in the Federative Republic of Brazil for an indefinite period on May 22, 1998 under the name Tele Celular Sul Participações S.A., which was later changed to TIM Participações S.A. on August 30, 2004.
Our headquarters are located at João Cabral de Melo Neto Avenue, 850 – North Tower – 12th floor, 22775-055 Rio de Janeiro, Brazil and our telephone number is +55 (21) 4109-4167.
Our agent for service of process in the United States is Puglisi & Associates located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.
The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://sec.gov. Our web site address is http://www.tim.com.br. Information contained on, or that can be accessed through, our website does not constitute a part of this Annual Report.
Historical Background
In July 1998, as part of the privatization of Telebrás, the Brazilian state-owned telecommunications monopoly, the Federal Government sold substantially all its shares of the 12 holding companies into which Telebrás had initially been broken up, including its shares of Tele Sudeste Celular Participações S.A., or TSU, and Tele Nordeste Celular Participações S.A., or TND. Following a series of acquisitions, corporate reorganizations and corporate name changes, TSU and TND merged to form TIM Participações in 2004.
We continued to expand and restructure our operations through a series of corporate reorganizations, mergers, acquisitions and name changes, and we are currently held, directly and indirectly, by Telecom Italia (which began operating in Brazil in 1998 as Telecom Italia Mobile) through its wholly owned subsidiary, TIM Brasil, formed in 2002 as the holding company of Telecom Italia’s operating companies in Brazil. In turn, the single largest shareholder of Telecom Italia is Vivendi, which is able to exercise significant influence over Telecom Italia. In 2019, Telecom Italia delisted all of its U.S. listed securities and deregistered from the SEC, having filed Form 15F on July 9, 2019. See “—C. Organizational Structure” for a description of our current corporate structure and Exhibit 8.1 attached hereto for a list of our significant subsidiaries as of the date of this annual report.
In 2009, the acquisition of Holdco Participações Ltda., or Holdco, holder at the time of 100% of Intelig’s capital, was approved and Intelig became a wholly owned subsidiary of TIM after this transaction. Our acquisition of Intelig (known since September 2017 as TIM S.A.) brought material advantages through significant synergies with its network, such as its metropolitan optimal fiber network and its large backbone that allowed us to accelerate the development of our 3G network and generate significant operational cost savings.
In 2011, our then wholly owned subsidiary TIM Celular (merged into TIM S.A. as a result of the Reorganization) entered into an agreement with Companhia Brasiliana de Energia and AES Elpa (the AES Group in Brazil) for the purchase of all of AES Elpa’s equity interests in Eletropaulo Telecomunicações and 98.3% of the interest of AES RJ, or the AES Atimus Acquisition. In connection with the acquisition, Eletropaulo Telecomunicações changed its corporate name to TIM Fiber SP Ltda., or TIM Fiber SP, and AES RJ changed its corporate name to TIM Fiber RJ S.A., or TIM Fiber RJ, and we call this business, collectively, TIM Fiber. In accordance with the reorganization of TIM Fiber, TIM Fiber RJ and TIM Fiber SP were merged into TIM Celular in 2012, which owns and operates an extensive fiber optic network in metropolitan São Paulo and Rio de Janeiro (and which, as discussed below, itself was merged into TIM S.A. in October 2018 as a result of the Reorganization). The purpose of this reorganization was to simplify our organizational structure and improve the administrative, operational and financial efficiency of the companies controlled by us.
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Our shareholders approved our adherence to the Novo Mercado rules and the transfer of trading of the shares issued by us to the Novo Mercado segment of the B3 S.A. – Brasil, Bolsa, Balcão, or the B3, in 2011. In order to join the Novo Mercado, we are required to comply with heightened requirements relating to corporate governance and the disclosure of information to the market and we are not permitted to issue preferred shares, participation bonuses or any kind of shares with restricted voting rights. From August 3, 2011, our preferred shares ceased to trade and we only had common shares traded on the Novo Mercado listing segment of the B3 by using the code “TIMP3,” and as from August 5, 2011, our ADSs representing preferred shares ceased to trade on the NYSE and our ADSs representing five common shares instead of ten preferred shares commenced trading on the NYSE. See “Item 9. The Offer and Listing—A. Offer and Listing Details.”
In 2013, Instituto TIM was founded with the mission to create and strengthen resources and strategies for the democratization of science, technology and innovation that promote human development in Brazil. In order to accomplish this mission, the Institute works around four pillars: Education, Inclusion, Technological Applications and Work, encouraging the democratization of free technological solutions and the creation of innovative approaches to the teaching of science and mathematics in Brazil.
On July 25, 2017, the Company’s Board of Directors approved the corporate reorganization, or the Reorganization, of its subsidiaries TIM Celular and Intelig. On September 6, 2017, as the first phase of the Reorganization, Intelig altered its articles of association to change the company from a limited liability company to an unlisted limited liability corporation, and to change its corporate name to TIM S.A.
As will be discussed in more detail below (see “—C. Organizational Structure”), in October 2018, the reorganization resulted in the merger of TIM Celular into TIM S.A. This merger achieved its objective of capturing operating and financial synergies, through the implementation of a more efficient operating structure, as well as accounting and internal control systems.
In 2018, Instituto TIM was acknowledged by the Ministry of Justice in Brazil as a qualified Civil Society Organization of Public Interest, or OSCIP, which reinforced the commitment to transparency in the activities of the Institute.
This achievement also brings more credibility and confidence to expand the network of partners and institutions that wish to take part in the projects supported by the TIM Institute.
2019 Important Events
New Accounting Standard IFRS 16 / CPC 06 (R2)
On January 1, 2019, IFRS 16 / CPC 06 (R2), a new accounting standard issued in July 2014, came into force. The standard requires that lessees recognize the assets and liabilities arising from lease agreements (“rent”; leases), except for short-term contracts (12 months or less) or contracts in which the underlying asset is of low value. In this sense, the increase in lease liability, due to the recognition of the right to use the assets, results in an increase in the Company’s net debt, with depreciation and interest being recognized in the income statement as a replacement for operating lease expenses.
Registration of TIM S.A. as Publicly Held Company
On October 28, 2019, our Board of Directors approved the submission of a request to CVM in order to register TIM S.A. as a publicly held company in category “A”, pursuant to CVM Instruction No. 480/09. TIM S.A. reformulated and consolidated its By-laws and informed the CVM that there would be no registration request for a public offer of shares of TIM S.A., and accordingly the event should not be considered a public offering of shares or other securities by the Company or TIM S.A. On March 17, 2020, CVM approved such request, granting the registration of TIM S.A. as a publicly held company before the CVM (without offering securities), pursuant to CVM Instruction No. 480/09.
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FINAME DIRETO Facility
On March 20, 2019, we entered into, but have not yet drawn on, a R$390 million credit agreement with Agência Especial de Financiamento Industrial S.A., or FINAME, for purposes of the acquisition of new machines, equipment, industrial systems, components and automation and computing goods manufactured in Brazil, or the FINAME DIRETO facility. This FINAME DIRETO facility replaced one of the sub-credits of a BNDES financing we entered into during 2018.
Interest on Equity
Since 2017, the Company has made payments of Interest on Equity to its subsidiaries and their respective shareholders. Interest on Equity is a commonly used alternative form of distribution (other than or as a complement of dividends) that allows the Company and/or its subsidiaries to take advantage of favorable tax impacts, since Interest on Equity is considered a deductible expense for the purpose of calculating Corporate Income Tax and Social Contribution (for additional detail, see “Item 4. Information on the Company—B. Business Overview—Taxes on Telecommunications Goods and Services”).
The Company made a distribution of R$995 million throughout the year ended December 31, 2019 in anticipation of the year’s results. A total of R$369 million from the total distributed was paid in 2019 and the other R$626 million was paid in January 2020.
Exclusion of ICMS of PIS and COFINS calculation basis
As discussed in “Item 3. Key Information—D. Risk Factors—Risks Relating to Brazil—Changes in Brazilian tax laws may have an adverse impact on the taxes applicable to our business and over our prices” in 2017, the STF handed down a decision confirming that it is unconstitutional to include ICMS in the calculation of PIS and COFINS bases.
The Company has three different lawsuits related to this issue. In November 2018, as a result of the confirmation of the STF decision in one of these lawsuits (in respect of TIM Nordeste, ultimately merged into TIM S.A.), the Company recorded an amount of R$353 million.
In 2019, the Company recorded the remaining two lawsuits in a total aggregate amount of R$3,023 million. In June 2019, due to a final and unappealable decision, the amount of R$2,875 million was recorded (R$1,720 million corresponds to the principal, and R$1,155 million to monetary adjustments), which are related to TIM Celular S.A., merged into TIM S.A. in October 2018). In September 2019, due to a final and unappealable decision, the amount of R$148 million was recorded (R$75 million corresponds to the principal, and R$73 million to monetary adjustments), which are related to TIM S.A. itself (when it still did business under the name Intelig Telecomunicações Ltda.).
Capital Expenditures
Capital expenditures totaled R$3,853 million in 2019, up 0.6% as compared to 2018, as found in the Industrial Plan 2020-2022. This increase was due to investments to expand coverage, installing more equipment and fiber. Approximately 93.4% of capital expenditures were dedicated to infrastructure, mainly transportation network projects, 4G technology and information technology. The actual amount and timing of our future capital expenditures may be affected by foreign exchange oscillations and other impacts from financial or economic crisis, such as the one arising from the spread of COVID-19. For a detailed breakdown of our capital expenditures in 2017, 2018 and 2019 and those currently in progress, as well as the total amount each year and method of financing, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Uses of Funds—Material Capital Expenditures” and “—Sources of Funds.”
On March 16, 2020, we released our Industrial Plan for 2020-2022, which demonstrates our transformation as a result of the execution of our previous Industrial Plans. These changes include, notably, network improvements and an improved customer experience, as recognized by independent third parties, and an ongoing inovations in network evolution, including 5G trials, multiple-input multiple-output technology, or massive-MIMO, repurposing frequency bands that have historically been allocated for 2G mobile services and that are being migrated to other frequencies (known as refarming), and the Vivo MoU (see Item 4. Information on the Company—B. Business Overview—Our
Business). Through specific and disciplined investments in new technologies and processes, we seek to reach a position that allows us to act on new opportunities to sustain revenue growth, increase profitability, develop our infrastructure and expand cash flow generation. We focus on improvement of returns on investment as well as customer experience maximization, but we are also committed to our role in society by promoting environmental, social and governance initiatives that will result in a positive transformation for all stakeholders.
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We expect that IT initiatives such as big data evolution, the rollout of “next best action,” or NBA, cognitive systems, and application and architecture review in a two-year time frame will advance our IT in a manner that will provide us with an enhanced view of our customers’ lifecycle and consumption patterns, as well as allowing for faster time-to-market, development of new capabilities, process automation, and increased efficiency. Our approach to investment in our network has a five-part focus, as follows: data growth, 5G ready, IoT, fixed broadband, and new initiatives. The benefits expected are network decommissioning savings, a convergent architecture, fixed wireless access improvement, network densification, innovative solutions and new IoT business opportunities.
The capital expenditure expected to support the Industrial Plan for 2020–2022 is approximately R$12.0 billion to R$12.5 billion for that three-year period. Furthermore, we aim to keep our capital expenditures measured as a percentage of our net revenues in a range of 20% to 25% by focusing our investments on infrastructure development for 2020 based on a smart and selective approach to capital expenditures. Some smart capital expenditure initiatives in development are industrial agreements (e.g., Vivo MoU), innovative technologies (e.g., massive-MIMO), the transformation of TIM Live by means of its partnership with Netflix, and cloudification (storage as commodity).
Recent Developments
On July 30, 2019, Mr. Alberto Whitaker presented his resignation as a member of the Board of Directors and Audit Committee Coordinator. Due to this resignation, the Board of Directors resolved, on the same date, to appoint Mrs. Flavia Maria Bittencourt as a member of the Board of Directors, which was further approved (ad referendum) at the annual and extraordinary shareholders’ meeting held on April 7, 2020.
On December 3, 2019, the Board of Directors acknowledged the resignation presented by Mr. Piergiorgio Peluso on November 28, 2019, effective immediately, as a member of the Board of Directors and the Control and Risks Committee.
On January 16, 2020, Mr. Raimondo Zizza presented his resignation as a member of the Board of Directors and the Control and Risks Committee, effective as of February 1, 2020.
Due to the resignations of Mr. Piergiorgio Peluso and Mr. Raimondo Zizza, the Board of Directors resolved, on February 11, 2020, to appoint Mrs. Sabrina Di Bartolomeo and Mr. Carlo Filangieri as members of the Board of Directors, which was further approved (ad referendum) at the annual and extraordinary shareholders’ meeting held on April 7, 2020.
On January 31, 2020, we entered into a credit agreement with Banco do Nordeste do Brasil S.A. as lender and TIM S.A. as borrower in the principal amount of R$752 million, secured by a bank guarantee and receivables. The agreement has a total term of eight years, with three years of grace period and five years of amortization period, to subsidize our capital expenditures plan for the next three years (2020-2022) in the northeastern region of Brazil. For further information on these financial contracts, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Sources of Funds—Financial Contracts.”
On February 18, 2020, as part of its liability management strategy, TIM S.A. prepaid the total outstanding debt with BNDES, due to its high cost, equivalent to 171% of the CDI without the payment of any breakage costs. On the same date, TIM S.A. drew down on new loans entered into with Bank of America Merrill Lynch on February 7, 2020 (R$425 million denominated in Euros) and The Bank of Nova Scotia on January 31, 2020 (R$375 million denominated in U.S. dollars), totaling the equivalent of R$800 million at a cost of 108.3% of the CDI. For further information on these financial contracts, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Sources of Funds—Financial Contracts.”
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On March 10, 2020, TIM S.A. jointly with Telefônica Brasil expressed to Bank of America Merrill Lynch, or BofA, Oi Group’s financial advisor, their interest in initiating negotiations targeting a potential joint acquisition of Oi Group’s mobile business, in whole or in part, so that, in the event of the completion of the transaction, each of the interested parties would receive a portion of that business. We believe that, if materialized, the transaction will add value to us, generating benefits for our customers and shareholders by accelerating our growth and increasing operational efficiency and quality of service. Additionally, the eventual conclusion of the transaction would bring benefits to the telecommunications market in general, reinforcing its competitiveness and investment capacity.
On March 26, 2020, TIM S.A. and Banco C6 S.A., or C6 Bank, concluded negotiations regarding a strategic partnership with the objective of developing combined offers with special benefits for their customer bases, joining in an innovative manner digital banking and telecommunications services. The agreement also provides for the possibility of exploring sales and payment channel synergies, expanding the distribution of offers and optimizing costs. This agreement does not create a joint venture, therefore TIM S.A. maintains the independence of its operations. However, depending on the evolution of the results of this partnership, TIM S.A. may become a minority shareholder in C6 Bank through an objective-based compensation mechanism.
On April 7, 2020, TIM S.A. entered into a new credit agreement as borrower and TIM Participações as guarantor with The Bank of Nova Scotia in the amount of R$574 million denominated in U.S. dollars. The cost post-hedge is 155.0% of the CDI, with a one year maturity. Disbursement occurred on April 22, 2020. The purpose of this credit agreement is to strengthen our cash position due to global macroeconomic uncertainty. It is also a part of the R$1 billion amount approved by our Board of Directors on March 25, 2020. For further information on this financial contract, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Sources of Funds—Financial Contracts.”
COVID-19
As of April 2020, there have been thousands of confirmed cases of COVID-19 across Brazil. The ultimate magnitude of COVID-19 in Brazil, including the extent of its impact on our financial and operating results, which could be material, will be determined by the length of time that the pandemic continues, its effect on the demand for our telecommunications services and our ability to provide them, as well as the effect of governmental regulations imposed in response to the pandemic.
As COVID-19 continues to spread, we are taking a variety of measures to ensure the availability of our telecommunications services, promote the safety and security of our employees and support the communities in which we operate. By way of example, we have put in place “work from home” policies for our administrative employees as well as for a portion of our network service employees and in-store sales teams, permitting greater space between employees that remain in our headquarters or stores. We have also implemented a contingency plan for our customer service call centers with modified call distribution logic and remote working for a portion of services. Our information technology teams are testing remote work processes and infrastructure for all activities except those of the technical room of our data center, which requires physical access.
The extent to which the COVID-19 impacts our operations and our results will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration and growth of the outbreak, new information, which may emerge concerning the severity of COVID-19 and the actions to contain the pandemic or treat its impact, among others. See “Risk Factors—Risk Relating to Our Business—We face various risks related to health epidemics and other outbreaks, which may have material adverse effects on our business, financial condition, results of operations and cash flows.”
We are continuing to respond to this global crisis through comprehensive measures to protect our employees while fulfilling our vital role in providing telecommunications services to our customers. Above all else, we are committed to the safety and well-being of our employees and are doing whatever possible to ensure that our facilities and operations continue to operate as much as possible within the restrictive measures currently in place. At the same time, we and our employees remain committed to meeting the needs of customers and the communities in which we operate.
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B. Business Overview
Market Characteristics
The telecommunications sector in Brazil is marked by strong competition and by the effective regulation of Anatel, whose mission is “to promote the development of the country’s telecommunications, in order to provide it with a modern and efficient telecommunications infrastructure, capable of providing the society with adequate, diversified and fair prices throughout the entire national territory.”
The gradual recovery of the Brazilian economy had a direct impact on the telecommunications market in 2019, which continued to experience a reduction in the mobile customer base. Such a reduction in customer base has been driven at least in part by the reduction of interconnection rates, eliminating the community effect between clients of the same mobile network operator, and consequently the common practice of multiple SIMs per person. The mobile market has also been characterized by the process of migration from prepaid to hybrid (Control plans) and postpaid plans. This movement can be seen as a result of the growing demand for access to data, driven by use of OTT solutions to communicate at no extra cost, and content services. At the same time, the operators sought to retain their customers with offers that are characterized by recurrent consumption and, consequently, of revenue, in line with the strategy of offering more for more.
In 2019, the sector also reflected the tendency toward increased data consumption, requiring operators to adapt their networks and face the challenge of delivering an increasingly robust infrastructure in an environment of more rational investments. Additionally, the industry was marked by increased integration of digital services into portfolios in order to monetize offerings.
Finally, the growing demand for fixed broadband and the strong migration to higher speed service offerings (especially for ultra-broadband, with speeds above 34Mbps) reflected the new perception of Internet access as an essential asset for the population.
Mobile Market Developments
The following table shows the data of Brazilian mobile market during the periods presented.
|
|
|
|
Brazilian wireless subscriber base (million)(1)
|
226.7
|
229.2
|
236.5
|
Prepaid lines (million)
|
116.8
|
129.6
|
148.6
|
Postpaid lines (million)
|
109.8
|
99.6
|
87.9
|
Estimated total penetration (%)(2)
|
96.9
|
109.9
|
113.9
|
(1) Source: Anatel
(2) Based on information published by Anatel and IBGE/IPC Maps (December 2019).
Following the dynamic of last year, the downward trend of customer base reduction in 2019 continued to be driven by “cleaning” actions in the prepaid segment, where customers are no longer using multiple SIM cards, and by the process of consolidation of multiple chips. According to Anatel, the Brazilian mobile market presented a contraction rate of 1.1%, compared to 2018. Although the prepaid customer base contracted by 9.9% over the course of 2019, it still continues to represent the market’s largest component, constituting 51.5% of total subscriber base as of December 31, 2019, as compared to 56.5% as of December 31, 2018. The significant reduction in the overall number of prepaid users is mainly due to acceleration in users consolidating multiple SIM cards to a single one, high penetration of mobile service and the rapid substitution of voice with data usage, resulting in a decrease in the so-called “community effect,” where consumers value a telecommunications system more as more users adopt it. The postpaid segment, however, experienced an increase of 10.2% over 2018, as compared to 13.3% in the year before, driven by operators’ efforts to monetize their customer base, offering more data, content and digital services, and the migrations from prepaid to Control plans, and from entrance plans to postpaid.
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Mobile Competitors
TIM is the brand name under which we market our mobile telecommunications services, offering GSM, 3G, and 4G technologies. Currently, our subsidiaries hold mobile licenses for each of the ten wireless areas of Brazil recognized by Anatel, making us a mobile operator in Brazil offering complete nationwide coverage. In two of our ten areas we are the Telebrás legacy provider. See “—A. History and Development of the Company—Historical Background.” Our network covers approximately 96% of the country’s population based on Anatel’s coverage criteria.
In addition to TIM, there are three other major participants in the Brazilian mobile market that offer nationwide coverage in all Anatel wireless areas: Vivo, Claro and Oi.
The Brazilian mobile telecommunications industry is highly competitive. Any adverse effects on our results and market share from competitive pressures will depend on a variety of factors that cannot be precisely assessed and are beyond our control. Among such factors are our competitors’ size, experience, business strategies and capabilities, the prevailing market conditions and the applicable regulations.
Other Competition
We also compete with landline telephone service providers, of which the incumbent providers in Brazil (Oi, Vivo and Embratel Participações S.A. (owned by America Movil), as well as Algar Telecom, a regional incumbent), and some other relevant players (GVT, acquired by Vivo, and Net Serviços de Comunicação S.A., owned by America Movil), offer packages including voice (both fixed line and mobile), broadband and pay-TV services in bundled offers. Landline providers are, however, required to offer their services to unaffiliated mobile providers on the same basis they are offered to affiliated mobile providers. Our acquisition of Intelig (now known as TIM S.A.) and AES Atimus (later TIM Fiber, which was merged into TIM Celular in 2012, and TIM Celular was merged into TIM S.A. in 2018) broadened our participation in the fixed telecommunication sector.
We compete in the corporate telephony business with Nextel, a former provider of digital trunking (based on push-to-talk technology which was discontinued during 2018), or specialized mobile services (serviço móvel especializado), or SME, and currently a regular mobile provider, (significant market power only), using 3G and 4G technology in some regions. Nextel became the fifth mobile telecommunications competitor, but its network deployment was focused mainly in the states of São Paulo and Rio de Janeiro. In 2014, Nextel also entered into a national roaming agreement with Vivo, whereby Nextel’s significant market power customers can use Vivo’s 2G and 3G mobile network in regions where Nextel does not have coverage. In 2019, Nextel Brazil was acquired by Claro S.A. and is still undergoing a consolidation process.
On November 6, 2018, Anatel issued Resolution No. 703/2018, which established new maximum limits for the amount of spectrum bandwidth that a single telecommunications service provider of collective interest, as well as its affiliates, subsidiaries or controller company, when operating in the same municipality, may hold on a primary basis. This regulatory change increases the competitive environment of the sector and facilitates consolidation of operations among the main players in the market.
Our Business
We are a telecommunications company that offers mobile voice and data services, broadband Internet access, Value-Added Services, and other telecommunications services and products.
TIM is recognized for its strong brand and for its reputation as an innovative and disruptive company capable of setting new consumption standards for the market. Our proactive approach allows the Company to be in a leading position in the transformation of the telecommunications business model. The change in consumer profiles and the emergence of new technologies foster a rupture in the telecommunications industry based on the consumption of digital data, content and services.
The Company is characterized by its pioneering and innovative offerings, among a complete portfolio for individuals as well as corporate solutions for small, medium and large companies. Besides traditional voice and data
services, TIM offers a fixed-line ultra-broadband service, TIM Live, WTTx technology through Ultrafibra service, and is starting to offer IoT solutions, with successful examples in agribusiness.
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The Company also offers a variety of digital content and services in its portfolio of packages, increasing for its clients the day-to-day functionality of their mobile devices. The ability to manage a complete and varied portfolio gives TIM the possibility to offer customized packages to its customers and to provide offers bundling services, like voice and data, to customers in certain regions.
In 2019, TIM maintained a position as a competitive player in the postpaid segment, with “TIM Black” tariff plans, providing a better service usage experience and continuously innovating offerings. TIM Black was innovative as the first postpaid plan to include unlimited calls to any operator, in addition to robust Internet and digital services packages, including video platforms and partnerships with OTTs. TIM also made innovations in its portfolio of Control and prepaid offerings. In the Control segment, which tends to be a gateway to postpaid plans, the Company was the first to offer a new tariff plan, the TIM Social Networks Control plan (TIM Controle Redes Sociais), with unlimited access to social networks, unlimited calls to any operator, plus data and digital services packages. The Company continues to be a valued leader in the prepaid plan segment and to offer innovative and complete packages, aiming to engender loyalty among our customer base.
On July 23, 2019, TIM S.A. and Telefônica Brasil also entered into a memorandum of understanding, or the Vivo MoU, to start negotiations regarding: (i) sharing of a single-grid 2G network; (ii) establishment of new infrastructure sharing agreements for the 4G network in 700Mhz, directed to cities with fewer than 30,000 inhabitants, which in the future may be expanded to larger cities; (iii) other network sharing opportunities in other frequencies and technologies; and (iv) other opportunities in efficiency and cost reduction in operations and network maintenance. We believe that implementing the concepts set forth in the Vivo MoU will result in synergies and efficiencies that could help support us in continuing to provide innovative and standard-setting offerings and services, as well as synergies and efficiencies in the allocation of investments and operating costs.
On March 26, 2020, TIM S.A. and C6 Bank concluded negotiations regarding a strategic partnership with the objective of developing combined offers with special benefits for their customer bases, combining in an innovative manner digital banking and telecommunications services. The agreement also provides for the possibility of exploring sales and payment channel synergies, expanding the distribution of offers and optimizing costs. This agreement does not create a joint venture, therefore, TIM S.A. maintains independence of its operations. However, depending on the evolution of the results of this partnership, TIM S.A. may become a minority shareholder in C6 Bank through an objective-based compensation mechanism.
TIM seeks to follow the desire of its consumers, considering them at the center of the Company’s decision making, based on: (i) innovation, which is in the DNA of the Company and will continue as a priority, with new plans, offers, partnerships and technologies; (ii) quality, which is the basis for acquiring the customer’s loyalty and for the expansion of its life cycle; and in the (iii) user experience, which is the strategic pillar of convergence of all others, establishing a new relationship with customers and acting in a way that everyone receives the best experience, great services and a transparent relationship with the Company.
Competitive Strengths
We believe that our robust network infrastructure, our innovative approach, our brand recognition and our widespread sales network, position us well to capitalize on opportunities in the telecommunications industry in Brazil and meet the constantly changing demands of the mobile telecommunications market. We believe that our main strengths include:
High quality services
Since national coverage and quality had improved quite substantially over the last few years, Anatel also has shifted its focus. The prior focus was service quality from a broader, state-oriented perspective and now, Anatel is taking a local perspective, concentrating its efforts on smaller geographic areas like cities, especially those where service is still considered poor. In the final quarter of 2017, Anatel proposed the Quality of Telecommunications Services Regulation (Regulamento de Qualidade dos Serviços de Telecomunicações), or RQUAL, which, following
public consultation No. 29/2017, was approved in December 2019 (Resolution No. 717/2019) and is expected to enter into force in 2021. RQUAL will apply to all telecommunication services (mobile, fixed, fixed broadband and payTV) on a municipal level and sets forth new obligations for service providers, such as a user compensation model and a mandatory ombudsman, and grants customers additional rights including the customer’s possibility of terminating their service agreement without penalty in case of poor service quality. For more information on the new quality regulation, see “—Regulation of the Brazilian Telecommunications Industry—Quality Management Regulation.”
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Accordingly, TIM has also started tracking its quality indicators and focusing on service quality at the city level, in order to assure an even more rigorous review of the customer experience. Following the contribution period, TIM continues to monitor municipalities outside the Anatel threshold (“critical”) and has already started simulating the new indicators set forth in Resolution No. 717/2019.
The results of this local focus are demonstrated in the solid improvements of Anatel’s quality metrics over the last years. As a highlight, the Company has been able to maintain positive results in 3G/4G data-related indicators due to the rapid expansion of our coverage, in particular in 4G, where we are the leading telecommunications company by number of cities covered, according to the Anatel website (www.anatel.gov.br). Anatel’s latest release, which includes data up to the third quarter of 2019, indicates that TIM was the company with the lowest number of critical municipalities.
TIM also demonstrated a strong performance of its LTE technology in data usage, wide coverage and availability. The TIM 4G network received higher measurements, when viewed against other test of 4G networks, in the Brazilian market on the SpeedTest platform. These results are important given the strong demand by TIM customers for this technology in 2019. At the end of 2019, approximately 85% of TIM’s data traffic was carried out by the 4G network.
Moreover, in a satisfaction survey conducted by Bridge Research, TIM achieved significant results in 2019. In December 2019, the Company ranked first in overall satisfaction for the postpaid segment and second in the Control segment. TIM had a similar outcome with respect to satisfaction with mobile Internet use, occupying the first place in pure postpaid and second in Control.
It is also worth mentioning that the Company continues to invest in digitization efforts in order to improve customer experience and boost process efficiencies. TIM believes that the digital transformation of its services must take place on several fronts, from the sale and activation of the line, to post-sale and so-called “self-caring” (a term used in the telecommunications market for digital service portals that allow customers to manage profiles and subscriptions), billing, collection and, finally, payment.
The Company has experienced strong results from such digitalization efforts. Customer service is one particular area in which digitalization – in particular our Mobile App and interactive voice response, or IVR, technology – has proven fundamental to improving the customer experience. In 2019, we increased by 0.2% the number of digital customer interactions (an increment of 69% in Mobile App and Website interactions partially set off by a decrease of 1% in IVR interactions). Additionally, the number of individual users of the “Meu TIM” application in 2019 grew 23%, while IVR retention increased 6pp. Also, digital sales in the postpaid segment increased by 45.6% in the year ended December 31, 2019 as compared to the year ended December 31, 2018, and more than 800% in the prepaid segment, while recharging by digital means continues to become a more relevant sales channel, with a 9.1% increase in the year ended December 31, 2019 as compared to the year ended December 31, 2018.
We believe our ultra-broadband service is also viewed generally as a reference of quality in the sector, driven by the Company’s commitment to the customer experience. This service quality of TIM Live has demonstrated itself to be excellent, as recognized by the widely circulated newspaper called “O Estado de São Paulo.”
The Company also seeks a strong position in the high-value customer market by offering a variety of plans for individual and family usage, bundling voice and data packages, as well digital Value-Added Services (music, e-reading, video streaming, games), in order to provide a custom customer experience.
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We are also better able to provide high quality services due to our strong relationship with our suppliers. We operate a system for information technology vendor management in order to improve the commitment of our suppliers. As a result of this approach, we benefit from enhancements like (i) better accountability of end-to-end vendors on our business processes; (ii) better contractual conditions and savings due to the increase of volumes per vendor; (iii) vendor consolidation and specialization in specific platforms/processes, creating the opportunity for long-term investments in such areas; and (iv) active contribution to transformation and simplification.
These processes were organized and improved through detailed rules such as the Projects Review Board and Investments, and the Function Points Productivity Contractual Auditing. This allowed us to achieve an excellent level of information technology governance, exemplified by better business contribution of each investment due to shared objectives and goals. As a result, we improved our efficacy and efficiency.
Finally, we also continue to seek new internal data sources in order to better understand our users’ perspective and needs, including collecting and analyzing information from applications and investing in the modernization of traditional quality-assessment tools.
The Company understands that the above statistics reflect its commitment to solid infrastructure and its focus on the customer experience. However, the Company recognizes that there are some statistics and/or quality measures that use different methodologies that could present diverse results from those that are mentioned above.
Open Innovation Program
TIM’s Open Innovation Program has the objective to establish a network to exchange knowledge, best practices and business models within a collaborative group of enterprises, startups and academia in order to leverage the development of innovative products and services. The program focuses on learning and exploring new technologies in partnership with complementary business partners, in order to create sustainable and responsible solutions. The collaboration network is based on the concept of partnerships with startup hubs and/or co-working spaces, and is designed to bring together entrepreneurs, vendors, technology companies, providers and content developers, innovation centers and universities so that they can recognize in TIM a potential partner in the development of new products, services or business models based on TIM’s business strengths and technology. In 2019, TIM increased its involvement with startups, establishing new partnerships with innovation hubs dedicated to healthtechs and agritechs.
During 2019, TIM established 5G Living Labs with the aim to foster the development and use of 5G in a variety of contexts, to perform network testing and promote market readiness. The 5G Living Labs establish an environment for experimentation and co-creation in which end-users, researchers, companies and public institutions explore, design and jointly assess new and innovative products, services, solutions and business models, and provide important feedback for development and subsequent commercialization of products and services. In 2019, four labs were launched with national and international partners across Brazil: one with the Federal University of Santa Catarina and CERTI Foundation, one with the National Telecommunication Institute (Inatel) in Santa Rita do Sapucai (State of Minas Gerais), one with the Federal University of Campina Grande and Virtus Institute and one in São Paulo within CUBO, the most prestigious startup hub in Latin America. These TIM 5G Living Labs focused on fostering 5G use in the following areas and business sectors: telemedicine, remote education, smartcity, security, intelligent home, game streaming, drones, industry 4.0, immersive technologies for education, health, industry and entertainment (actual reality and virtual reality) and smart agriculture using experimental 5G radiofrequencies.
Strong brand associated with innovation.
In 2019, we changed our institutional campaign slogan to “The innovation never stops” (“A inovação não para”). This slogan brings to the forefront one of the three pillars of our brand: innovation. Innovation is already in our DNA and will continue as a priority, with new plans, offers, partnerships and technologies. To further associate our brand with innovation and continuous adaptation to new technologies, we began testing 5G technology (not yet used in Brazil) accompanied by a campaign which revolved around the slogan: “TIM. Ready for the future.” In September 2019, we sponsored an innovation event called HackTown in the State of Minas Gerais, where we showed the public, via interactive 5G demonstrations at the TIM 5G House (Casa TIM 5G), the revolutionary effects of 5G in different sectors such as education, health, safety, smart cities and the connected home, among others. We
will continue to tactically address our brand’s other two pillars, quality (focusing on the current 4G network) and user experience, through the year.
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Advanced Technology and Innovation Center
In 2017, we set up TIM Lab, a multifunctional test bed environment for evaluation of innovative technologies, products and services, assessing their functional efficiency and performance requirements, and development of new models and solutions. This endeavor brings engineers, researchers and technicians together to ensure effective assessment, and serves as an open space for new opportunities, leading innovation for the Brazilian telecommunications market and acting as a national reference for R&D activities.
TIM Lab performs a strategic role in supporting service assessment and innovation activities. These projects support TIM’s network evolution and tackle certain important business and market needs, including the evaluation of new generation networks, future Internet applications, projects with positive social and environmental impacts and open innovation initiatives.
In this sense, TIM has also joined the Telecom Infra Project, or TIP, an initiative founded by Facebook and other companies to create a new approach for building and deploying telecommunication network infrastructure, with TIM Lab as the first TIP Community Lab in Latin America. In addition, since 2017 TIM Lab has also participated as one of the GSMA Mobile IoT Open Labs since 2017, a community where companies developing solutions over cellular low power wide area networks can work with experts on their projects.
Among the technologies assessed and approved at the TIM Lab environment are certain extremely important technologies to support the network evolution, including 700MHz LTE, IP multimedia networks (voice over LTE, video over LTE, WiFi calling services, completely laid out functional blocks, and enabled by an IP multimedia subsystem platform), network functions virtualization, or NFV, 4G RAN sharing, NB-IoT, Defense Wavelength Division Multiplexing, transport network and power saving features and solutions. In 2019, TIM launched its nationwide 4G NB-IoT network in 700MHz, covering over 3,200 cities.
The only Brazilian telecommunications company listed on the Novo Mercado and member in various other company-ranking indices.
Since our listing on the Novo Mercado in July 2011, we are the only company in the Brazilian telecommunications sector listed on this segment of the B3. As part of our listing on the Novo Mercado, we are required to comply with heightened requirements relating to corporate governance and the disclosure of information to the market. As part of our strong commitment to these principles, we made our financial results meetings available by teleconference, smartphones and tablets, in addition to computers. We believe that the listing on the Novo Mercado provides greater liquidity and value for our shares and allows us greater access to international markets, promotes the strengthening of our corporate image and increases confidence in us, in addition to reaffirming the long-term commitment of Telecom Italia and its subsidiaries, or the Telecom Italia Group, in Brazil. We believe listing on the Novo Mercado also aligns the interests among our controlling and minority shareholders with respect to voting rights, tag along rights and dividend policy.
In addition, we belong to a select group of companies comprising the portfolio of the Corporate Governance Index and the B3 Tag Along Stock Index, comprised of companies that have committed to adopt better co-sale protection to minority shareholders, have actively traded in 30% of the trading sessions and do not constitute a penny stock. In 2019, we were listed for the twelfth consecutive year as part of the portfolio of the Corporate Sustainability Index of the B3, an index comprised of companies that have a strong commitment to sustainability and social responsibility. In January 2019, TIM was selected for the seventh year to join the portfolio of the Carbon Efficient Index, or ICO2, of the B3, with the commitment to measure, disclose and monitors its greenhouse gas, or GHG, emissions. As part of its commitment to society in addressing climate change, TIM conducts periodic mapping of the sources of emissions in its activities. The Company is able to do so by preparing annually a GHG inventory in accordance with the guidelines of the GHG Protocol (which sets the global standard for how to measure, manage, and report greenhouse gas emissions). In August 2019, we received for the seventh year the gold seal of Greenhouse Gas Protocol, the program of the FGV Center for Sustainability, which aims to foster corporate responsibility with respect to greenhouse gas emissions.
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Highly qualified and experienced executives and controlling shareholder support.
We have a team of highly qualified executives, widely recognized in the industry and possessing extensive experience in telecommunications markets in Europe and emerging countries. Our executive compensation policy seeks to align the interests of our executives with those of our shareholders, through variable compensation plans and stock options that reward good performance and the accomplishment of certain goals, as well as provide for improved executive retention.
Our controlling shareholder’s support in our operations is further demonstrated through the sharing of know-how and best practices and development of new solutions for networking, marketing and finance, which are rapidly rolled out under a “plug & play” strategy, under which network innovations may be developed by our parent company first in other regions and then implemented with us.
Strong financial position
With consistent financial results in recent years, including the highest earnings before income tax, depreciation and amortization, or EBITDA, margin in the telecommunications sector in Brazil, according to our internal analysis, we believe that we have a strong cash flow, a solid financial position and a low relative debt to EBITDA ratio. In this scenario, we understand that we are in a strong position to take a significant role in potential future consolidations in the market and/or to have a competitive position in important frequency auctions in the years to come.
Our Strategy
Our forward-looking strategy for the Company is based on the five strategic fronts set forth below, each of which is focused on the Company’s main stakeholders (customers, employees and shareholders), and which, together, are aimed to redesign the customer experience and make TIM the best choice by value in the market, supported by its position as the leader in the mobile ultra-broadband and its array of innovative offers:
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Move from volume to value: Move from a volume strategy to a value-based approach, sustaining a healthy mobile business growth by leveraging customer experience;
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Improve efficiency: Transform to an exchange to exchange, or E2E, operational model in order to improve cash costs, leveraging digital, automation, and evaluation of make-or-buy business models, which allow us to determine whether to carry out an activity internally or outsource it based on productivity;
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Monetize beyond the core: Carve out new revenue streams from alternative business models, such as mobile financial services and mobile digital advertising, aiming at the monetization of our customer base;
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Enhance technology and operations: Address structural challenges and prepare our technology and operations for future developments (i.e., 5G network and data monetization), with a focus on differentiation and efficiency; and
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Explore fixed broadband opportunities: Address, from a financial perspective, the growth of and untapped demand in the ultra-broadband market, leveraging not only the customer experience but the returns on invested capital.
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All five strategic pillars mentioned above are directly related to our commitment to the user experience, which is one of our three foundational pillars of the TIM brand (also including innovation and quality). This is the main objective of the proposed structure in which the customer is the center of decision-making. These pillars for the basis of the strategies described below.
Protecting the value of our prepaid customer base and aiming at the growing postpaid segment, shifting focus from absolute market share to revenue share, and strengthening our existing customer base.
As mentioned above, the Brazilian mobile telecommunications market is facing an overall reduction in the number of prepaid customers, as users which previously held multiple SIM cards are consolidating to one single
SIM card, the reduction of interconnection charges, which allow companies to offer plans with off-network calls at the same price of on-network calls and the increase of use of OTT solutions to make calls at no extra cost. In connection with this trend, our strategy is to be chosen as the single SIM provider for the prepaid consumer market by providing offers that are attractive and valuable to customers and maintaining our reputation for quality and innovation. For the prepaid consumer market, our key priority is to offer simplification to improve customer experience with continued evolution of digital channels, while for the postpaid consumer market, our plan is to grow based on a “Mobile Challenger” approach pushing migration from prepaid, leveraging the benefits of 4G coverage leadership and establishing a customer long-term relationship driven by loyalty initiatives. To support this strategy, we are also implementing new offers, new handset strategy and initiatives in our sales channel model, including a more efficient regional approach.
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In the business to business market, we intend to leverage consumer offers and channels in order to gain market share in the small and medium business, or SMB, segment, as well as to launch a new mobile offering focused on micro and small businesses. We are also pursuing the development of targeted markets such as the Internet of things, or IoT, and the machine-to-machine market, or M2M, beyond simple connectivity, and evaluating business opportunities for the application, using the 5G network, of mobile application and fixed wireless access. Moreover, we are repositioning our sales channel strategy in order to increase not only efficiency but also sales productivity. Our growth strategy is mainly focused on addressing the potential for mobile Internet in the Brazilian market, particularly increasing mobile Internet penetration and data traffic. We believe mobile operators are in a strong position to address the demand for broadband in Brazil, with the ability to provide flexible price plans affordable to the majority of the Brazilian population. The lack of fixed infrastructure is still an issue for accessibility to fixed broadband, especially in suburban areas, making mobile coverage more suitable for such customers without broadband access. In addition to providing affordability and coverage advantages, mobile operators appeal to the new cultural demand for Internet connectivity at all times and in all places.
In addition, our strategy also involves positioning TIM as a partner of our existing customer base, by increasing their loyalty by offering exclusive products to existing customers, focusing on Value-Added Services in our offers, and by differentiation in our products and services. Value-Added Services represent an important part of the TIM strategy, as it is already a relevant market and has high growth rates with the potential to increase revenue streams. Such services are generally launched through a partnership with an established OTT player. We believe the foregoing strategies will allow us to strengthen customer loyalty without requiring us to incur higher costs, as increased traffic within our own network does not significantly increase our operational costs. We are also investing in new channels, to bring new customers to the company and to enhance each customer’s experience. We are constantly seeking new customers through new marketing efforts and promotional initiatives. Another important growth factor is expected to come from our digital strategy evolution, with an increased role in the growing M2M and IoT ecosystem, exploring new revenues opportunities including being a platform provider (analytics, big data, mobile advertising, etc.) and a content offer aggregation to support mobile and fixed service revenue growth. Capitalizing on fixed-mobile substitution in voice and traditional services.
We seek to capitalize on the existing opportunity of fixed-mobile substitution in voice and data traffic and encourage the use of mobile devices, rather than landlines, for long distance communication and Internet. We believe that the main advantage of our product offerings is that our customers are able to use our growing mobile network.
In the voice market, this strategy has been successful in part due to the limited service offerings of other long distance carriers in Brazil and the acceleration of fixed-mobile substitution. We have become a market leader in long-distance telecommunications, based on our market share. Fixed-mobile substitution is still evident in Brazilian market, as fixed telephony operators have experienced declining revenues. Since we are primarily a mobile operator with robust network infrastructure, the impact of any reduction in the fixed telephony market does not have a material impact on our performance, and we therefore encourage the acceleration of fixed-mobile substitution, which in turn increases demand for our services.
As already mentioned, TIM is also targeting the residential broadband market through its 4G mobile broadband network, using fixed wireless access technology, connecting homes to the Internet by using a router that connects to our 4G mobile network. We believe such product can be suitable especially for areas with poor fixed broadband
infrastructure as our 4G coverage is growing rapidly. We are also evaluating the use of the 5G network to provide fixed wireless access solutions.
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Providing Internet access to everyone.
We intend to provide universal Internet access to an increasing number of individuals, offering our prepaid and postpaid customers competitive data usage plans through wireless handsets or other data devices (e.g., tablets, wearables, etc.). Our focus on increased data usage among our customers is also influenced by our ability to effectively manage our handset and accessories sales, with a primary focus on smartphone models that provide for quality Internet access at a low cost. This approach has allowed us to offer our services at a highly competitive price, offer convenient payment methods, meet market demand and allow for opportunities for innovation. The result of this strategy can be seen in the increase in our number of data users and in smartphone penetration, especially in 4G. Leading mobile Internet growth in our sector is a key pillar of our strategy, since we see this as the most important market in terms of growth and size in the foreseeable future. Our marketing efforts have also been designed to stimulate Internet usage and leverage our 3G and 4G networks by providing for suitable and affordable postpaid and prepaid Internet plans.
Construction of a unique infrastructure network in the Brazilian market and improving our network
We are committed to developing a robust network infrastructure capable of serving our customer base and anticipating new trends and technologies in the industry. The development of this infrastructure requires both organic (planning and infrastructure development projects for the existing network) and inorganic (acquisitions) investments. As part of our strategy to focus our investments in infrastructure, we acquired Intelig (now known as TIM S.A.) in December 2009, in order to establish our own fiber optic network and develop automation projects. We also acquired the company formerly known as AES Atimus (later TIM Fiber, which was merged into TIM Celular in 2012, and TIM Celular was merged into TIM S.A. in 2018) in 2011 to strengthen and expand our fiber optic network.
Besides improving our core infrastructure, TIM has been rolling out an aggressive plan for 4G coverage, which has placed TIM as the undisputed leader in 4G coverage in Brazil, achieving more than 3,477 cities with 4G technology in 2019, considerably ahead of its competitors. This positions TIM as having the best coverage and the best mobile broadband technology, creating the possibility of an improved market position, particularly for high-end customers. Moreover, TIM has also been strategically investing in 3G technology, achieving more than 3,200 cities covered in 2019. In order to improve our network coverage in an efficient way, without raising investment levels, TIM has executed network sharing agreements during 2019 with other telecommunications providers.
Expansion into new businesses and continued strength in recently expanded sectors.
TIM Live offers high quality ultra-broadband, with high-speed data connection varying from 35 Mbps through 2 Gbps (2,000 Mbps) downstream and 500 Mbps upstream speeds, currently operating in more than 25 cities, including the country’s biggest cities, Rio de Janeiro, São Paulo, Salvador, Goiania, Manaus and Recife.
In 2019, we had a base of 566 thousand clients, covering 5.5 million addressable households, 290 optical line terminations (gigabit passive optical networks) and 3,157 multi-service access nodes in the cities mentioned above. We plan to continue expanding our coverage in Rio de Janeiro and São Paulo states throughout 2020 and accelerate our deployment of fiber (backbone, backhaul and fiber-to-the-home) with fiber-to-the-home offered in selected regions. Our success with TIM Live has resulted from a strategy of transparent communication and a commitment to deliver the services that the consumer actually purchased, which differentiates us from local market practice.
Sales and Marketing Strategy
Our recent sales and marketing strategy has been characterized by:
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a focus on improving our positioning towards high value consumers, by offering a variety of plans bundling voice, data packages, and certain free access to applications, as well digital Value-Added Services (music, e-reading, video streaming). The approach for this segment is driven by the strategy of adding value for the customer base and providing users with a custom experience;
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strengthening of our strategy in respect of the migration of customers away from the prepaid segment, by focusing on recurrent offers instead of daily offers and therefore boosting consumption;
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a continuous evolution of our postpaid plans, within which we are pursuing a number of strategies, including: (i) a review of our offers in order to stimulate the sales of postpaid plans, with discounts in services and handsets, according to the commitment of the customers; (ii) add value, including Value-Added Services as part of our plans, without extra charges; (iii) creating new markets for postpaid plans, according to our customers’ usage profile; (iv) creating new opportunities for transitioning the higher spending prepaid and TIM Controle customers to postpaid; and (v) including unlimited voice calls at no extra costs in all postpaid plans and top Control plans. See “—Mobile Service Rates and Plans”;
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an effort to maintain our position as an innovator by introducing TIM Black Família, the first mobile plan in Brazil with the monthly Netflix fee included. The portfolio also includes the following on all family plans: large data packages to share with up to six lines, data rollover, international roaming (including seven days of unlimited WhatsApp and 30 minutes of voice) and a new app experience with many new functionalities, such as Internet control and self-care provisioning, which allows the owner of the contract to share Internet with the other lines through the app;
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a monetization process in respect of our postpaid customer base, leveraging ARPU, via a “more for more” strategy and end-to-end product offerings which result in higher revenue generation;
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maintaining of TIM Beta offers in order to develop brand loyalty as well as profitability and improve customer satisfaction. New offers are charged per week or per month and deliver a higher data package for users who achieve high scores in the gamification, which consists of the use of games dynamics to give rewards to customers, and that is exclusive to Beta users; and
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a restructuring of our SMB segment, targeting the growth of the overall sales force in order to boost mobile sales. This strategy will continue in order to meet customer needs and achieve alignment with industry demands.
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Mobile Service Rates and Plans
In Brazil, as in most of Latin America, mobile telecommunications service is offered on a “calling party pays” basis, under which the customer generally pays only for outgoing calls. Additional charges apply when a customer receives or places calls while outside the customer’s “registration area,” which are the areas into which we divide our coverage areas.
Under our current authorizations, we are allowed to set prices for our service plans, provided that such amounts do not exceed a specified inflation adjusted cap. Anatel must ratify our basic and other service plans, but its focus is on compliance with the relevant regulatory rules rather than the prices charged. See “—Regulation of the Brazilian Telecommunications Industry—Wholesale Rates Regulation.” We charge different rates for our services, which vary according to the customer’s service plan. Per minute prices decrease as customers commit to purchasing more minutes per month. Prices can also vary depending on the type of call (for example, calls from other operators on fixed lines or calls outside the network for mobile calls) or the location of the parties on a call.
Anatel regulations require mobile telecommunications providers to offer service to all individuals regardless of income level. We recommend service plans that are suitable to each potential customer’s needs and credit history, such as our prepaid service plans described below. If a customer fails to make timely payment, services can be interrupted. See “—Billing and Collection.”
We offer mobile services under a variety of rate plans to meet the needs of different customer classification, including our corporate customers. The rate plans are either postpaid, where the customer is billed monthly for the
previous month, or prepaid, where the customer pays in advance for a specified volume of use over a specified period.
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Our postpaid plans include the following charges:
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monthly subscription charges, which usually include a bundle of minutes, data and digital contents, that are included in the monthly service charge;
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usage charges, for usage in excess of the specified number of minutes included in the monthly subscription charge; and
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additional charges, including charges for Value-Added Services and data services.
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Certain plans include the cost of national roaming and long distance in the price per minute so that all calls within Brazil cost the same amount per minute. Some postpaid plans are designed for high- and moderate- usage subscribers, who are typically willing to pay higher monthly fees in exchange for minutes included in the monthly service charge while other plans are designed to satisfy the more limited needs of low-usage postpaid subscribers. We also offer customized services to our corporate clients, which may include local call rates between employees wherever located in Brazil.
We offer a single prepaid plan with promotional offerings, which does not include monthly charges. Prepaid customers can purchase a prepaid credits plan that may be used for calls, data and additional services, based on the specific customer’s needs. We have agreements with large national retail store chains, in addition to partnerships with regional retail store chains, to offer recharging online and by WhatsApp. Customers can also recharge straight from their mobile handsets using credit cards.
Consumer Plans
In 2019, we continued to improve our positioning towards high value consumers, offering a variety of plans bundling voice, data packages and free access to certain applications, as well digital Value-Added Services (music, e-reading, video streaming). The approach to this segment is driven by the strategy of adding value for the customer base and ensuring users a premium custom experience.
Within the consumer business, our main plans include:
Prepaid Plans
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TIM Pré TOP: launched during 2020, the TIM Pré TOP plan was created in order to provide customers with a full yet simplified experience by adapting consumption according to balance and recharge and increasing benefits (unlimited network calls, unlimited calls for other carriers using code 41, adaptable data packages, SMS and OTT).
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TIM Beta: plan marketed to young customers, charged per day for voice (to TIM numbers), SMS and mobile Internet services or weekly and monthly service bundles. The plan works with a referral mechanism. A new member can join only if referred to by existing members.
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Postpaid Plans
In the higher value postpaid segment, we have maintained our position in the market as an innovator and disruptor with our new TIM Black Família plan, discussed above, improving our portfolio by offering large shared data packages with monthly video streaming subscriptions, such as Netflix, already included in the fee.
TIM Black Família plans start at R$199.99 for an entry level plan with unlimited off-network calls, 30 GB shared data package (for one main line and one dependent), and unlimited data for OTT applications such as WhatsApp, Facebook and others. The main offer is set at R$269.99 (for one main line and two dependents) with unlimited off-network calls, 60 GB shared data package, Netflix monthly fee included, and unlimited data for OTT applications such as WhatsApp, Facebook and others.
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Control Plans
Our Control plans are a hybrid between our prepaid and postpaid plans, with fixed price billed to the customer on a monthly basis, either via credit card or digital account. Once customers of Control plans have reached the limit of their data plan, the data transmission is no longer available and the user has two options: (i) to repurchase a data package or upgrade to higher tariff plan or (ii) to wait for the next data period to commence, which varies by plan, at which point his data availability and usage limit are renewed in full. Postpaid customers can also purchase a data package to navigate in full speed but the usage is not blocked when he reaches the limit of his data package.
TIM Controle plans start at R$44.99 with unlimited on-network calls and 25 minutes of off-network local calls and 2.5 GB Internet. The main offer in the TIM Controle portfolio (which has a commercial focus) is set at R$64.99 with unlimited calls, 4.0 GB Internet and unlimited data for OTT applications.
We are seeking to increase customer base loyalty within the Controle segment by offering discounts for a 12-month contract; this type of offer allows TIM to be more competitive while taking a selective and rational approach. We also offer an innovative unlimited data “plug in” at a price of R$20.00 for use of social networks, and give customers the opportunity to “try and buy” this social network plug in for three months. We launched a new higher tariff plan within TIM Controle set at R$79.99 with unlimited access to social networks, 5.0 GB Internet and unlimited calls in order to encourage customers to upgrade after the try and buy period.
Corporate Plans
In 2019, we continued to improve our positioning towards the large companies as potential clients, offering a variety of corporate solutions for mobile or fixed services (both voice and data), as well as Value-Added Services and mobile-to-mobile services. The approach for these top clients are driven by customized solutions and a premium customer service focus.
In the SMB segment, we have positioned our core offering targeting the “prosumer” market, or those individuals who both consume and produce a product. “TIM Black Empresas” has become the brand for the SMB portfolio, delivering unlimited voice calls and a variety of data packages, consistent with its strategy of providing “lots of minutes and lots of Internet, across all operators and anywhere in Brazil.” In addition to mobile connectivity, relevant Value-Added Services have been added to the main “TIM Black Empresas” offer in order to empower our business customers during their progress towards digital transformation, such as: cloud storage and backup, a website and online store builder, sales/field force automation and productivity apps. Those complimentary services were built based on revenue sharing agreements through strong partnerships with UOL, Fs, Datamob, Prouser and Deezer, that supports our aim to become our customers’ business partner rather than a pure connectivity provider.
Additionally, TIM commenced an ambitious endeavor in 2018 to bridge the connectivity gap in Brazilian rural areas in partnership with the agricultural industry. As a leader in 4G coverage, TIM already had agribusiness customers, but sought to enable the digitalization of the industry and to offer innovative solutions in order to increase its productivity with automation, control and new technologies. We joined major companies within the sector to create ConectarAGRO, a customer-focused initiative to expand connectivity to all rural areas of Brazil, increasing productivity and transforming the lives of those who live in these regions. The initiative has reached its 2019 goal of 5 million connected hectares and expects to progress further in 2020.
Value-Added Services
We are constantly seeking to increase value to our customers through innovative offers and products, and 2019 was no exception. We offer, directly or through agreements entered into with third parties, Value-Added Services in varied categories, such as education, music, reading, games, videos and social networks. Our most relevant change regarding Value-Added Services in 2019 was the improvement of our portfolio through additional services provided by new strategic partners. For 2020, we intend to continue to implement this strategy in a wider array of products, to introduce new types of Value-Added Services into these bundles, and to launch a new strategy to sell stand-alone Value-Added Services offers which will focus on aligning clients with Value-Added Services offerings.
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Financial and Other Services
In 2019, we continued to develop this business as well as the insurance services we relaunched in 2018 with a new portfolio of services, which allow us to take a broader approach to this market. For 2020, we intend to develop new partnerships with Brazilian fintechs in order to provide agility and innovation to our customers.
Digital Channels
In 2019, we focused our efforts in the evolution of digital channels (including public and logged web sites, self-caring applications and e-commerce portals) in order to deliver new services, provide better customer experience and operate with more efficiency. Digital channels usage volume has increased significantly in 2019, with more visits in the public website and increases in the total sales and users of the Meu TIM application as compared to 2018.
In addition, we are able to interact with our customers through WhatsApp, a channel that is already integrated into their digital life. We are the first Brazilian operator to close a commercial contract to use WhatsApp Business, which allows communication between companies and customers in a simple and easy way.
Customer Service
In order to serve our customer base, almost 55 million customers, we aligned the insourced/outsourced ratio of our internally managed customer service operations to our outsourced customer service operation to the best practices of Brazilian telecommunications business. We operate through 14 customer care centers, two of our own and twelve outsourced, comprising around 11,730 customer service representatives (of which 2,340 are the purpose of offering dedicated to provide the best options in terms of offers and services to our multi-customer base). Our high value customer service and core or critical processes are maintained within our internal customer care centers.
As of December 31, 2019, we had more than 11.8 thousand points of sales through premium shops and dealers (exclusive or multi-brand) and consolidated partnerships with large retail chains. This figure includes 161 of our own stores. In addition to these retail stores, our customers have access to prepaid phone services through supermarkets, newsstands, and other small retailers, totaling more than 220 thousand points of sale throughout Brazil.
For the corporate market, TIM Brasil has more than 536 third-party business partners and 112 employees focused on serving small- and medium-size companies and a direct sales force team of 86 employees focused on large companies.
Throughout 2019, an important aspect of our customer service was digital customer service such as our mobile application Meu TIM and the Company’s website. The digital channels are also gaining relevance in customer self-caring, top up of prepaid customers and upselling of services. In addition to being a better customer experience due to the quick response it provides, digital channels also allow TIM to reduce costs such as customer service operations and sales commissions.
In 2019, we worked to keep our “Customer Experience” foundational pillar as a focus (see “—Our Strategy”), creating initiatives that sought to put the customer as the center of decision-making. The approach used to promote this cultural transformation was guided by the relationship between customer and employee.
We have evaluated and taken action to improve the experience and professional development of our employees, with educational projects to promote engagement and insight. These efforts strengthened the bonds between an employee’s business functions and the products and services they deliver to the customer. The impact was noticeable in our Organizational Climate Survey, a study performed by consulting company Korn Ferry, considering several companies across the country, in which our employees’ performance in respect of “Quality and Customer Focus” improved by 4%, from 2018 to 2019. Compared to the other companies that also use this survey, TIM is 12% above average regarding this indicator.
The business area responsible for supporting these initiatives was divided in three sections: Design, Execution and Monitoring.
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The Design area created a policy with “Customer Experience” guidelines. This document defined expected behaviors and patterns in communication and interactions with customers, outlined a monitoring model, as well as refactored the products and services development cycles, to better cover all elements of Customer Experience.
The Execution area sought to solve legacy issues, with many of them concluded, which represented the efforts in the Customer Experience governance plan. These actions were grouped on four strategic pillars:
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Customer Centric: being customer oriented, understanding their needs, the relationship and the value proposition they expect when interacting with the Company;
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User Experience: understand the perceptions and reactions of our customers, including their emotions, beliefs, preferences, physical and psychological responses, as well their behaviors before, during and after they use our products, offers and services;
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Customer Monitoring: making use of tools and techniques such as big data and predictive analytics to extract value from customer information, and to identify opportunities in revenue increase, reduced costs and improved quality;
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Crew Experience: With the understanding that our employees are key to create great customer experiences, empower our employees so that it is clear we are a consumer oriented organization;
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In addition, we continued to use the so-called “Net Promoter Score” as a fundamental key performance indicator to measure customer experience with our call center. There is an ongoing project to expand this survey to other of our customer service channels.
We have also sought to maximize customer satisfaction through improvements in our processes and systems, including customer journey mapping, where employees are invited to assume the customer perspective using empathy maps and design thinking tools. The goal of using these methods is to reduce customer effort, increase customer success and to ensure positive emotions towards TIM. We also work in teams to resolve critical issues and implement improvements in processes and systems.
We also enhanced our interactive voice response channels to include more customer oriented services.
We completed the migration of prepaid and postpaid consumer back office services (front end was implemented in 2015) to the Siebel customer relationship management, or CRM, platform. The migration to the Siebel system from legacy systems for corporate clients is still ongoing.
Lines of Revenue
Our revenues from mobile and fixed services includes: (i) monthly subscription charges, (ii) network usage charges for local mobile calls, (iii) roaming fees, (iv) interconnection charges, (v) national and international long distance calls, (vi) Value-Added Services, and (vii) co-billing. Additionally, we have revenues from sales of products (mobile handsets and accessories).
Monthly Subscription Charges
We receive a monthly subscription fee under our postpaid mobile plans, which varies based on the usage limits under the relevant plan.
Network Usage Charges
We divide our coverage areas into certain areas defined as “home registration areas.” Calls within the same home registration area are considered local calls. Each of our customers is registered as a user of one of our home registration areas.
As determined by Anatel, our usage rate categories for local mobile services on a prepaid or postpaid basis are as follows:
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VC1 (local rate). The VC1 rate is our base rate per minute and applies to mobile / fixed or mobile / mobile calls made by a customer located in the customer’s home registration area to a person registered in the same home registration area.
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AD. AD is a per-call surcharge applicable to all outgoing calls or incoming calls made or received by a customer while outside such customer’s home registration area.
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VU-M. VU-M, also known as an interconnection rate or mobile termination rate, is the fee another telecommunications service provider pays us for the use of our network by such provider’s customers, in this case for local calls. See “—Interconnection Charges.”
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Usage charges are for minutes in excess of those included as part of the monthly subscription charge under the relevant postpaid plan.
Roaming Fees
We receive revenue pursuant to roaming agreements we have entered into with other mobile telecommunications service providers. When a call is made from within our coverage area by a client of another mobile service provider, that service provider is charged a roaming fee for the service used, be it voice, text messaging or data, at our applicable rates. Similarly, when one of our clients makes a mobile call when that customer is outside our coverage area using the network of another service provider, we must pay the charges associated with that call to the mobile service provider in whose coverage area the call originates at the applicable rate of such mobile service provider.
Automatic national roaming permits our customers to use their mobile telephones on the networks of other mobile service providers while traveling or “roaming” in the limited areas of Brazil not covered by our network, complementing our current mobile coverage. Similarly, we provide mobile telecommunications service to customers of other mobile service providers when those customers place or receive calls while in our network. Mobile service providers which are party to roaming agreements must provide service to roaming customers on the same basis that such providers provide service to their own clients. All such providers carry out a monthly reconciliation of roaming charges. Our roaming agreements have a one-year term and automatically renew for additional one-year terms.
Interconnection Charges
We receive interconnection revenues in connection with any call originating from another service provider’s network, mobile or fixed line, which is received by any mobile customer, of ours or of another provider’s, while using our network. We charge the service provider from whose network the call originates an interconnection fee for every minute our network is used in connection with the call.
We have entered into interconnection agreements with most the telecommunications service providers operating in Brazil, which include provisions specifying the number of interconnection points, the method by which signals must be received and transmitted, and the costs and fees for interconnection services. The interconnection among the networks of providers of telecommunications services of collective interest is mandatory and the interconnection agreements must be submitted to Anatel for approval. Nevertheless, even in the absence of ratification by Anatel, the parties to these interconnection agreements are obligated to offer interconnection services to each other.
The interconnection fees we were permitted to charge other mobile telecommunications providers, and which other mobile telecommunications providers charge us, have in the past been adjusted by inflation. In 2004, Anatel issued regulation establishing that the agency would determine rules for the calculation of reference rates for interconnection fees based on a cost model. Transition rules were defined and applied until, in July, 2014, by means of Resolution No. 639/2014, Anatel effectively issued the rule for the definition of reference rates for entities with significant market power, based on a cost model, for VU-M, as well as maximum rates for the termination of calls on TU-RL. Since the issuance of Resolution No. 639/2014, interconnection fees have been decreasing based on a specific glide path. See “—Regulation of the Brazilian Telecommunications Industry—Interconnection Regulation.”
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Long Distance
Telecommunications customers in Brazil are able to select long distance carriers on a per-call basis under the carrier selection program, or the CSP, introduced in July 2003, by punching in a two-digit code prior to dialing long distance. This regulation also increased the size of home registration areas, calls within which are local calls and, as a result, reduced the number of home registration areas.
For mobile customers, we offer long distance services throughout Brazil through our wholly owned subsidiary TIM S.A. (into which our then-subsidiary TIM Celular was merged in 2018). This service allows our mobile customers the option of continuing to use our service for long distance calls, which we believe strengthens our respective relationship and loyalty, and enhances the perception of our brand as a comprehensive mobile telecommunications service. Mobile customers of other service providers can also choose to use our long distance service.
Under this structure, a customer is charged the VC1 rates directly by us only for calls made by and completed to a number registered within that customer’s home registration area. Long distance calls, however, are charged to a customer by the chosen long distance carrier. Other long distance carriers, in turn, pay us a VU-M fee for any use of our network for a long distance call.
As determined by Anatel, our long distance usage rate categories are as follows:
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VC2. The VC2 rate applies to calls placed by a customer located in one of our home registration areas selecting us as the long distance carrier, on a per-call basis, to place a call to a person registered in another home registration area within the same wireless area recognized by Anatel (e.g., a subscriber registered in home registration area 11 calling another subscriber registered in home registration area 12 to 19);
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VC3. The VC3 rate applies to calls placed by a customer located in one of our home registration areas selecting us as the long distance carrier, on a per-call basis, to place a call to a person registered outside the same wireless area recognized by Anatel (e.g., a subscriber registered in home registration area 11 calling another subscriber registered in home registration area 21 to 99); and
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VU-M. VU-M is the fee another telecommunications service provider pays to us for the use of our network by such provider’s customers, in this case for long distance calls. See “—Interconnection Charges.”
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Co-Billing Services
Co-billing occurs when we bill our customers on behalf of another long distance service provider for services rendered to our customer by that carrier. Beginning July 2003, we started providing co-billing services to other telecommunication service providers operating in Brazil. The rates of such services are negotiated under the supervision of Anatel.
Sales of Product
We offer a diverse portfolio of handset models from several manufacturers for sale through our dealer network, which includes our own stores, exclusive franchises and authorized dealers. We are focused on offering an array of handsets, including essential and smartphones devices with enhanced functionality for Value-Added Services, mainly 4G equipment that provides Dual SIM, near-field communication, WiFi, Internet, Bluetooth and camera functionalities, while practicing a policy of increasing 4G smartphone penetration, focusing on high quality 4G smartphones to enhance the customer experience. Our mobile handsets can be used in conjunction with either our prepaid or postpaid service plans. In 2020, TIM will further its focus on postpaid and TIM Controle segments, offering to these customers discounts on 4G smartphones. Currently, we believe that supplies of mobile handsets are sufficient to satisfy demand, but also plan to expand our mobile handset portfolio to new devices focused on the customer experience, such as routers, other web devices and accessories.
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Billing and Collection
Our company-wide, integrated billing and collection systems are provided by a third-party vendor. These systems have four main functions: (i) customer registration, (ii) customer information management, (iii) accounts receivable management and (iv) billing and collection.
These billing systems give us significant flexibility in developing service plans and billing options.
Certain aspects of billing customers in Brazil are regulated by Anatel. For mobile and fixed telephones, currently if a customer’s payment is more than 15 days overdue, we can suspend the customer’s ability to make outgoing calls if preceded by a notification. If the payment is 45 days overdue, we can suspend the customer’s ability to receive incoming calls, also if preceded by a notification. For residential broadband, currently if a customer’s payment is more than 15 days overdue, we can reduce the speed of the customer’s broadband access and if the payment is 45 days overdue, we can suspend the customer’s broadband access. After 90 days from the customer’s payment due date, we generally discontinue service entirely, with a notification to the customer. Discontinuation of service is sometimes delayed, however, between 120 and 180 days after the due date for valued customers. The rules of suspension and discontinuation of fixed and residential broadband service are the same as those applied for the mobile service.
In March 2014, Anatel approved a single regulation for the telecommunications sector, with general rules for customer service, billing, and service offers, which are applicable to fixed, mobile, broadband and cable TV customers.
In order to avoid delinquency and discontinuation of service, however, we have invested in CRM models to identify customers with a higher propensity to early delinquency, or when a postpaid customer does not pay the first or second invoice, and also reinforced credit history checks for our customers prior to service activation. Although we continue to have one of the lowest delinquency rates in the segment, we noticed an increase in bad debt as a consequence of the expansion of the postpaid base of customers and the challenging economic environment. Our Express Plan has also proved to be an important tool to prevent early delinquency, since the payments are made by credit card.
Pursuant to Anatel regulations, we and other telephone service providers periodically reconcile the interconnection and roaming charges owed among them and settle on a net basis. See “—Lines of Revenue—Interconnection Charges” and “—Lines of Revenue—Roaming Fees.” Currently, the roaming reconciliation process is largely managed by industry sponsored groups, while the interconnection reconciliation process is primarily managed directly by us.
Seasonality
We have experienced a trend of generating a significantly higher number of new clients and product sales in the fourth quarter of each year as compared to the other three fiscal quarters. A number of factors contribute to this trend, including the increased use of retail distribution in which sales volume increases significantly during the year-end holiday shopping season, the timing of new product and service announcements and introductions, and aggressive marketing and promotions in the fourth quarter of each year.
Regional Overview
We offer GSM telecommunications services with a national reach to 95.2% of the urban population, which is one of the most extensive GSM coverage areas in Brazil, with a presence in 3,476 municipalities. We have 3G and 4G coverage available in 3,477 cities to more than 94% of the urban population of Brazil.
The following table shows information regarding Brazilian mobile telecommunications, at the dates indicated.
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As of or For the Year Ended December 31,
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Brazilian population (millions)(1)
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210.1
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208.5
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207.7
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Estimated total penetration (%)(2)(3)
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96.9
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109.9
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113.5
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Brazilian wireless subscriber base (millions)
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226.7
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229.2
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236.5
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National percentage subscriber growth (%)
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(1.1)
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(3.1)
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(3.1)
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(1) According to the last information disclosed by IBGE (July 2019).
(2) Percentage of the total population of Brazil using mobile services, equating one mobile line to one subscriber (December 2019).
(3) Based on information published by Anatel and IBGE/IPC Maps (December 2019).
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Our Network
Our wireless networks use 2G, 3G and 4G technologies and cover approximately 96% of the urban Brazilian population based on Anatel’s coverage criteria. In order to move toward 4G services, in October 2012, we acquired additional bandwidth in the 2,530-2,540 MHz and 2,650-2,660 MHz sub-bands, with national coverage, and the 450 MHz band in Espírito Santo, Paraná, Rio de Janeiro and Santa Catarina states.
Between 2007 and 2014, we acquired new RF authorizations used for 3G and 4G mobile telephone services at the 2100 MHz, 2500 MHz and 700 MHz bands. In September 2014, we invested approximately R$2.85 billion to acquire bandwidth in the 700 MHz range, aligned with our strategy of expanding our broadband and 4G service across Brazil. We began providing our services in the 700MHz range in 2016. See “—Regulation of the Brazilian Telecommunications Industry—Frequencies and Spectrum Background”. In December 2015, Anatel auctioned left over radio frequencies in the 1,800 MHz, 1,900 MHz and 2,500 MHz bands. We submitted bids for the left over lots of the 2,500 MHz band, in the 2,500-2,510 MHz and 2,620-2,630 MHz sub-bands – known as P-Band, which had originally been auctioned in 2012. This particular P-Band spectrum provides for 4G mobile services. We acquired the lots for Recife, in the state of Pernambuco (Region AR 81), and Curitiba, in the state of Paraná (Region AR 41), based on our bids which totaled R$57.5 million. The corresponding authorization terms were signed in July 2016. During 2017, several municipalities throughout Brazil had their analog TV signals switched-off, freeing up the bandwidths in those regions for 4G mobile services. In 2018, the analog TV switch-off schedule was completed in regions where it is necessary to clean up the 700 MHz spectrum for the LTE. Therefore, by September 2019, all municipalities were able to receive TIM’s expanded 4G coverage through the 700 MHz band. Throughout 2020, the entity created to ensure the spectrum cleanup, called the Entity for Administration of TV and RTV Channel Relocation and Digitalization Process, or EAD, is expected to fulfill the remaining auction obligations, concluding the relocations of broadcasters and the provision of interference solutions in order to complete the switch-off process and to make the spectrum fully available to mobile operators. See “—Regulation of the Brazilian Telecommunications Industry—Authorizations and Concessions.” In connection with the conclusion of the Reorganization whereby TIM Celular was merged into TIM S.A., see “—Item 4. Information on the Company—C. Organizational Structure,” TIM S.A. holds all of the authorizations previously issued in the name of other companies controlled, directly or indirectly, by TIM Participações.
RF authorizations are generally valid for a period of 15 years and renewable for 15 more, and our current authorizations will start expiring in September 2022 (for details on spectrum licenses and expiration dates see “—Regulation of the Brazilian Telecommunications Industry—Frequencies and Spectrum Background”). In the case of authorizations that cannot be renewed, current telecommunications law sets forth that the spectrum is returned to the Federal Government under Anatel’s management. This is why reviewing the General Telecommunications Law has meaningful impact for the sector, as the proposed updated law allows for subsequent and unlimited renewals of radio frequency authorizations of up to 20 years each, generating an environment possibly more conducive to long-term investments.
We consider the purchase of any frequency made available by Anatel for the provision of mobile services as a priority, since having available frequency is core to our business. In 2019, we made R$3,853 in investments, of which 93.4% of our capital expenditures were in infrastructure, primarily in 4G and 3G deployment, expansion and capacity enhancement of our optical transport networks, quality maintenance and enabling of fiber-to-the-site and the mobile broadband MBB programs.
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These investments allowed us to reach, by the end of 2019, the milestone of 3,272 cities with 4G coverage, or 94% of the country’s urban population. We are thus the leader in 4G coverage in Brazil among mobile telecommunications providers, both by number of cities served and percentage of population covered.
Our wireless network has both centralized and distributed functions, and mainly includes transmission equipment, consisting primarily of 13 thousand BTS in our GSM network, 16 thousand NodeBs (which provide connection between mobile phones and the network) for the 3G layer and 38.8 thousand eNodeBs for 4G network as of December 2019, considering site-sharing, hardware equipment and software installation and upgrades. The network is connected primarily by IP radio links and/or optical fiber transmission systems distributed nationwide.
Throughout 2019, we also expanded the installation of “Biosites” across Brazil, a cellular antenna shaped like a lamp post and designed to accommodate 3G and/or 4G transmission equipment, illustrating our focus on seeking innovative infrastructure alternatives to improve the quality of and our customers’ satisfaction with our services. Each Biosite is a multifunctional device, allowing not only for the installation of new 3G and/or 4G stations, but also modernizing streetlights in cities and reducing visual clutter, since the cellular antennas and their necessary equipment are self-contained within the post itself, without the need for an external or auxiliary engineering structure. Following the development of our Biosites at the end of 2019, we have 1,582 installed in 277 cities, the highest capacity of Biosites among Brazilian telecommunications providers, which we expect will aid in significant growth in coming years.
Another priority is developing our national network. In December 2019, we continued to increase the quantity of sites connected by optical fiber, contributing to an increase in data carried on our network as compared to 2018. The results are consistent with Anatel’s network quality requirements, and with TIM retaining its solid performance in 2019. Since national coverage and quality of service has improved substantially over the last few years, Anatel has shifted its focus in recent years. Anatel is now concentrating its efforts on smaller geographic areas, particularly in those areas where service is still considered poor.
The AES Atimus Acquisition and consequent creation of TIM Fiber (which was merged into TIM Celular in 2012, and TIM Celular was merged into TIM S.A. in 2018) has improved our optical fiber (or fiber optic) network presence in the metropolitan regions of Rio de Janeiro, São Paulo, Salvador, Goiânia and Manaus. Our optical fiber network has capacity to offer high quality ultra-broadband service, available through our TIM Live service.
As of December 31, 2019, our optical fiber infrastructure is highlighted by the following characteristics:
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the presence of TIM Fiber (now TIM S.A.) services in 290 optical line terminations in the metropolitan regions of Rio de Janeiro, São Paulo, Salvador, Goiânia, Manaus and Recife with continued expansion in Rio de Janeiro and São Paulo, where our TIM Live service is available;
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an extensive wide covered area network covering more than 5.4 million households by address and approximately 3.2 thousand multi-service access nodes and 290 optical line terminations, which is a network element that provides connection with the core network.
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Our switching exchanges and intelligent network platforms enable us to offer flexible, high quality voice service at extremely competitive prices. Our satellite network covers distant areas of the country and is being expanded and renewed to provide high private service.
As a general matter, telecommunications operators’ networks have tended to be designed, deployed and managed according to a vertical architecture model referred to as “end-to-end,” where the hardware and software are proprietary and dedicated to each network function. With the growing demand for differentiated services, the need for physical space, energy and speed have become critical and, consequently, companies’ capital expenditure and operating costs have tended to increase.
Such network architecture based on monolithic network elements requires a long time for development and deployment, impacting directly the time-to-market for launching new products or services and, consequently, reducing the generation of new revenues.
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NFV is the new architectural paradigm that aims to address the infrastructural network transformation as a key step in the evolution of the implementation of new systems and network infrastructure, as it adopts the concept of consolidating standardized commercial off-the-shelf hardware elements that are available in virtual environments for shared use across various applications, accelerating the ability to deliver services, reducing costs and improving customer satisfaction. TIM aims to capitalize on the proposed benefits from such technology.
TIM understands that the NFV and the sharing of resources and equipment is the way to establish an economically more efficient structure, by reducing investment and/or operational costs while also reducing the time-to-market for launching new offers (an increasingly relevant factor in a competitive scenario).
By the end of 2019, we have deployed 10 new virtualized network datacenters located in Rio de Janeiro (2), São Paulo (2), Fortaleza, Salvador, Brasília, Belo Horizonte, Belém and Curitiba, in addition to 11 new virtualized Edge network datacenters located in Campinas, Porto Alegre, Natal, João Pessoa, Florianópolis, Blumenau, Maringá, Londrina, São Luis, Goiânia and Ponta Grossa. Some of our core network functions are already running in a virtualized fashion through these network datacenters. The migration of additional network functions to a virtualized datacenter will be based on a roadmap of virtual network functions, or VNFs, respecting the maturity of each network function.
Based on the efficiency and on the robustness of the technologies used in the NFV and IP networks, in virtualizing its core network, TIM is also optimizing capital expenditures.
Therefore, our commitment to solid infrastructure and quality improvement allow the Company to develop projects such as: (i) unification of the functions of an Intelligent Network core signaling network and network data base through Unified Data Consolidation and (ii) the evolution of security platforms such as Session Border Controller that accomplishes IP interconnection in with other operators. We expect from these and other projects to be able to reduce our operating expenditures by decreasing leased lines and infrastructure sharing, simplifying maintenance processes and architecture/topology, increasing resilience even in conditions of disaster recovery and improving the customer experience by increasing the speed in which calls are set up and data is transmitted and improve the amount of time needed to make customers profiles available in our data base.
In 2011, TIM implemented a Policy and Charging Control, or PCC, platform in accordance with the standards of the 3rd Generation Partnership Project, or 3GPP. This PCC made it possible for us to develop a brand new means to control fair use, as we are now able to reduce a given subscriber’s speed, block usage and offer additional data packets to maintain maximum speeds after the subscriber’s existing data packet is depleted. Since then, several innovative data offers have been launched that promote the usage of data, social media and streaming. This PCC platform is now evolving to an NFV model, which brings modernization and high scalability to support the increasing demand of mobile data and reduces the time-to-market when launching new data offers.
In 2014, TIM started to change our Mobile Packet Core platform to a Unified Packet Core based on the most advanced 3GPP Evolved Packet Core standards, providing a coordinated seamless mobility management in a HetNet access environment (full multiple-access nodes for 2G/3G/4G/Femto/WiFi) in order to support the huge increase in data demand in the Brazilian telecommunications market, as discussed elsewhere throughout this annual report on Form 20-F. The Evolved Packet Core platform is also evolving to an NFV model, based on 3GPP’s Control and User Plane Separation of EPC nodes. This enables flexible network deployment and operation, by distributed or centralized deployment and the independent scaling between control plane and user plane functions.
In 2017, TIM started to implement our Voice over LTE/4G, or VoLTE, platform following 3GPP standards, providing better voice quality and 4G service continuity, avoiding the need to resort to 2G/3G during voice calls. The VoLTE platform is also evolving to an NFV model, based on 3GPP’s nodes.
In 2018, TIM implemented a new security system to access its new and legacy platforms, called “Secure Password.” It uses a secure shell, or SSH, security protocol, monitors attempts of non-standard access and generates related warnings (IAM-Identity Access Management). This process involves password encryption and a logical safe that only grants recovery to authorized users while also granting and recording accesses through video and text devices. More specifically, it features: (i) password authentication with a maximum validity of 90 days; (ii) authorization through a login administration interface; and (iii) audit (logs) generated by the system, allowing the
traceability of user actions from the beginning to the end of each operation. The system also sends logs to a centralized system as a historical database. Additionally, TIM has a plan to mitigate network risk in case of unexpected events on a macro scale that prioritizes the critical network infrastructure based on a risk map, or the Network Resilience Plan. The Network Resilience Plan allows the Company to focus on the main issues, and these in turn become the basis for crafting short-, medium- and long-term mitigation measures in order to enhance the robustness of the network, even in case of unexpected events.
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Sources and Availability of Raw Materials
Our business and results of operations are not significantly affected by the availability and prices of raw materials.
Site-Sharing and Other Agreements
Site-Sharing Agreements
With the objective of avoiding unnecessary duplication of networks and infrastructure, Anatel allows telecommunications service providers to use other providers’ networks (long distance, backhaul and spectrum frequencies, among others) as secondary support in providing telecommunications services, with a focus on reducing costs and increasing the penetration of mobile services in Brazil. Therefore, we have allowed other telecommunications service providers in our region to use our infrastructure, and we have used other providers’ infrastructure, pursuant to site-sharing agreements with such operators.
Based on such Anatel policy, in November 2012, TIM Celular (which has been merged into TIM S.A. in connection with the Reorganization) formalized with Oi an agreement for the reciprocal assignment of their LTE networks (4G technology) in certain cities, which was approved by Anatel and the Administrative Council for Economic Defense (Conselho Administrativo de Defesa Econômica), or CADE, which is the Brazilian antitrust agency and has the mission to ensure free competition in the market, not only by investigating and ultimately deciding on the competitive matter, but also by disseminating a free competition culture.
In April 2014, TIM Celular (now TIM S.A.) and Oi entered into a new agreement to negotiate the joint construction, implementation and reciprocal assignment of parts of their respective GSM (2G) and UMTS (3G) network infrastructures in cities with less than 30,000 inhabitants, which was also approved by Anatel and CADE.
In July 2015, TIM Celular (now TIM S.A.), Oi and Vivo entered into an agreement for the reciprocal assignment of LTE network media (4G), similar to the agreement between TIM Celular (now TIM S.A.) and Oi in 2012, but also covering frequencies sharing. As with the prior sharing agreements, Anatel and CADE approved the agreement between the parties.
Also in 2015, TIM Celular (now TIM S.A.), Vivo, Claro and Oi filed with CADE a Term of Commitment with the objective of negotiating the joint contracting of one or more companies to carry out the construction, installation and provision of infrastructure in indoor environments (such as shopping malls) in several locations in Brazil, which was approved without restriction by CADE.
In November 2015, TIM Celular (now TIM S.A.), Intelig (now TIM S.A.) and Vivo filed an agreement to share UMTS network (3G) under a multiple operation core network, RAN sharing model which includes frequency sharing in certain cities based on their rural coverage obligations, which was also approved without restrictions.
In March 2018, due to the mediation process between TIM and Oi, a new RAN sharing agreement was executed, which changed the sharing modality described in the 2012 agreement (technological evolution from the multi-operator radio access network to the multi-operator care network) and included part of the 1,800 MHz radio frequency bands. CADE and Anatel approved the operation without any restrictions.
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On July 23, 2019, TIM S.A. and Telefônica Brasil entered into a memorandum of understanding, or the Vivo MoU, to start negotiations regarding: (i) sharing of single-grid 2G network; (ii) establishment of new infrastructure sharing agreements for the 4G network in 700Mhz, directed to cities with fewer than 30,000 inhabitants, which in the future may be expanded to larger cities; (iii) other network sharing opportunities in other frequencies and technologies; and (iv) other opportunities in efficiency and cost reduction in operations and network maintenance. We and Telefônica Brasil believe that the potential developments from the concepts set forth in the Vivo MoU would result in improved services at both carriers, as well as synergies and efficiencies in the allocation of investments and operating costs.
On December 19, 2019, pursuant to the Vivo MoU with Telefônica Brasil, two new sharing agreements have been entered into regarding: (i) the creation of a unique network in 2G technology; and (ii) a single-grid agreement that will result in an expansion of 3G and 4G networks and a network consolidation in small cities (with less than 30,000 inhabitants). These agreements are still under analysis by CADE and Anatel.
Our Operational Contractual Obligations
For more information on our material contractual obligations, see “Item 10. Additional Information—C. Material Contracts.”
Interconnection and Other Agreements
We have entered into interconnection agreements with most of the telecommunications service providers operating in Brazil. The terms of our interconnection agreements include provisions specifying the number of interconnection points, the method by which signals must be received and transmitted, and the costs and fees for interconnection services. Interconnection agreements must be submitted for Anatel’s approval. Nevertheless, even in the absence of ratification by Anatel, the parties to these interconnection agreements are obligated to offer interconnection services to each other. See “—Interconnection Regulation.”
Roaming Agreements
We have entered into roaming agreements for automatic roaming services with other mobile operators outside our regions. Automatic roaming allows our customers to use their mobile telephones on the networks of other mobile operators while traveling abroad or out of TIM coverage areas in Brazil. Similarly, we provide mobile services for customers of other mobile operators when those customers place or receive calls while visiting Brazilian cities with TIM coverage. We provide services for the clients visiting our network on the same infra-structure basis provided to our own clients. All of the mobile operators party to these agreements must carry out a monthly reconciliation of roaming charges with its roaming partners.
National Roaming Agreements
In 2017, Anatel required that TIM, Claro, Oi and Vivo guarantee the provision of mobile services (voice, SMS and data) in all cities with less than 30,000 inhabitants. The project started with trial service in 35 cities (8 for TIM, 9 for Claro, 9 for Oi and 9 for Vivo), which has already been implemented. Following the trial period in 2018, TIM has expanded its coverage to 613 new cities which means now its coverage encompasses a total of 2,519 cities.
International Roaming Agreements
We have international roaming agreements available in 202 different countries with 398 international operators that encompass 492 individual (PMNs) networks. These agreements include at a minimum voice service, and may be enhanced based on the technology available on the visiting network and can include voice, SMS and data (2G, 3G and 4G). Our international roaming agreements have steadily expanded in recent years. By the end of 2019, we expanded our 4G data coverage to 14 new networks, meaning now we offer 4G roaming in 57 countries, covering the main travel destinations for Brazilians.
In July 2019, an agreement was entered into among the Mercosur countries to eliminate international roaming charges among them, and instead charge users of mobile services (voice and data) traveling throughout the Mercosur countries according to the plan contracted in their home country, without additional charges. In Brazil, the
agreement must still be approved by the Brazilian Congress and will only be valid after two or more countries have ratified the agreement before the secretariat of Mercosur. In November 2018, Brazil also entered into a free trade agreement with Chile, which resulted in the end of international roaming between the two countries. This agreement is also pending approval by the Brazilian Congress. In 2020, Anatel is expected to set up technical groups to discuss the details of the implementation of both the Mercosur agreement and the Chile free trade agreement.
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Fraud Detection and Prevention
“Subscription fraud,” which consists of using identification documents or data personal information of another individual to obtain mobile services, is the main fraud relating to mobile, fixed and long distance service. We are focused on implementing prevention measures in our points of sales to avoid such subscription fraud. Examples of prevention measures include digital authentication for our sales front-end system, a strong training program, maintaining a blacklist of offenders to prevent fraud, analysis of the documentation presented and monitoring and identification of point of sale. We also work to detect and prevent fraud by frequently improving and updating our traffic behavior monitoring and subscriber data.
Our security operations management develops programs and strategies to mitigate fraud risks through macro business processes such as:
Network: Actions aimed to combat theft, robbery or damage of equipment and network infrastructure by the application of physical and electronic protections, such as equipment tracking, installation of protective security equipment, virtual and physical surveillance and intelligence analysis.
Investigations of Specific Incidents: These anti-fraud efforts are focused on the reduction of illicit activities. The program consolidates and analyzes all the facts related to known incidents in order to identify circumstances in which the Company’s services may be being used to perpetuate noncompliance with laws, codes and other policies such as extortion, pedophilia, aggression, theft, drug trafficking and harassment.
Personal Security: These efforts focus on the combined use of organizational, technical and human resources aimed at preserving the physical, intellectual and emotional integrity of the human resources of the group, ensuring compliance with the precepts pointed out in the security operations mission and focused on the foreign public on a visit to Brazil.
Commercial Security: These efforts seek to mitigate the losses resulting from theft and robbery of smartphones, among them the deployment of safes in the stores for the storage of high value devices in all stores, prioritizing street-front stores.
Security in Logistics: These efforts are directed to combat loss due to theft or theft of merchandise whether in transportation or storage.
Security Compliance: Active monitoring of the emergence of new legislation related to customer data security and related internal compliance efforts.
Taxes on Telecommunications Goods and Services
The telecommunications goods and services offered are subject to a variety of federal, state and local taxes (in addition to taxes on income), the most significant of which are ICMS, ISS, COFINS, PIS, FUST, FUNTTEL, FISTEL, CONDECINE and Corporate Income Tax and Social Contribution on Net Income, which are described below.
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ICMS. The principal tax applicable to goods and telecommunication services is a state value-added tax (Imposto sobre Operações Relativas à Circulação de Mercadorias e sobre Prestações de Serviços de Transporte Interestadual, Intermunicipal e de Comunicação), or ICMS, which the Brazilian states levy at varying rates on certain revenues arising out of the sale of goods and services, including certain telecommunications services. The ICMS tax rate for domestic telecommunications services is levied at rates between 25% and 35%. The ICMS tax rate levied on the sale of mobile handsets and other products such as modem and SIM cards averages between 17% and 20%. With respect to the sale of mobile handsets, among other goods, ICMS may be charged in a different tax regime, under which another taxpayer in the distribution chain of the goods (such as, for example, the manufacturer of the goods) is required to anticipate and pay ICMS amounts that would otherwise be due in other steps of the distribution chain. There is also an exception for certain handsets whose manufacturers are granted certain local tax benefits, thereby reducing the rate to as low as 7%.
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ISS. Since January 2018, the tax incidence over certain Value-Added Services has increased with the inclusion of those receivables within the ISS basis of calculation due to Law No. 157/2016, which is a municipality tax with rates varying from 2% to 5%.
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COFINS. COFINS is a social contribution levied on gross revenues. Since 2000, companies began to pay COFINS tax on their bills at a rate of 3%. In December 2003, through Law No. 10,833, COFINS legislation was further amended, becoming a noncumulative tax, raising the rate to 7.6% for most transactions. However, telecommunications services revenues, among others, continued to be subject to a cumulative basis at a rate of 3%. In 2015, Decree No. 8,426 came into effect, which restored COFINS on financial revenues at a rate of 4%, except for some types of financial revenues (for example, revenues from foreign exchange variations of exportation of goods and services, revenues resulting from foreign exchange fluctuations of obligations undertaken by the company, including loans and financing and revenues related to hedging transactions on stock exchange values, and revenues from commodities and futures exchanges or over the counter transactions and related to the operational activities of the Company).
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PIS. PIS is another social contribution levied at the rate of 0.65%, on gross revenues from telecommunications service activities. In 2002, Law No. 10,637 was enacted, making such contribution non-cumulative and increasing the rate to 1.65% on gross revenues, except in connection with telecommunications services, for which the method continues on a cumulative basis at a rate of 0.65%. In 2015, Decree No. 8,426 came into effect, which restored PIS on financial revenues at a rate of 0.65%, except for some types of financial revenues (for example, revenues from foreign exchange variations of exportation of goods and services, revenues resulting from foreign exchange fluctuations of obligations undertaken by the company, including loans and financing and revenues related to hedging transactions on stock exchange values, and revenues from commodities and futures exchanges or over-the-counter transactions and related to the operational activities of the Company).
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FUST. In 2000, the Brazilian government created the Fundo de Universalização dos Serviços de Telecomunicações, or FUST, a fund that is supported by a tax applicable to all telecommunications services. The purpose of the FUST is to reimburse a portion of the costs incurred by telecommunications service providers to meet the universal service targets required by Anatel (such as targets for rural and impoverished areas, schools, libraries and hospitals), in case these costs are not entirely recovered through the collection of telecommunications service fees and charges. FUST tax is imposed at a rate of 1% on gross operating revenues, net of discounts, ICMS, PIS and COFINS, and its cost may not be passed on to clients. Telecommunication companies can draw from the FUST to meet the universal service targets required by Anatel.
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In 2005, Anatel enacted Ordinance No. 7/05 requiring that FUST should be paid on revenues arising from interconnection charges since its effectiveness. A notice was issued deciding that we must adjust values on the FUST calculation basis in order to include interconnection revenues received from other telecommunications companies. A writ of mandamus was filed against Anatel to avoid the terms of Ordinance No. 7/05. The first level decision was issued in our favor. Such decision was challenged by Anatel and the Appeal will be judged by second level.
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FUNTTEL. In 2000, the Brazilian government created the Fundo para Desenvolvimento Tecnológico das Telecomunicações, or FUNTTEL, a fund that is supported by a social contribution tax applicable to all telecommunications services. FUNTTEL is a fund managed by BNDES and FINEP, government research and development agencies. The purpose of FUNTTEL is to promote the development of telecommunications technology in Brazil and to improve competition in the industry by financing research and development in the area of telecommunications technology. FUNTTEL Tax is imposed at a rate of 0.5% on gross operating revenues, net of discount, ICMS, PIS and COFINS, and its cost may not be passed on to clients.
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In 2013, Anatel enacted Resolution No. 95, which regulates FUNTTEL collection. As in the case of FUST, it requires that FUNTTEL be calculated based upon revenues arising from interconnection charges since its effectiveness. Sinditelebrasil, the Brazilian syndicate of telecommunications companies, filed a Writ of Mandamus against Anatel in order to compel Anatel not to apply Resolution No. 95/2013. An injunction was issued in our favor and a final decision is still pending.
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FISTEL. Fundo de Fiscalização das Telecomunicações, or FISTEL, is a fund supported by a tax applicable to telecommunications services, which was established in 1966 to provide financial resources to the Brazilian government for its regulation and inspection of the sector. FISTEL consists of two types of fees: (1) an installation inspection fee assessed on telecommunications stations upon the issuance of their authorization certificates, as well as every time a new mobile number is activated, and (2) an annual operations inspection fee that is based on the number of authorized stations in operation, as well as the total basis of mobile numbers at the end of the previous calendar year. The amount of the installation inspection fee is a fixed value, depending on the kind of equipment installed in the authorized telecommunication station. Effective in 2001, the installation and inspection fee is assessed based on net activations of mobile numbers (that is, the number of new mobile activations reduced by the number of cancelled subscriptions), as well as based on the net additions of radio base stations. The operations inspection fee equals 33% of the total amount of installation inspection fees that would have been paid with respect to existing equipment. The public funds raised from this installation fee are appropriated to either the Brazilian Communication Company, or EBC, or the Brazilian National Cinema Agency (Agência Nacional do Cinema), or ANCINE, in order to benefit Brazilian cinema industry. Also, Anatel charges the installation inspection fee when there is an extension of the term of validity of the right to use radio frequencies associated with the operation of the personal mobile service. The Company understands that such collection is unjustified and is challenging this rate in court.
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Corporate Income Tax and Social Contribution on Net Income. Income tax expense is made up of two components, a corporate income tax, or IRPJ, on taxable income and a social contribution tax on net income, or CSLL. The corporate income tax is payable at the rate of 15% plus an additional rate of 10% (levied on the part of taxable profits that exceed R$0.02 million per month or R$0.24 million per year). The social contribution tax is currently assessed at a rate of 9% of adjusted net income.
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In 2013, the Brazilian government enacted Provisional Measure No. 627/2013, in order to end the Transitional Tax Regime, or RTT. RTT was implemented in 2008 as a way to neutralize the tax impact caused by the adoption of IFRS accounting rules in lieu of Brazilian GAAP.
In 2014, Provisional Measure No. 627 was converted into Law No. 12,973, the main objective of which was to implement the new tax regime, adapted to the new accounting guidance provided by IFRS, ending the RTT. Given that the implementation required specific adjustments to promote the elimination of the effects of registration of the new accounting methods and criteria to the statutory books, some assets and liabilities now have different methods and accounting criteria from those previously adopted by the former accounting rule. Law No. 12,973 established as a condition for the accurate tax treatment of these differences to impact only at the time of the realization of these assets or liabilities the creation of subaccounts for individualized control. The treatment is the same in regard to present value adjustments and fair value adjustments.
The rules for deductibility of goodwill were maintained for transactions which occurred prior to the end of 2017. The tax treatment by TIM Celular (now TIM S.A.) of the goodwill arising from the purchase of the companies AES Atimus SP and RJ was not impacted by the new rules.
Regarding dividends, Law No. 12,973 ensured the full and unconditional exemption on payment or credit of profits or dividends earned between 2008 and 2013, previously paid or not. Uncertainty remained, however, about the exemption on profits and dividends generated in the calendar year 2014, if higher than the taxable income in the same period in the case of companies that do not opt for early adoption of the new post-RTT tax regime that year.
According to the Federal tax authorities the exception is not applicable to the excess amount, or in other words, to the profits and dividends paid in excess of the taxable income.
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Dividends are not subject to withholding income tax when paid. However, as the payment of dividends is not tax deductible for the company that is distributing them, there is an alternative regime for stockholder compensation called “interest on equity,” which allows companies to deduct any interest paid to stockholders from net profits for tax purposes.
These distributions may be paid in cash. The interest is calculated in accordance with daily pro rata variation of the Brazilian government’s long-term interest rate TJLP, as determined by the Central Bank from time to time, and cannot exceed the greater of: (1) 50% of the net income (before taxes and already considering the deduction of the own interest amount attributable to stockholders) related to the period in respect of which the payment is made; or (2) 50% of the sum retained profits and profits reserves as of the date of the beginning of the period in respect of which the payment is made.
Any payment of interest to stockholders is subject to withholding income tax at the rate of 15%, or 25% in the case of a stockholder who is domiciled in a Low or Nil Tax Jurisdiction. These payments may be qualified, at their net value, as part of any mandatory dividend. As described herein the Company and its subsidiaries paid interest on equity in 2019. Please refer to “Item 4. Information of the Company—2019 Important Events—Interest on Equity” for detailed information.
Losses carried forward are available for offset during any year up to 30.0% of annual taxable income. No time limit is currently imposed on the application of net operating losses on a given tax year to offset future taxable income within the same tax year, nevertheless there is no monetary restatement.
Companies are taxed based on their worldwide income rather than on income produced solely in Brazil. As a result, profits, capital gains and other income obtained abroad by Brazilian entities are added to their net profits for tax purposes. In addition, profits, capital gains and other income obtained by foreign branches or income obtained from subsidiaries or foreign corporations controlled by a Brazilian entity are computed in the calculation of an entity’s profits, in proportion to its participation in such foreign companies’ capital.
In the end of 2017, the Brazilian Federal Revenue Office, or RFB, issued Normative Instruction No. 1,771/2017 in order to determine the tax treatment due to the accounting CPC 47 – Customer Contract Revenue, which tax treatment went into effect in 2018.
Income tax and social contribution were regulated by Decree No. 3,000/1999 in addition to other federal laws and decrees. In December 2018, this decree was revoked and replaced by Decree No. 9.580, which consolidates the main provisions related to income tax and social contribution. As of the date hereof, no relevant impacts to the Company were identified with regard to such changes.
Regulation of the Brazilian Telecommunications Industry
General
The telecommunications sector is regulated by Anatel, which was established by law and is administratively independent and financially autonomous from the Ministry of Science, Technology, Innovation and Communication (Ministério da Ciência, Tecnologia, Inovações e Comunicações), or MCTIC. Anatel is responsible for promulgating standards related to telecommunications services and regulating the relationship between different operators, as set forth in the General Telecommunications Law and the Regulamento da Agência Nacional de Telecomunicações, or the Anatel Decree.
Despite liberalization, which occurred in 1997, the Brazilian telecommunications market still faces persistent dominant positions held by fixed incumbent operators. In particular, broadband access is currently offered by operators over their own infrastructure and the respective regulatory framework is not always based on effective implementation of the wholesale access obligations.
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A presidential decree issued on June 30, 2011, established a bidding process for 4G RFs, an important landmark for the telecommunications sector. The bid occurred in 2012 and, in order to guarantee full rural service by 2018, Anatel linked the 4G blocks in the 2,500 MHz band to the 450MHz band in specific geographic regions of Brazil. As a result, the four winning operators of the 4G blocks in the 2,500 MHz band linked to the 450MHz band are subject to coverage commitments in rural areas. Such presidential decree also resulted in two new regulations to measure mobile and fixed broadband quality standards. The presidential decree also approved the PGMU, creating fixed line universal service obligations binding on the fixed telephony services (Serviço Telefônico Móvel Comutado), or STFC, concessionaires.
In October 2012, Anatel enacted the Regulation on Universal Obligations related to the fixed line universal service obligations (Plano Geral de Metas de Universalização), or PGMU, regulating backhauling, public pay phones and telephone services for low income families, among others. A new PGMU was published in December 2018, and included obligations to deploy 4G fixed wireless access in non-urban districts. In addition, there was a reduction in the obligation to maintain and deploy payphones.
In November 2012, Anatel enacted PGMC 2012, whose goal is to encourage competition by creating interconnection obligations and the sharing of infrastructure already installed by other operators. PGMC 2012 was amended by Resolution No. 694/2018, the New PGMC. Full adoption of these standards required new investments and has been under debate.
In March 2014, by means of Resolution No. 632/2014, Anatel approved the adoption of a single regulation for the telecommunications sector (Regulamento Geral de Direitos do Consumidor de Serviços de Telecomunicações), or RGC, with general rules for customer service, billing, and service offers, which are applicable to fixed, mobile, broadband and cable TV customers. In 2018, Anatel held a subsidies grant, which is an opinion-gathering tool similar to but at the preparation stage of a public consultation, aiming to improve the RGC in respect of the digitalization of processing and customer services, as well as billing and contracting services. A public consultation is expected in 2020.
In 2016, Anatel issued certain regulations which are particularly relevant to our operations, including: Resolution No. 663/2016, which modified rules for mobile virtual network operators; Resolution No. 667/2016, which approved the General Regulation of Accessibility in Telecommunications Services of collective interest; Resolution No. 668/2016, which modified the STFC Regulation; and Resolution No. 671/2016, which approved the Regulation on the Use of the Radio frequency Spectrum and modified the Regulation on the Collection of Public Price for the Right of Use of Radio frequencies and the Regulation on the Imposition of Administrative Sanctions.
In 2018, Anatel also issued several resolutions that are material to our business in certain respects. Resolution No. 693/2018 approved the new General Interconnection Regulation and revoked the “General Interconnection Regulatory Framework” set forth by Anatel in 2005. Resolution No. 695/2018 approved the new Public Price for the Right to Use of Radio Frequencies, or PPDUR, setting forth a two-part price calculation basis, one for renovation of radio frequencies and the other for license acquisition. Resolution No. 702/2018 reduced the authorization fee to R$400.00 for all telecommunication services. Resolution No. 703/2018 set forth a new cap for spectrum usage limits and allowed a given player to retain more spectrum bandwidth (30% to 40% of the total available spectrum).
Throughout 2019, MCTIC and Anatel issued other important public consultations and decrees as listed below:
MCTIC
In 2019, the Brazilian Government published a document titled the Public Consultation on a Brazilian Strategy for 5G Network, or the 5G Strategy. The objective of the government was to base a policy on a diagnosis of the challenges, a vision of the potentialities and a map of the opportunities offered by 5G in Brazil. The document was divided into five thematic axes: (i) radiofrequency and licensing; (ii) research; (iii) development and innovation; (iv) applications; and (v) security in the 5G environment.
In March 2018, the E-Digital Decree (Decree No. 9,319/2018) was published in order to identify around 100 strategic actions aimed at boosting competition and online productivity levels in Brazil, while raising connectivity and digital inclusion levels. The actions seek to address the main strategic issues for the digital economy, including
connectivity infrastructure, the use and protection of data, IoT, and cyber-security. The E-Digital Decree sets out approximately 100 strategic actions aimed at increasing competition and online productivity levels in Brazil, as well as the increasing connectivity and digital inclusion levels of the Brazilian population as a whole. These actions cover strategic topics related to the digital economy, including infrastructure connectivity, privacy and data protection, IoT and cyber-security.
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In June 2019, the Decree on the National Plan for Internet of Things (Decree No. 9,854/2019) was published in order to regulate and encourage this technology in Brazil. It refers to IoT as “the infrastructure that integrates the provision of value-added services with physical or virtual connection capabilities of things with devices based on existing information and communication technologies and their evolution, with interoperability.” The decree lists the following subjects as required to further support the National Plan for Internet of Things: (i) science, technology and innovation; (ii) international insertion; (iii) vocational education and training; (iv) connectivity and interoperability infrastructure; (v) regulation, security and privacy; and (iv) economic viability.
Anatel
In 2019, Anatel submitted 67 topics for public consultation. The main topics were: (i) Public Consultation No. 35 – Regulation on pole sharing negotiation with electricity distributors with a neutral and external entity; (ii) Public Consultation No. 25 – Proposal to re-evaluate Femtocell use regulations; (iii) Public Consultation No. 39 – Proposal of IoT applications and machine-to-machine communications regulation; (iv) Public Consultation No. 64 – Proposal of Bid Notice for the Exploration of Satellites; (v) Public Consultation No. 59 – Proposal for an Act approving the power limit for operation in the 3,300 – 3,600 MHz band, for use by stations with significant market power, Multimedia Communication Service (SCM), Switched Fixed Telephone Service (STFC) and Limited Private Service (SLP); (vi) Public Consultation No. 60 – proposal for an Act approving the power limit for operation in the 2,300 – 2,400 MHz band, for use by stations of significant market power, SCM, STFC and SLP; (vii) Public Consultation No. 14 – Proposal of regulatory revision of “L Band” (1,427 – 1,518 MHz); and (viii) Public Consultation No. 15 – Proposal of allocation of radiofrequency bands in the “S band.” Additionally, Anatel enacted several important regulations that will have a significant impact on our activities, particularly those summarized below:
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Resolution No. 709/2019: this Resolution approved the General Numbering Regulation, which establishes that the management of the resources for telephone numbering will take place through an independent entity to be constituted by operators in a similar way to what happens with number portability.
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Resolution No. 710/2019: this Resolution approved the allocation and the regulation on conditions of use of the 2,300 GHz radiofrequency band to the SLP.
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Resolution No. 711/2019: this Resolution approved the allocation and the regulation on conditions of use of the 3,500 GHz radiofrequency band.
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Resolution No. 716/2019: this Resolution approved the 2019 edition of the Plan for the Allocation, Destination and Distribution of Frequency Ranges in Brazil.
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Resolution No. 717/2019: this Resolution approved the RQUAL, aiming to better measure and remedy the quality conditions experienced by consumers.
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Telemarketing self-regulation code
In September 2019, the main telecommunications operators in Brazil compromised on a self-regulation code of conduct on telemarketing. Such initiative was adopted in March 2019 and, since July 16, 2019, consumers can register themselves on a specific website to restrict telemarketing calls from telecommunications operators.
Review of the Current Regulatory Model for the Provision of Telecommunications Services
The Brazilian government is currently focused on reviewing the General Telecommunications Law to transform the previous fixed telephony concessions into authorizations, modifying the obligations related thereto.
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On April 11, 2016, MCTIC issued guidelines to be followed by Anatel when implementing this transformation, moving to a more market-oriented licensing approach. These guidelines were issued following a public consultation that ended on January 15, 2016.
In general terms, the MCTIC’s guidelines establish that public authorities should promote access to broadband service at affordable costs and levels, putting broadband at the center of public policy.
As a result, Anatel is expected to: (i) propose concrete rules and criteria to enable the phasing-out of concessions, (ii) highlight the consistency of the new licensing rules with the existing infrastructure coverage obligations, (iii) ensure service provision (including broadband) in less attractive economic areas, (iv) give incentives to concessionaires to migrate to the new licensing framework, (v) lessen obligations for fixed telephony, (vi) schedule the phasing-out of the retail price control over retail fixed telephony services, (vii) withdraw recurring licensing fees, (viii) schedule the phasing-out of the asset reversion scheme (foreseeing that the network assets used to provide services under a concession must be returned to the state upon the expiry of the concession), and (ix) establish suitable mechanisms to ensure regulation compliance control.
As a result of the ongoing debate regarding the licensing regime, Anatel was tasked with reviewing concession contracts by December 2016. However, after the publication of Resolution No. 673, approved on December 30, 2016, the deadline for reviewing these contracts was postponed to June 30, 2017. In spite of the fact that the deadline has passed, revised concession contracts have been not signed yet.
A bill that proposes changes to the General Telecommunications Law and allows Anatel to change the licensing mode of telecommunications service is under review in the Brazilian Senate. According to the proposal, upon request of the STFC concessionaires, Anatel may authorize the migration of the concession agreements to authorizations, subject to the observance of certain requirements. Anatel will be responsible for determining the economic value associated with the migration, which shall be paid in exchange for investment commitments, prioritizing the implementation of network infrastructure with high capacity for data communication in locations without appropriated competition.
The bill also proposes changes in the radio frequency rules, allowing subsequent and unlimited renewals of radio frequency authorizations of up to 20 years each, generating an environment possibly more conducive to long-term investments. In addition, the bill favors the creation of a spectrum secondary market, allowing transfers of radio frequency authorizations between players, upon Anatel’s approval. The economic and operational conditions will be defined by Anatel.
Currently, a proposal to postpone its entry into force until January 1, 2021 was already approved by the Brazilian Senate and will be voted by the House of Representatives, before being submitted to Presidential approval.
Also, there is a new Presidential Decree No. 9,612/2018, or the Connectivity Plan, that established a series of guidelines for execution of terms of conduct adjustment, onerous granting of spectrum authorization and regulatory acts in general which includes: (i) expansion of high capacity telecommunications transport networks; (ii) increased coverage of mobile broadband access networks; and (iii) broadening the coverage of fixed broadband access network in areas with no internet access through this type of infrastructure. It also establishes that the network implemented from the commitments will be subject to sharing from its entry into operation, except when there is appropriate competition in the respective relevant market.
Authorizations and Concessions
With the privatization of the Telebrás system and pursuant to the Minimum Law (Lei Mínima), Band A and Band B service providers were granted concessions under Cellular Mobile Service (Serviço Móvel Celular), or SMC, regulations. Each concession was a specific grant of authority to supply mobile telecommunications services in a defined geographical area, subject to certain requirements contained in the applicable list of obligations attached to each concession.
Our predecessors were granted SMC concessions and in December 2002, such SMC concessions were converted into PCS authorizations, with an option to renew the authorizations for an additional 15 years. We
acquired PCS authorizations in conjunction with auctions of bandwidth by Anatel in 2001, and subsequently acquired additional authorizations and operations under the PCS regulations as well.
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In December 2007, we acquired certain 3G frequencies sub-bands (1,900-2,100 MHz), with national coverage; these authorizations were granted in April 2008 and are valid until 2023.
On May 30, 2011, we entered into two new RF terms, formalizing the acquisition of excess RF in the states of Minas Gerais, Paraná, Santa Catarina, Amapá, Roraima, Pará, Amazonas and Maranhão and those new terms expire in April 2023.
In October 2012, we acquired the 2,530-2,540 MHz and 2,650-2,660 MHz sub-bands, with national coverage, and the 450 MHz band in Espírito Santo, Paraná, Rio de Janeiro and Santa Catarina states (the 450 MHz band was jointly acquired with Intelig (now known as TIM S.A.)), which terms expire in October 2027.
In December 2014, we acquired the 718-728 MHz and 773-783 MHz sub-bands, with national coverage; these authorizations are valid until 2029. These sub-bands will be fully available for mobile operations by the end of 2020, which is the deadline by which EAD must complete its remaining auction obligations, relocate broadcasters and implement interference solutions, thereby completing the switch-off process.
On March 4, 2015, by Decision No. 66/2015-CD, Anatel approved our renewal application related to the 4G Block (2500 MHz P Band) in Minas Gerais, and also approved our renewal application concerning the authorization terms of the D and E Bands (900 MHz and 1800 MHz). On July 22, 2015, Authorization Act No. 4710/2015-CD was issued (and subsequently published in the Official Gazette of July 28, 2015), extending the use of the aforementioned authorizations terms, until 2030 and 2028, respectively.
In December 2015, Anatel auctioned left over radio frequencies in the 1,800 MHz, 1,900 MHz and 2,500 MHz bands. We submitted bids for the left over lots of the 2,500 MHz 4G band, which had originally been auctioned in 2012. We were classified as the first-ranked bidder in the lots for Recife, in the state of Pernambuco, and Curitiba, in the state of Paraná, based on our bids which totaled R$57.5 million. The corresponding authorization terms were excluded by Anatel in July 2016.
Because there is prejudicial unsolved interference in 3G frequency (F sub-band) in the São Paulo metropolitan area (Registration Area (Área de Registro) 11), TIM was granted an authorization to use the 900 MHz spectrum under a secondary basis in such area. The last license was granted by Act No. 711 on March 2017 and is valid for 36 months (until March 2020).
The STFC and SCM authorization terms do not have an expiration date. In August 2017, TIM obtained an authorization to explore SLP, in order to use this license to operate a private network formed by point-to-point radio communication (radioenlaces). These radio licenses are valid for 15 years.
In connection with the conclusion of the Reorganization whereby TIM Celular was merged into TIM S.A. (see “Item 4. Information on the Company—C. Organizational Structure”). TIM S.A. holds all of the authorizations previously issued in the name of other companies controlled, directly or indirectly, by TIM Participações.
The following table shows each of our authorizations in effect on December 31, 2019:
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800 MHz, 900 MHz and 1800 MHz
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Additional Frequencies 1800 MHz
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1900 MHz and 2100 MHz (3G)
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States of Amapá, Roraima, Pará, Amazonas and Maranhão
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–
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March, 2031*
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April, 2023
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April, 2023
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October, 2027
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PA – February, 2024*
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December, 2029
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States of Rio de Janeiro and Espírito Santo
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October, 2027
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March, 2031*
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ES – April, 2023–
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April, 2023
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October, 2027
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RJ – February, 2024*
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December, 2029
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States of Acre, Rondônia, Mato Grosso, Mato Grosso do Sul, Tocantins, Distrito Federal, Goiás, Rio Grande do Sul (except for the city of Pelotas and its surrounding region) and the cities of Londrina and Tamarana in the state of Paraná
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PR – October, 2027
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March, 2031*
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April 2023
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April, 2023
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October, 2027
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Curitiba – PR July, 2031
DF – February, 2024*
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December, 2029
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State of São Paulo
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–
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March, 2031*
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Interior – April, 2023–
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April, 2023
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October, 2027
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–
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December, 2029
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State of Paraná (except for the cities of Londrina and Tamarana)
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October, 2027
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September, 2022*
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April, 2023
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April, 2023
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October, 2027
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AR 41, except Curitiba and Metropolitan Region – February, 2024*
AR41, Curitiba and Metropolitan Region -July, 2031
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December, 2029
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State of Santa Catarina
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October, 2027
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September, 2023*
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April, 2023
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April, 2023
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October, 2027
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–
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December, 2029
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City of Pelotas and its surrounding region in the State of Rio Grande do Sul
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–
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April, 2024*
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–
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April, 2023
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October, 2027
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–
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December, 2029
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State of Pernambuco
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–
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May, 2024*
|
–
|
April, 2023
|
October, 2027
|
Recife July, 2031
|
December, 2029
|
State of Ceará
|
–
|
November, 2023*
|
–
|
April, 2023
|
October, 2027
|
–
|
December, 2029
|
State of Paraíba
|
–
|
December, 2023*
|
–
|
April, 2023
|
October, 2027
|
–
|
December, 2029
|
State of Rio Grande do Norte
|
–
|
December, 2023*
|
–
|
April, 2023
|
October, 2027
|
–
|
December, 2029
|
State of Alagoas
|
–
|
December, 2023*
|
–
|
April, 2023
|
October, 2027
|
–
|
December, 2029
|
State of Piauí
|
–
|
March, 2024*
|
–
|
April, 2023
|
October, 2027
|
–
|
December, 2029
|
State of Minas Gerais (except for the cities in sector 3 of PGO for 3G and excess radio frequency)
|
–
|
April, 2028*
|
April, 2023
|
April, 2023
|
October, 2027
|
February, 2030*
|
December, 2029
|
States of Bahia and Sergipe
|
–
|
August, 2027*
|
–
|
April, 2023
|
October, 2027
|
–
|
December, 2029
|
* Terms already renewed for 15 years and therefore not entitled to another renewal period.
** Only covers complementary areas in the specified states. The Radio frequency Blocks of the Municipalities of the National Code (CN) 92, which were part of Lot 208, were returned.
Obligations of Telecommunications Companies
In 2011, Anatel published Resolution No. 575/11 regarding the review of the regulation on the management of quality of service – PCS. The new regulation established new quality goals, evaluation criteria, data collection and quality monitoring of service providers – PCS. The Anatel regulation aims to create a comprehensive model of quality management of the PCS providers providing preventive and proactive on the part of Anatel, through the
incorporation of indicators and benchmarks that allow the systematic evaluation of the quality of service in all its dimensions. Anatel also published Resolution No. 574/11 in 2011, which set broadband quality measurement standards.
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In March 2014, by means of Resolution No. 632/2014, Anatel approved the adoption of a single regulation for the telecommunications sector, the RGC, with general rules for customer service, billing, and service offers, which are applicable to fixed, mobile, broadband and cable TV customers. In 2018, Anatel held a subsidies grant, which is an opinion-gathering tool similar to, but at the preparation stage of a public consultation, aiming to improve the RGC in respect of the digitalization of processing and customer services, as well as billing and contracting services. A public consultation is expected in 2020.
In December 2019, Anatel approved RQUAL, which is expected to enter into force in 2021. RQUAL will apply to all telecommunication services (mobile, fixed, fixed broadband and payTV). Under this new model, service quality is measured based on three indicators (Quality of Service Index, Perceived Quality Index and User Complaint Index) and it classifies operators according to performance. It also establishes a mandatory ombudsman. Anatel will be able to adopt case-by-case remediation measures, such as consumer compensation (based on a user compensation model), adoption of an action plan or adoption of precautionary measures in order to ensure the improvement of quality standards. It also grants customers additional rights including the customer’s possibility of terminating their service agreement without penalty in case of poor service quality. The new regulation is expected to enter into force in 2021. Until the working group is formed by Anatel, operators and electronic self-assessment questionnaires, or ESAQs, shall define the goals, criteria and reference values for quality control and remediation measures. Anatel will monitor the indicators similar to the new ones established under RQUAL. The criteria and reference value shall be determined in the coming 12 months by the working group.
PCS Regulation
In September 2000, Anatel promulgated regulations regarding PCS wireless telecommunications services that are significantly different from the ones applicable to mobile companies operating under Band A and Band B.
According to rules issued by Anatel, renewal of a concession to provide mobile telecommunications services, as well as permission from Anatel to transfer control of cellular companies, are conditioned on agreement by such cellular service provider to operate under the PCS rules. TIM Sul, TIM Nordeste and TIM Maxitel converted their cellular concessions into PCS authorizations in December 2002, and later transferred them to TIM Sul, TIM Nordeste and TIM Maxitel, which are now TIM S.A. (following the Reorganization and various intercompany mergers discussed herein) subject to obligations under the PCS regulations. See “—Authorizations and Concessions.”
In 2018, Anatel initiated administrative proceedings against TIM Celular (now TIM S.A.) for noncompliance with certain quality standards and noncompliance with its rules and authorization terms. We have been fined by Anatel in some proceedings and are still discussing the penalty imposed in appeals before the agency. As a result of these proceedings, Anatel applied some fines that did not cause a material adverse effect on our business.
On August 22, 2019, Anatel’s board of officers unanimously approved the execution of a TAC with TIM S.A. The agreement covers fines imposed against us in the total amount of R$627 million. The commitment we assumed foresees actions to develop our services from three different perspectives: (i) customer experience, quality and infrastructure, through initiatives to improve the licensing process of base stations, efficient use of resources, (ii) evolution of digital service channels, decreasing complaint rates and user repair demands, and (iii) reinforcement of transportation and access networks. In addition, the agreement also includes the commitment to bring mobile broadband through the 4G network to 366 cities with less than 30 thousand inhabitants thus reaching over 3.4 million people. The new infrastructure will be implemented in three years – more than 80% in the first two years – with our assurance that these areas will be shared with other providers. The TAC was approved by Anatel on August 22, 2019 and the proceeding is currently pending deliberation by Federal General Accounting Office, which had intervened in the negotiations and requested further clarification, causing a delay in the procedural process. We expect the TAC to be executed in the following months.
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We continue to do our best to fully comply with our obligations under the PCS regime or with future changes in the regulations to which we are subject. See “—Obligations of Telecommunications Companies,” “Item 3. Key Information—D. Risk Factors—Risks Relating to our Business” and “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.”
Significant Market Power
In November 2012, Anatel published a new competition framework known as the PGMC 2012. Also in November 2012, Anatel published a series of regulations identifying groups with significant market power in the following relevant markets as defined by the PGMC 2012: (i) wholesale offer of fixed access infrastructure for data transmission through copper or coaxial cable in rates equal or higher than 10 Mbps (Act No. 6,617, of November 8, 2012); (ii) wholesale offer of fixed infrastructure for local and long distance transportation for data transmission in rates equal or higher than 34 Mbps (Act No. 6,619, of November 8, 2012); (iii) passive infrastructure for transport and access networks (Act No. 6,620, of November 8, 2012); (iv) mobile network termination (Act No. 6,621, of November 8, 2012); and (v) national roaming (Act No. 6,622, of November 8, 2012).On December 5, 2016, Anatel published public consultations on (i) the revision of PGMC 2012’s relevant markets and remedies, and (ii) the proposal of a specific Regulation for the Approval of Reference Offers, for public comment until March 22, 2017.
In July 2018, Anatel published the New PGMC, which revised PGMC 2012 and created two new markets: (i) interconnection for telephone traffic in fixed networks; and (ii) high capacity data transport. According to the New PGMC proposal, cities in Brazil will be classified by levels of competition (1 – competitive, 2 – moderately competitive, 3 – less competitive, 4 – non-competitive), and asymmetric measures will be applied according to the market competition. In addition, also based on the proposal submitted to public consultation, wholesale relevant markets will be defined as follows:
|
|
|
Wholesale mobile call termination
|
|
Wholesale mobile interconnection
|
National roaming
|
|
National roaming
|
Full unbundling and bistream, or, wholesale fixed network infrastructure access less than 10 Mbps
|
|
Wholesale fixed network infrastructure access
|
Leased lines, interconnection class V, interlinking, or, wholesale fixed network infrastructure transport less than 34 Mbps
|
|
Leased lines
|
Ducts, trenches and towers, or passive infrastructure
|
|
Passive infrastructure – redefined
* towers regulated by law
|
–
|
|
Wholesale fixed interconnection
|
–
|
|
High capacity data transport
|
Under the New PGMC, TIM has been classified as having significant market power in the following markets: (i) mobile network termination (otherwise referred to as the mobile network termination market); (ii) national roaming; and (iii) high capacity data transport (five municipalities). The measures applied to an significant market power operator in those markets include: (i) the application of mobile termination rates on a glide path based on a price cap system and the partial application of the Bill & Keep system (at a 50% threshold (i.e., not a significant market power operator pays only if the terminated traffic on the significant market power operator network is more than 50% of the total traffic exchanged) and only until the next revision of the New PGMC in 2021) and (ii) an obligation to offer the service of national roaming service to operators not having significant market power.
Due to such classification, we are subject to increased regulation under the New PGMC, which could have an adverse effect on our business, financial condition and results of operations. Specifically, because we have been classified as having significant market power in the mobile network termination market, the rates charged by mobile service providers to other mobile service providers to terminate calls on their mobile networks, or VU-M, are regulated. On July 4, 2014, Anatel approved, by means of Resolution No. 639/2014, a rule for the definition of
maximum reference rates for entities with significant market power, based on a cost model, for VU-M, TU-RL, and EILD. Pursuant to Anatel’s rule, reference rates will decline based on a glide path until the cost modeling known as BU-LRIC is applied (in 2019, for VU-M and TU-RL; and in 2020, for EILD). On July 7, 2014, Anatel published the corresponding Acts Nos. 6,210/2014, 6,211/2014 and 6,212/2014, which determined the specific reference rates effective as of February 2016. On December 19, 2018, Anatel published the corresponding Acts Nos. 9,918/2018, 9,919/2018 and 9,920/2018, which determined the specific reference rates effective as of February 2020. By the end of 2019, Anatel began the process of reviewing these Acts and the related reference rates again.
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Because of our classification as having significant market power in the national roaming market, we must also offer roaming services to other mobile providers without significant market power at the rates approved by Anatel. We are also required to provide access to our high capacity data transport network due to our classification as having significant market power in that market.
For additional detail, see “—Lines of Revenue—Network Usage Charges,” “—Lines of Revenue—Roaming Fees,” “—Lines of Revenue —Interconnection Charges” and “—Lines of Revenue—Long Distance” above.
Interconnection Regulation
Telecommunication operators must publish a public interconnection offer on both economic and technical conditions and are subject to the “General Interconnection Regulatory Framework” issued by Anatel in 2005.
Also in 2005, Anatel issued a ruling for “Accounting Separation and Cost Accounting,” introducing the obligation of presenting the Accounting Separation and Allocation Document (Documento de Separação e Alocação de Contas), or DSAC, by the license holders and groups holding significant market power in the offering of fixed and/or mobile network interconnection and wholesale leased lines (Industrial Exploration of Dedicated Lines (Exploração Industrial de Linha Dedicada), or EILD). Starting from 2006 (for fixed operators) and 2008 (for mobile operators related to the results of 2006 and 2007), operators (TIM included) are delivering the requested information to Anatel.
In 2013, Anatel reviewed almost the entirety of DSAC. Pursuant to Resolutions No. 608 and 619, the level of information to be delivered to Anatel and the number of products analyzed were extended. Rules on costs allocation were also standardized in order to allow comparison of the results among operators.
With respect to mobile interconnection, in October 2011, Anatel established a mechanism for reducing fixed-to-mobile call rates, applying a reduction of 18% in 2012 and 12% in 2013. In November 2012, through Resolution 600, Anatel decided that the VU-M reference rates in 2014 would be 75% of the valid VU-M in 2013, and in 2015 by 50% of the valid VU-M in 2013. Based on that, in December 2013, VU-M prices for 2014 and 2015 were published in accordance with Resolution No. 600/2012.
In addition to the VU-M reduction, Anatel established a bill and keep, or B&K, rule between significant market power and non-significant market power PCSs. From January 2013 until February 2015, the B&K was 80%/20%. On February 12, 2015, Anatel approved, by means of Resolution No. 649/2015, the following new B&K percentages, amending the percentages established by Resolution 600: 75%/25%, from 2015 until 2016; 65%/35%, from 2016 until 2017; 55%/45%, from 2017 until 2018; and 50%/50%, from 2018 until 2019, which was the object of a judicial suit (ongoing), in order to suspend its effects. After 2019, the VU-M will be charged by the significant market power whenever their network is used to originate or to finish a call. In July 2015, we filed a lawsuit seeking to annul Resolution No. 649/2015 and maintain the percentages originally established by Resolution No. 600/2012, which currently remains pending a final decision. However, as discussed above, the New PGMC in 2019 set the partial Bill & Keep threshold to 50% (i.e., a non-significant market power operator pays only if the terminated traffic on the significant market power operator network is more than 50% of the total traffic exchanged) and will be applied until the next revision of the New PGMC scheduled for 2021. In addition, Anatel determined the end of the existing additional 20% on the value of mobile termination rate paid by significant market power operators to non-significant market power operators.
Related to fixed interconnection, Anatel revised the criteria for pricing the use of fixed networks in May 2012. According to such regulation, after January 1, 2014, a full B&K regime (in which no payments are due for the traffic
termination) was implemented for local STFC operators dealing with other local STFC operators. Currently, therefore, no payments are due for the use of a local STFC operator’s network by other local STFC operator. With respect to interconnection of STFC operators with long distance and mobile operators, we understand that, in 2012, when Anatel issued PGMC 2012, the asymmetrical measure that permitted STFC operators without significant market power to charge a TU-RL 20% higher than the TU-RL charged by STFC operator, with significant market power was revoked. In September 2016, we filed a lawsuit on this subject, which is still pending a final decision.
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On July 4, 2014, Anatel approved, by means of Resolution No. 639/2014, a rule for the definition of maximum reference rates for entities with significant market power, based on a cost model, for VU-M and TU-RL, and for EILD. Pursuant to Anatel’s rule, reference rates will decline based on a glide path until the cost modeling known as BU-LRIC is applied (2019, for VU-M and TU-RL; and 2020, for EILD). On July 7, 2014, Anatel published the corresponding Acts No. 6,210/2014, 6,211/2014 and 6,212/2014, which determined the specific reference rates effective as of February 2016. On December 19, 2018, Anatel published the corresponding Acts Nos. 9,918/2018, 9,919/2018 and 9.920/2018, which determined the specific reference rates effective as of February 2020. By the end of 2019, Anatel began the process of reviewing these Acts and the related reference rates again.
On February 24, 2017, considering the glide path provided in Act No. 6,211, VU-M rates were again reduced, depending on the region, to the level of approximately R$0.05 (five cents) and, in 2018, will also be reduced to levels of R$0.03 (three cents) and, in 2019, will also be reduced to levels of R$0.01 (one cent). In December 2019, Anatel published Acts setting forth mobile termination rate which will be valid from 2020 until 2023.
Wholesale Rates Regulation
Under our PCS authorizations, we are allowed to set prices for our service plans, subject to approval by Anatel, provided that such amounts do not exceed a specified inflation adjusted cap. Anatel currently uses the telecommunication services index (Índice de Serviços de Telecomunicações), or IST, a specific price inflation index that it developed, in evaluating prices and determining the relevant cap for prices charged in the telecommunications industry. As mentioned above, on July 4, 2014, Anatel approved the calculation of VU-M, TU-RL and EILD reference rates based on a cost model. We expect that the adjustment of our prices will follow the market trend, and that the adjustment will be below the annual inflation rate based on the IST.
Number Portability
In March 2007, Anatel issued a new regulation regarding number portability in Brazil for fixed telephony and PCS providers. Portability is limited to migration between providers of the same telecommunications services. For PCS providers, portability can take place when a customer changes its services provider within the same Registration Area as well as when a customer changes the service plan of the same area. Anatel finished the nationwide NP implementation schedule in March 2009.
Value-Added Services and Internet Regulation
Value-Added Services are not considered under Brazilian telecommunications regulations to be telecommunications services, but rather an activity that adds features to a telecommunications service. Regulations require all telecommunications service providers to grant network access to any party interested in providing Value-Added Services, on a non-discriminatory basis, unless technically impossible. Telecommunications service providers also are allowed to render Value-Added Services through their own networks. Internet connection, when offered to users on a single basis, by parties other than telecommunications service providers, is considered by Brazilian legislation to be a value-added service, and its providers are not considered to be telecommunications companies. Current regulations allow us or any other interested party to offer Internet connection through our network. In such case, Internet connection would be deemed as a portion of the telecommunications service that enables users to navigate the Internet.
In April 2014, the Brazilian President passed Law No. 12,965/2014, known as the Legal Framework for the Use of the Internet (Marco Civil da Internet), or the Internet Framework, which establishes the principles, guarantees, rights and duties for the use of the Internet in Brazil. Key topics covered in the Internet Framework are: net
neutrality; collection, use and storage of personal data; confidentiality of communications; freedom of expression and the treatment of illegal, immoral or offensive contents.
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The Presidential Decree No. 8,711/2016 was enacted by the Brazilian President on May 11, 2016 and provided additional detail on the Internet Framework in three main aspects: (i) clarification of the scope and implementation of the net neutrality rules, (ii) implementation of the rights and obligations related to privacy and data protection regarding Brazilian Internet users, and (iii) governance of the Internet Framework, including authorities entitled to enforce the legislations. See “—Review of the Current Regulatory Model for the Provision of Telecommunications Services.”
Privacy and Data Protection
On August 14, 2018, the Brazilian President passed the LGPD. This new law is closer to the European Union General Data Protection Regulation, or GDPR, including significant extraterritorial application and considerable fines of up to 2% of a company’s global turnover of the previous financial year. Currently, a proposal to postpone its entry into force until January 1, 2021 was already approved by the Brazilian Senate and will be voted by the House of Representatives, before being submitted to Presidential approval.
In December 2018, Provisional Measure No. 869/2018 amended the LGPD to create the National Data Protection Authority, or ANPD, within the structure of the executive branch, which implies a larger control by the Federal Government. This Provisional Measure also extended the entry into force of the LGPD by 24 months (i.e., until August 2020), when all legal entities will be required to adapt their data processing activities to these new rules.
In July 2019, Provisional Measure No. 869/2018 was converted into Law No. 13,853, keeping the ANPD, as a federal public administration body, as part of the executive branch.
We have set up a team tasked with adapting our processes and technologies to ensure compliance with the LGPD requirements. Notably, we have, among other developments, created a specific clause for the protection of personal data in our contracts with suppliers and business partners, developed lectures for top leadership on the topic of data protection, and created an Executive Data Protection Committee, led by the CEO.
Frequencies and Spectrum Background
In connection with the PCS authorization auctions in 2001 and 2002, Anatel divided the Brazilian territory into three separate regions, each of which is equal to the regions applicable to the public regime fixed-line telephone service providers. PCS services could only be provided under Bands C, D and E at that time with initially 1800 MHz band and afterwards also the 900 MHz band. We acquired the D band in regions II and III and the E band in region I, completing our national coverage when considering TIM Sul, TIM Nordeste and Maxitel coverage (each ultimately merged into TIM S.A.).
We requested a renewal of our authorizations for the D and E bands (1,800 and 900 MHz frequencies) in September 2013, given that the initial term for which the authorization was expiring. The process was reviewed by Anatel, which handed down a decision based on formal legal opinion by the Federal Attorney General on the matter. According to such decision, TIM was entitled under the current rules to a renewal of our authorizations for the D and E bands, which started on March 2016.
In December 2007, we acquired new authorizations for the 1,800 MHz frequency in the São Paulo and Rio de Janeiro in order to improve our RF capacity in these regions. Within the same auction, Claro and Vivo acquired authorizations to provide PCS services in regions where we had historically provided services but where Claro and Vivo previously did not, using 1,800 MHz and 1,900 MHz bands. This resulted in increased competition in these regions. In the same auction, Oi received authorization to provide PCS services in the state of São Paulo using 1,800 MHz (band M in the whole state and band E in the state’s countryside).
In December 2007, we acquired 3G frequencies sub-bands (1,900–2,100 MHz), with national coverage; these authorizations were granted in April 2008 and are valid until 2023. Oi, Claro, Vivo and Algar Telecom also acquired
3G frequencies sub-bands in the same auction carried out by Anatel. All the authorization winners were subject to coverage and/or expansion commitments, divided by Municipality among the winners, in unserved areas.
64
In December 2010, Anatel auctioned an empty 3G band of radio spectrum consisting of (10+10) MHz in 2.1 GHz in the whole country (the “H Band” Auction), and other left over frequencies in the 900 MHz and 1800 MHz bands that had not been assigned in previous auctions. In this auction:
·
|
Of the 12 available lots in the H Band, 10 were awarded to Nextel, which was recently acquired by Claro S.A. Current operators were prevented from participating due to spectrum caps. Oi and CTBC (now known as Algar Telecom), managed to win the remaining two lots where they had cap availability.
|
·
|
TIM won individual block of frequencies in five service areas, strengthening its presence in the North, Santa Catarina, Minas Gerais and Paraná, bidding a total of R$81.8 million, to be paid proportionately to the remaining years in the existing authorization licenses (remaining years/15).
|
·
|
VIVO won blocks in 900 MHz and due to available cap, managed to win lots of 1700/1800 MHz in all regions, completing a national coverage of (10+10) MHz in this band.
|
·
|
Claro won blocks of spectrum in the 1700/1800 MHz band.
|
In December 2011, Anatel started auction No. 001/2011-PVCP/SPV, pursuant to which 16 blocks in the 1,800 MHz band were sold to Claro, Oi, CTBC and TIM. As a result of our participation in the auction, we expanded our 2G coverage and increased our presence in the northern and central-western regions of Brazil, including the states of Paraná, Espírito Santo, Rio Grande do Sul, Santa Catarina and Minas Gerais. Our corresponding RF authorization periods were formalized with Anatel in May 2013.
In 2012, Anatel established a bidding process in order to comply with Presidential Decree No. 7.512 of June 2011, which set April 2012 as the deadline to auction the 2.5 GHz band, in order to introduce 4G technology in Brazil. Anatel modeled the auction with two national blocks of (20+20) MHz (W and Z) and two national blocks of (10+10) MHz (V1 and V2). In order to guarantee full rural service by 2018, Anatel linked the 4G blocks to the 450MHz band in specific geographic regions of Brazil.
We participated in the auction as a group bidding in the name of TIM and Intelig (now known as TIM S.A.). We did not bid for the W block (Amazonas as a rural area), which we viewed as having a high premium if compared to the X block (67%). We successfully acquired the V1 block, which in our view held the best capital expenditure/operating expenditure profile associated with rural services in its selected regions (the States of Rio de Janeiro, Espírito Santo, Santa Catarina, and Paraná). The joint bid allowed us to take advantage of the flexibility of the auction rules. These bands brought heavy coverage obligations as its short-range characteristics demands large investments.
In November 2013, Anatel approved the dedication of a single band, of the 700MHz spectrum, exclusively to mobile services and in September 2014, Anatel concluded the 700 MHz spectrum auction that granted to TIM, Vivo, Claro and Algar the operation of the 700 MHz frequency for the 4G mobile technology, to be added to the current LTE service in the 2.5 GHz RF. We bid on Block 2 of that auction, for national coverage of the 700 MHz band, and won the same with a bid of R$1,947 million (a 1% premium over the minimum price of R$1,927 million).
The auction also required the winning bidders to proportionally reimburse the broadcasters for the cleanup of the spectrum previously held and used by them. We spent R$1,199 million in order to create in March 2015 the EAD with the other winning bidders, to ensure the spectrum cleanup. The price allocated to the cleanup of the spectrum related to unsold blocks was shared proportionately among the winning bidders who bought the other blocks. To offset such additional cost to the winning bidders, the price of the 700 MHz spectrum was discounted using Anatel’s WACC methodology.
The Authorization Terms for usage of the 700 MHz spectrum were signed in December 2014 and the Articles of Association and By-laws of EAD were filed on March 2, 2015. Our EAD payments were completed in January 2018.
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In December 2015, Anatel auctioned remaining radio frequencies in the 1,800 MHz, 1,900 MHz and 2,500 MHz bands. We submitted bids for the left over lots of the 2,500 MHz band, which had originally been auctioned in 2012. This particular band spectrum provides for 4G mobile services. We were the first ranked bidder in the lots for Recife, in the state of Pernambuco, and Curitiba, in the state of Paraná, based on our bids which totaled R$57.5 million. The corresponding authorization terms were executed by Anatel in July 2016.
Industrial Exploration of Dedicated Lines
In December 2010, Anatel approved a public hearing that considered alterations of the EILD, which established mechanisms for the operation of transmissions circuits up to 34 Mbps to increase transparency between operators and concessionaires. In May 2012, Anatel approved the new EILD regulations (Regulação de Exploração Industrial de Linha Dedicada), or REILD, detailing mechanisms to optimize the operating structure for transmission loop contracts in order to increase contract price transparency and affording equal treatment to independent service providers from concessionaire groups. The REILD specifically sets out more effective rules on project definition including Standard EILD or Special EILD, in addition to contract and delivery terms, and specifies EILD delivery dispute resolution procedures. Concurrently, in May 2012, Anatel approved new EILD reference prices, a step towards value fixation in controversies between service providers.
Considering that EILD is also a market subject to the asymmetric regulation defined by Anatel in the PGMC 2012, operators classified by Anatel as pertaining to group with significant market power in the EILD market, such as Oi, were required to submit reference prices and offers for Anatel’s approval, as well as to only offer EILD through a specific system designed for the PGMC 2012. In September 2013, Anatel ratification, for the first time, reference prices and offers of the operators with significant market power in the EILD market. At least every six months new reference prices and offers must be submitted for Anatel’s approval. We are not currently classified as having significant market power in the EILD market.
Nevertheless, the TIM network is still growing and, with its backbone now reaching the North region of Brazil by using optical fiber technologies and not only via satellite, this has allowed TIM to strengthen and expand the services offered in that region, particularly in the states of Pará, Amapá and the city of Manaus, the capital of the state of Amazonas and a very important industrial zone.
The greatest benefits of the use of the optical fiber technology are the higher network stability and assurance, greater voice and data traffic capacity and the higher transmission rates that we can now provide to our customers, all of which are essential features to support the increasing telecommunication services demands in the region.
We have started discussions to apply the EILD reference rates based on cost model to the existing agreements we have with operators with significant market power in the EILD market. As part of the strategy of reducing operating expenses and as consequence of the expansion of our optic network infrastructure we are gradually deactivating leased lines such as EILD. The agreements for network sharing between the national operators is also a key factor to the reducing of leased lines. The number of leased circuits has considerably decreased along the last year. New lines are hired only in the cases where leasing is demonstrated to be the most cost effective solution.
Migration of the Mobile Networks with Analog Technology
In February 2011, Anatel approved Resolution No. 562/11, which modified a provision of the regulation on conditions of use of RF, determining that, after a period of 360 days from the publication, the use of analog technology in RF sub bands of 800 MHz would no longer be allowed.
In relation to the use of such RF, we no longer have subscribers of analog technology (AMPS). However, our analog networks were still used by STFC concessionaires to provide services to subscribers in rural areas of the country, through a service called RuralCel.
In December 2016, Anatel approved Resolution No. 672/16, which prohibited the use of analog technology in the radio frequency sub bands of 800 MHz, 900 MHz, 1,800 MHz, 1,900 MHz and 2,100 MHz. We shut down our RuralCel service in 2017, and consequently turned off the related radio base stations, as attested to by Oi and recognized by Anatel in Decision-making No. 6/2017.
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Quality Management Regulation
In October 2011, Anatel published PCS and SCM quality management regulations to establish quality parameters which were to have been met by the mobile telephone and Internet connection operators in up to 12 months. Most quality parameters established relating to the quality of the networks, both mobile and fixed, became effective in October and November 2012.
As a response to the need to better quantify the financial impacts, Oi has presented a cancellation request along with a revision request to Anatel for the presentation of technical surveys of the economic impacts of the new regulations. The aforementioned request was submitted for a public hearing by Anatel, which resulted in a series of differing opinions regarding quality measures by the different operations that are currently being considered by Anatel.
With regard to STFC, Anatel approved in December 2012 the Quality Management Regulation for STFC service providers, the purpose of which is the creation of a new quality management model available, such as Quality Management Regulation for PCS and SCM.
In February 2013, Anatel published STFC quality management regulations to establish quality parameters which should be met by fixed telephone operators in 120 days. All parameters established became effective in June 2013.
In December 2019, Anatel approved Resolution No. 717/2019, the new telecommunications services quality regulation, or RQUAL. RQUAL will apply to all telecommunication services (mobile, fixed, fixed broadband and payTV). Under this new model, service quality is measured based on three indicators (Quality of Service Index, Perceived Quality Index and User Complaint Index), and it classifies operators according to performance. It also establishes a mandatory ombudsman. Anatel will be able to adopt case-by-case remediation measures, such as consumer compensation (based on a user compensation model), adoption of action plan or adoption of precautionary measures in order to ensure the improvement of quality standards. It also grants customers additional rights including the customer’s possibility of terminating their service agreement without penalty in case of poor service quality. The new regulation is expected to enter into force in 2021. Until the working group is formed by Anatel, operators and ESAQs shall define the goals, criteria and reference values for quality control and remediation measures. Anatel will monitor the indicators similar to the new ones established under RQUAL. The criteria and reference value shall be determined in the coming 12 months by the working group.
Anatel Administrative Proceedings
Under the terms of its PCS authorization, TIM Celular (now TIM S.A.) implemented mobile personal telecommunications coverage for the assigned area. Under such term of authorization, TIM Celular (now TIM S.A.) is required to operate in accordance with the quality standards established by Anatel. If it fails to meet the minimum quality standards required, TIM Celular (now TIM S.A.) is subject to Obligation Non-Compliance Determination Procedures, or PADO, and applicable penalties. Anatel has brought administrative proceedings against the TIM Group, which are currently pending for (1) noncompliance with certain quality service indicators (the quality management regulation, or RGQ, and/or RQUAL); and (2) default of certain other obligations assumed under the Terms of Authorization and pertinent regulations. In its defense before Anatel, the TIM Group attributed the lack of compliance to items beyond its control and not related to its activities and actions. We cannot predict the outcome of these proceedings at this time, but have accrued the amount in our balance sheet as a provision for all those cases in which we estimate our loss to be probable.
Disclosure Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act
Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added Section 13(r) to the Exchange Act. Section 13(r) requires an issuer to disclose in its annual or quarterly reports filed with the SEC whether the issuer or any of its affiliates has knowingly engaged in certain activities, transactions or dealings with the Government of Iran, relating to Iran or with designated natural persons or entities involved in terrorism or the proliferation of weapons of mass destruction during the period covered by the annual or quarterly report. Disclosure
is required even when the activities were conducted outside the United States by non-U.S. entities and even when such activities were conducted in compliance with applicable law.
67
We are also required to disclose our affiliates’ activities relating to Iran and Syria. TIM S.A. has entered into Roaming Agreements for the provision of telecommunication services with mobile telephone network, or MTN, from Iran and Syriatel from Syria.
In accordance with our Code of Ethics, we seek to comply with all applicable laws. The Code of Ethics is available on our website: www.tim.com.br/ir.
TIM Participações activities relating to Iran, Syria, Sudan and North Korea
TIM Participações is not, to its knowledge, engaged in any activities, transactions or dealings with the Government of North Korea, Iran, Syria and Sudan, or the Designated Countries.
The activities, transactions or dealings TIM Participações had in the year ended December 31, 2019 in its knowledge, related in any way to Designated Countries are roaming agreements for the provision of telecommunication services, which allow our mobile customers to use their mobile devices on a network outside their home network, or Roaming Agreements. In our view, the amounts related to these operations, detailed below, are immaterial in our business. The Company does not have any agreement with providers from North Korea.
Roaming Agreements with the following local mobile phone operators:
· MTN Irancell, in Iran;
· MCI Iran Telecom, in Iran;
· Sudanese Mobile Telephone (Zain) Co. Ltd, in Sudan; and
· Syriatel Mobile Telecom SA and MTN Syria (JSC), in Syria.
The impact on our net profit (loss) arising from Roaming Agreements with networks of the Designated Countries is detailed as follows:
|
Year ended December 31, 2019
|
|
|
|
|
(thousands of reais)
|
North Korea
|
¾
|
¾
|
Iran
|
4
|
2
|
Sudan
|
2
|
1
|
Syria
|
|
|
Total
|
|
|
Telecom Italia activities relating to Designated Countries
The information in this section is based solely on information provided to us by our parent Telecom Italia for purposes of complying with our obligations under Section 13(r) of the Exchange Act.
Telecom Italia informs us that the activities, transactions or dealings it and its consolidated subsidiaries had in the year ended December 31, 2019 that, to its knowledge, relate to Designated Countries are (1) Roaming Agreements, (2) international telecommunications services agreements with international carriers, which cover delivery of traffic, or International Carrier Agreements, and (3) commercial sale and other agreements, or Commercial Sale and Other Agreements.
Telecom Italia informs us that the only activities that it and its consolidated subsidiaries had in the year ended December 31, 2019 that, to its knowledge, relate in any way to the Designated Countries are:
68
Roaming Agreements
Its Roaming Agreements are with the following local mobile phone operators:
·
|
North Korea: none;
|
·
|
Iran: KFZO-TKC (former Payam Kish), Gostaresh Ertebatat Taliya PJS (former Taliya), Rightel Communication, Irancell (MTN), and Mobile Company of Iran (MCI);
|
·
|
Sudan: Sudanese Mobile Telephone (former ZAIN SD) and MTN Sudan, Sudatel Telecom Group;
|
·
|
Syria: MTN Syria (former Spacetel Syria 94 and former Areeba), and Syriatel Mobile Telecom SA (Syriatel).
|
|
Year ended December 31, 2019
|
|
|
|
|
|
|
(thousands of euros)
|
North Korea
|
—
|
—
|
—
|
—
|
Iran
|
5
|
24
|
701
|
2,689
|
Sudan
|
42
|
55
|
49
|
—
|
Syria
|
|
|
|
|
Total
|
|
|
|
|
The amounts of revenues, charges, receivables and payables are considered de minimis by Telecom Italia’s compared to its consolidated revenues, operating expenses, trade receivables and trade payables, respectively.
International Carrier Agreements
Telecom Italia’s subsidiary Telecom Italia Sparkle S.p.A., or TI Sparkle, directly and through its subsidiaries, has agreements with the Telecommunication Company of Iran (TCI) in Iran; Sudatel Telecom Group, ZAIN Sudan and Canartel in Sudan; and Syrian Telecom Establishment (STE) (Directorate General of Syria) in Syria.
The purpose of these International Carrier Agreements is to allow the uninterrupted exchange of international traffic. Consequently, Telecom Italia intend to continue maintaining these agreements.
|
Year ended December 31, 2019
|
|
|
|
|
|
|
(thousands of euros)
|
North Korea
|
—
|
—
|
—
|
—
|
Iran
|
131
|
—
|
—
|
—
|
Sudan
|
1,984
|
2,526
|
2,029
|
2,533
|
Syria
|
|
|
|
|
Total
|
|
|
|
|
The amounts of revenues, charges, receivables and payables are considered de minimis by Telecom Italia’s compared to its consolidated revenues, operating expenses, trade receivables and trade payables, respectively.
Commercial Sale and Other Agreements
TI Sparkle provides institutional access to Internet to Syria and Sudan by means of Seabone IP ports and data transmission capacity through international cable systems.
On December 20, 2016, Olivetti and Faravaran Hamgam, a local Iranian company, executed an agreement for the local production and sale of Olivetti’s electronic cash registers and the provision of assistance in connection with these machines in Iran. The agreement was never implemented.
69
In September 2016, TI Sparkle reached an agreement with TCI for the development of a Point of Presence, or POP, of Sparkle Internet backbone in Iran and the provision of IP Transit services from Sparkle to TIC. Currently the POP is not open.
|
Year ended December 31, 2019
|
|
|
|
|
(thousands of euros)
|
North Korea
|
—
|
—
|
Iran
|
226
|
259
|
Sudan
|
259
|
231
|
Syria
|
|
|
Total
|
|
|
The amounts of revenues, charges, receivables and payables are considered de minimis by Telecom Italia’s compared to its consolidated revenues, operating expenses, trade receivables and trade payables, respectively.
C. Organizational Structure
We are part of the Telecom Italia Group, which is engaged in the communications sector and, particularly, the fixed and mobile national and international telecommunications sector. The operating segments of the Telecom Italia Group are organized according to the respective geographical location of the telecommunications business (Domestic—Italy and Brazil). We are currently held, directly and indirectly, by Telecom Italia through its wholly owned subsidiary, TIM Brasil, which as of December 31, 2019 held 66.58% of our shares. In turn, the single largest shareholder of Telecom Italia is Vivendi, which holds, directly, a stake of approximately 23.9% of ordinary share capital. In 2019, Telecom Italia delisted all its U.S. listed securities and deregistered from the SEC, having filed Form 15F on July 9, 2019. Substantially all assets held by TIM Participações consist of the shares of its wholly owned subsidiary TIM S.A. (known, until its corporate name change in September 2017, as Intelig, and into which TIM Celular was merged in October 2018 in connection with the Reorganization, as set forth in more detail below) (incorporated in the Federative Republic of Brazil and headquarters located in the State of Rio de Janeiro).
On July 25, 2017, the Company’s Board of Directors approved the Reorganization, under which TIM Celular was to be merged into TIM S.A. In connection with the Reorganization, Intelig was transformed by corporate act into a closely held joint stock company and its corporate name was changed to TIM S.A. On October 31, 2018, the Reorganization was concluded and the merger of TIM Celular into TIM S.A. was completed, transferring all of TIM Celular’s operations to TIM S.A., and with TIM S.A. succeeding to all of TIM Celular’s assets, rights and liabilities. The Reorganization had the objective of capturing operational and financial synergies, through the implementation of a more efficient process structure, as well as accounting and internal control systems. This final step of the Reorganization resulted in efficiencies including: (i) tax efficiencies related to the termination of intercompany transactions; (ii) the creation of one company with combined services (fixed and mobile services) potentially resulting in a more efficient and swift response to the market’s needs, through the development of new services and integrated offers, and enabling a better strategic positioning and competitiveness as well as a better customer experience; (iii) optimization of resources and systems; and (iv) the recording by the Company of an approximately R$952 million tax credit. The minutes of the Reorganization were filed with and approved by the Board of Trade of the State of São Paulo (Junta Comercial do Estado de São Paulo), or JUCESP, in December, 2018.
TIM Participações holds 100% of the shares of TIM S.A.
The following chart illustrates our ownership structure prior to the Reorganization:
70
The following chart illustrates our current ownership structure:
D. Property, Plants and Equipment
Our principal properties consist of radio frequencies, transmission equipment, switching exchanges and gateway equipment, which connect calls to and from customers and enables data traffic connections, and radio base stations, which comprise certain signal transmission and reception equipment covering a defined area. At our radio base station, we have also installed antennas and certain equipment to connect these antennas with our switching equipment. As of December 31, 2019, we had more than 38 thousand eNodeB, more than 16 thousand NodeB, almost 13 thousand BTS and more than 100 thousand kilometers in fiber optic networks. We generally lease or buy the sites where our mobile telecommunications network equipment is installed. Over the course of financial year 2019, we had leased approximately 113,197 square meters of real property, all of which was available for office space. We also lease approximately 1,110 square meters of commercial office space, and 23,734 square meters of stores operated by us. There are no material encumbrances that may affect our utilization of our property or
equipment. All of our property and equipment is owned or leased domestically; we do not own or lease any property or equipment outside Brazil.
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TIM’s strategic plan for the 2020-2022 period, or the Industrial Plan 2020-2022, forecasts Company’s capital expenditures in a range of R$12.0 to R$12.5 billion. The Company has historically applied more than 80% of its yearly capital expenditures to network and information technology infrastructures.
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
A. Operating Results
The following discussion of the Company’s financial condition and operating results should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2019 included in this annual report and the Company’s audited consolidated financial statements as of and for the years ended December 31, 2018 and 2017 incorporated by reference to our annual report filed on Form 20-F with the SEC on April 10, 2019, which have been prepared in accordance with IFRS, issued by IASB, as well as with the information presented under “Item 3. Key Information—A. Selected Financial Data.”
Brazilian Political and Economic Overview
The year 2019 was marked by a modest improvement of the Brazilian economy including the continued recovery of GDP, which grew by 1.1%, mainly driven by services, investments and trade surplus. Brazil ended the year with a trade surplus of U.S.$47 billion, which is a reduction of 19.6% compared to 2018. Of note was the 7.5% decrease in exports that mostly offset the 3.3% decrease in imports. Inflation, measured by the IPCA, was under strict control and, by the end of 2019, it was at 4.3%, slightly above the 4.25% target set by the Central Bank for 2019. Such performance is explained by the slow economic recovery and the still relatively high unemployment rate. The SELIC, or basic interest rate, was further reduced in 2019 and closed the year at a low of 4.5%, which is 2.0 percentage points lower than SELIC at the closing of 2018. On February 5, 2020, the COPOM reduced the SELIC rate to 4.25% and further reduced the rate to 3.75% on March 18, 2020. As of April 28, 2020, the SELIC rate is 3.75%. This movement is explained by the still-modest economic recovery of the country and the lower expectation of inflation as well as by the uncertainties and market volatility arising from the ongoing COVID-19 pandemic. Despite the overall positive economic impact of the approval of the public pension reform, instability continued to characterize Brazil’s political environment, leading to uncertainties regarding the approval of other reforms such as fiscal and political reforms.
Internationally, continuous military posturing, particularly between the United States and North Korea, and enhanced trade disputes, especially between the United States and China, brought volatility to the markets, generating strong fluctuations in securities trading and commodities markets. In Europe, levels of economic activity entered a slower growth trajectory, as political tensions within the Eurozone and ongoing discussions regarding the Brexit transition period continue after the United Kingdom formally left the European Union on January 31, 2020. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Brazil—We may be impacted by volatility in the global financial markets”. In the United States, concerns regarding the impeachment of the current president throughout the now-concluded impeachment process, as well as his international policy, set a tone of uncertainty about the sustainability of global economic growth in the years to come.
In regard to foreign exchange, the Brazilian real depreciated 4.02% compared to the U.S. dollar in 2019. During the year, the exchange rate fluctuated due to continued reports of corruption cases in Brazil, expectations regarding the approval of the reforms, adjustments to Brazilian monetary policy, international trade disputes, and reforms proposed by the U.S. government. During the first part of 2020, the real continued to depreciate considerably as compared to the U.S. dollar. As of April 28, 2020, the exchange rate for U.S. dollars as reported by the Central Bank was R$5.5683 per U.S.$1.00, due to the expectations regarding the impact of overall market declines and
increased volatility arising from the COVID-19 pandemic, among other factors, that partially explains the 23.06% increase of the exchange rate since March 1, 2020.
72
Impact of Inflation on Our Results of Operations
Inflation directly impacts our results of operations as certain of our assets and liabilities are subject to monetary adjustments by reference to indexes that measure or that are impacted by inflation such as IPCA, TJLP, and SELIC. In 2019, the net impact of inflation adjustments was a gain of R$1,072 million and in 2018, was a loss of R$133 million. The net impact in 2019 can be explained by the gains regarding the adjustment of credits from a legal proceeding of TIM Celular S.A. (merged into TIM S.A.) on the exclusion of ICMS from PIS and COFINS tax bases. The loss in 2018 can be explained by the gains arising from restatements of taxes and the losses arising from the provisions for the aggregate contingent value of civil, labor and tax claims pending against us.
Sale and leaseback
A sale and leaseback transaction is one where the group sells an asset and immediately reacquires the use of the same asset by entering into a lease agreement with the buyer. The accounting treatment of the sale and leaseback transaction depends upon the substance of this transaction (by applying the principles of lease classification) and whether or not the sale was made at the asset’s fair value.
For financial sale and leaseback, the total gain is deferred and amortized over the lease term. For operational sale and leaseback, generally the assets are sold at fair value, and consequently, the gain or loss from the sale is immediately recognized in the income statement.
At the beginning of the lease term, the Company recognizes finance leases as assets and liabilities on its balance sheet at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the beginning of the lease.
The discount rate used in a sale and leaseback transaction is determined based on observable market transactions where the lessee would have to pay on a similar lease or borrowing arrangement contract or loan. As mentioned in Note 15 to our consolidated financial statements, discount rates applied by management in the transactions carried out during the year were decisive for the calculation of the portion of the gain recorded through profit and loss, as well as the portion of deferred gain and amortized over the lease term.
On January 1, 2019, IFRS 16 / CPC 06 (R2), a new accounting standard issued in July 2014, came into force. The standard requires that lessees recognize the assets and liabilities arising from lease agreements (“rent”; leases), except for short-term contracts, that is 12 months or less, or contracts in which the underlying asset is of low value. In this sense, the increase in the lease liability, due to the recognition of the right to use the assets, results in an increase in our net debt, with depreciation and interest being recognized in the income statement as a replacement for operating lease expenses.
Critical Accounting Policies
Critical accounting policies are those that are important to the presentation of our financial condition and results of operations and require management’s most subjective, complex judgments, often requiring management to make estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the possible future resolution of the uncertainties increases, those judgments become more complex.
Accounting estimates and judgments are continuously reassessed. They are based on the Company’s historical experience and other factors, such as expectations of future events, considering the circumstances presented as at the base date of the financial statements.
By definition, the accounting estimates resulting from such assumptions rarely equal the actual outcome. The estimates and assumptions that present significant risk with probability to cause relevant adjustments in the book values of assets and liabilities for the next fiscal years are shown below. We also describe our significant accounting policies, including the ones discussed below, in Note 2 to our consolidated financial statements.
73
Impairment Losses of Non-Financial Assets
Losses from impairment take place when the book value of assets or cash generating unit exceeds the respective recoverable value, which is considered as the fair value less costs to sell, or the value in use, whichever is greater. The calculation of the fair value less costs to sell is based on the information available from sale transactions involving similar assets or market prices less the additional costs incurred to dispose of those assets. The value in use is based on the discounted cash flow model. Cash flows derive from the Company’s business plan. Since this is an ongoing business, as from the fifth projection year a perpetuity of nominal growth of cash flows was estimated.
Any reorganization activities to which the Company has not committed itself on the financial statements disclosure date on which the financial statements are reported or any material future investments aimed at improving the asset base of the cash generating unit being tested are excluded for the purposes of the impairment test.
At December 31, 2019 and 2018, the principal non-financial assets valued in this way were goodwill recorded by the Company (see Notes 3(a) and 14 to our consolidated financial statements), and the fair value of goodwill was substantially in excess of its net book value.
Income Tax and Social Contribution (Current and Deferred)
Income tax and social contribution (current and deferred) are calculated in accordance with interpretations of the legislation currently in force. This process normally includes complex estimates in order to define the taxable income and differences. In particular, deferred tax assets on income tax and social contribution losses and temporary differences are recognized to the extent that it is probable that future taxable income will be available and can be offset. The recoverability of the deferred income tax on tax and social contribution losses and temporary differences takes into account estimates of taxable income (see Note 3(b) to our consolidated financial statements).
Provision for Legal and Administrative Proceedings
Legal and administrative proceedings are analyzed by the Company’s management and internal and external legal advisors. The Company’s reviews take into account factors such as the hierarchy of laws, case law available, recent court decisions and their relevance in the legal order. Such reviews involve the judgment of our management (see Note 3(c) to our consolidated financial statements).
Fair Value of Derivatives and Other Financial Instruments
Financial instruments presented at fair value in the balance sheet are measured using evaluation techniques that consider observable data or observable data derived from the market (see Notes 3 and 37 to our consolidated financial statements).
Unbilled Revenues
Considering that some billing cut-off dates occur at intermediate dates within the months, at the end of each month there are revenues already earned by the Company but not effectively billed to the customers. These unbilled revenues are recorded based on estimates which take into account historical data of usage, number of days since the last billing date, among other factors.
Results of Operations
The following discussion should be read in conjunction with “Item 4. Information on the Company” and “Item 3. Key Information.” As set forth in greater detail below, our financial condition and results of operations are significantly affected by Brazilian telecommunications regulation, including the regulation of rates. See “Item 4. Information on the Company—B. Business Overview—Regulation of the Brazilian Telecommunications Industry—Wholesale Rates Regulation.” Our financial condition and results of operations have also been, and are expected to continue to be, affected by the political and economic environment in Brazil. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Brazil.”
74
The following table shows certain components of our statement of operations for each year in the three-year period ended December 31, 2019, as well as the percentage change from year to year.
|
|
|
|
|
|
|
|
|
|
(in thousands of reais)
|
|
|
Revenue
|
17,377,194
|
16,981,329
|
16,233,959
|
2.3
|
4.6
|
Cost of services provided and goods sold
|
|
|
|
|
|
Gross income
|
|
|
|
|
|
Operating income (expenses):
|
|
|
|
|
|
Selling expenses
|
(4,986,289)
|
(4,970,780)
|
(4,575,177)
|
0.3
|
8.6
|
General and administrative expenses
|
(1,717,859)
|
(1,608,319)
|
(1,424,643)
|
6.8
|
12.9
|
Other income (expenses), net
|
1,275,542
|
(283,289)
|
(298,710)
|
n.a.
|
(5.2)
|
Operating income (expenses)
|
(5,428,606)
|
(6,862,388)
|
(6,298,530)
|
(20.9)
|
9.0
|
Operating income
|
4,514,857
|
2,417,523
|
1,933,352
|
86.8
|
25.0
|
Financial income (expenses):
|
|
|
|
|
|
Financial income
|
1,430,171
|
412,733
|
512,565
|
246.5
|
(19.5)
|
Financial expenses
|
(1,408,053)
|
(951,439)
|
(1,009,653)
|
48.0
|
(5.8)
|
Foreign exchange variations, net
|
(908)
|
1,373
|
(748)
|
n.a.
|
n.a.
|
Financial income (expenses)
|
21,210
|
(537,333)
|
(497,836)
|
n.a.
|
7.9
|
Income before income and social contribution taxes
|
4,536,067
|
1,880,190
|
1,435,516
|
141.3
|
31.0
|
Income and social contribution taxes
|
|
|
|
|
|
Net income for the year
|
|
|
|
|
|
Results of Operations for the Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018
Operating Revenues
Our operating revenues consisted of:
·
|
Mobile and Fixed Services: (i) local and long distance voice, (ii) data and content (Value-Added Services), (iii) interconnection, and (iv) other services.
|
·
|
Product Revenue: sale of handsets and accessories.
|
The composition of our operating revenues by category of service is presented in Note 26 to our consolidated financial statements and discussed below. We do not determine net operating revenues or allocate cost by category of service.
The following table shows the breakdown of our operating revenue, as well as the percentage change of each component from the prior year, for each of 2019 and 2018:
Statement of Operations Data: Operating Revenues
|
|
|
|
|
|
|
|
(in millions of reais)
|
|
Gross operating revenue
|
25,183
|
24,232
|
3.9
|
Deductions from gross revenue
|
|
|
|
Total revenue
|
|
|
|
Our gross operating revenue was R$25,183 million for the year ended December 31, 2019, representing a gain of 3.9% as compared to our gross operating revenue of R$24,232 million for the year ended December 31, 2018.
This gain was mainly due to the increase of mobile service revenue, which increased by 2.4% compared to the year ended December 31, 2018, and by the increase of landline service revenue, which increased by 11.3% for the year ended December 31, 2019, compared to the year ended December 31, 2018.
75
Deductions from gross revenue for the year ended December 31, 2019 were R$7,806 million, a decrease of R$555 million or 7.7% compared to the year ended December 31, 2018. This dynamic is directly related to the change in the mix of plans subscribed to by our client base. Plans with larger amounts of non-telecommunications services increased proportionally, and the revenues related to certain of those non-telecommunications services generate less taxes, and consequently lower deductions from gross revenue.
Our revenue for the year ended December 31, 2019 was R$17,377 million, an increase of 2.3% as compared to the year ended December 31, 2018. Net mobile service revenue increased 1.9% for the year ended December 31, 2019 as compared to the year ended December 31, 2018, from R$15,354 million in the year ended December 31, 2018 to R$15,648 million in the year ended December 31, 2019. Net landline service revenue increased by 11.3%, to R$949 million for the year ended December 31, 2019 from R$852 million for the year ended December 31, 2018, mainly explained by the results from the strong performance of TIM Live, which more than offset the decline in revenues from other fixed segments (such as corporate and wholesale).
The Company’s management understands that a breakdown of net revenue can be helpful in an analysis of the Company’s revenue dynamics. The details of net revenue and the main highlights are presented below:
Revenue Breakdown
|
|
|
|
|
|
|
|
(in millions of reais)
|
|
Total revenue
|
|
|
|
Service revenue
|
16,597.2
|
16,206.2
|
2.4
|
Service revenue – mobile
|
15,648.2
|
15,354.1
|
1.9
|
Client generated
|
14,372.2
|
14,043.5
|
2.3
|
Interconnection
|
477.3
|
712.2
|
(33.0)
|
Others
|
798.8
|
598.3
|
33.5
|
Service revenue – landline
|
948.9
|
852.3
|
11.3
|
Goods sold
|
780.0
|
775.1
|
0.6
|
Service Revenue
Service revenue for the year ended December 31, 2019 was R$16,597 million, an increase of 2.4% compared to R$16,206 million in the year ended December 31, 2018. Revenue from mobile services, or MSR, increased 1.9% to R$15,648.2 million for the year ended December 31, 2019, from R$15,354 million for the year ended December 31, 2018, mostly influenced by higher spending by prepaid customers, in addition to our ongoing efforts to monetize our postpaid client base via migrations to high-value plans.
As mentioned above, client generated revenues, or CGR, increased by 2.3%, from R$14,044 million for the year ended December 31, 2018 to R$14,372 million for the year ended December 31, 2019. This was driven by the process of clients migrating between segments and within segments in order to avail themselves of higher-value offers.
Interconnection revenue decreased 33% for the year ended December 31, 2019, with R$477 million as compared to R$712 million for the year ended December 31, 2018. The result remains impacted by the reduction of VU-M tariffs and less growth of incoming traffic.
Other mobile revenue for the year ended December 31, 2019 was R$799 million, an increase of 36% as compared to R$598 million for the year ended December 31, 2018. This performance reflects the increased revenues generated by network sharing and swap agreements. Such increased network sharing volume is aligned with our
strategy to be more efficient, from the perspective of asset allocation (capital expenditure and operating expenditure) in the process of expanding fiber (backbone and backhaul).
76
Monthly ARPU was R$25.1 for the year ended December 31, 2019, an increase of 5.8% as compared to the year ended December 31, 2018. The main explanation for this is the trend of customers migrating to high-value offers with faster speeds. ARPUs per segment, which exclude “non-TIM” client revenues and other mobile revenues, were slightly improved from the year ended December 31, 2018. ARPU for prepaid customers was R$12.9, an increase of 7.9%, and ARPU for post-paid customers was R$39.4, a decrease of 1.1%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018).
Landline service revenue increased 11.3% to R$949 million for the year ended December 31, 2019 as compared to R$852 million the year ended December 31, 2018, boosted by growth in TIM Live (which increased by 30.6%) more than offsetting the 3.9% drop in revenues from other businesses in the fixed segment (corporate and wholesale).
Goods Sold
Revenue from goods sold increased 0.6%, from R$775 million for the year ended December 31, 2018 to R$780 million for the year ended December 31, 2019, reflecting a better sales mix that contributed to a higher average price of handsets, making up for an inferior sales volume.
Operating Costs and Expenses
Operating costs and expenses decreased 1.0% for the year ended December 31, 2019 as compared to the year ended December 31, 2018.
The following table shows the components of operating costs and expenses for each of the periods indicated.
Statement of Operations Data: Operating Costs and Expenses
|
|
|
|
|
|
|
|
(in millions of reais)
|
|
Personnel
|
(1,070.7)
|
(1,031.6)
|
3.8
|
Third-party services
|
(3,123.5)
|
(3,140.4)
|
(0.5)
|
Interconnection and means of connection
|
(1,419.5)
|
(2,513.2)
|
(43.5)
|
Depreciation and amortization
|
(5,129.0)
|
(3,954.3)
|
29.7
|
Taxes, fees and contributions
|
(831.5)
|
(916.3)
|
(9.3)
|
Rent and insurance
|
(433.7)
|
(805.5)
|
(46.2)
|
Cost of goods sold
|
(931.8)
|
(883.9)
|
5.4
|
Publicity and advertising
|
(355.2)
|
(421.6)
|
(15.7)
|
Losses on doubtful accounts
|
(748.3)
|
(544.9)
|
37.3
|
Others
|
|
|
|
Total operating expenses
|
|
|
|
Personnel
Personnel costs increased by 3.8% in the year ended December 31, 2019 as compared to the year ended December 31, 2018, to R$1,071 million from R$1,032 million, respectively. This increase can be explained by (i) inflation as compared to the previous year, which increased wages and benefits since most of our employees’ wage and salary increases are generally tied to inflation rates; (ii) a larger number of employees (an increase of 0.4% in the year ended December 31, 2019 as compared to the year ended December 31, 2018); (iii) a non-recurring cost resulting from the end of contracts of certain executives who left the company in the year ended December 31, 2019; (iv) re-composition of old pension plans; and (v) a revision of our labor contingency loss forecast related to our own employees.
77
Third-Party Services
Third-party services costs decreased 0.5%, to R$3,124 million in the year ended December 31, 2019 as compared to R$3,140 million in the year ended December 31, 2018, mainly due to the decrease in prepaid sales and the related commissioning expenses for such prepaid segment, as well as reduced expenses related to physical billing, given the advance in the digitalization of this process.
Interconnection and Means of Connection
Our costs for interconnection and means of connection decreased 43.5%, to R$1,419 million in the year ended December 31, 2019 as compared to R$2,513 million in the year ended December 31, 2018. This dynamic was influenced by lower interconnection costs, in particular (i) the decrease in the mobile termination rate (VU-M), (ii) reduced outgoing traffic to other operators and (iii) a reduction in costs relating to content providers. These positive effects more than offset the higher costs related to network elements and infrastructure sharing and rent.
Depreciation and Amortization
Depreciation and amortization expenses increased by 29.7% in the year ended December 31, 2019 as compared to the year ended December 31, 2018, to R$5,129 million from R$3,954 million, respectively. This increase is mostly explained by (i) the increase in leased fixed assets due to the recognition of the right to use assets such as network infrastructure, vehicles, shops, among others, as consequence of the adoption of IFRS 16 in 2019, corresponding to R$940 million of the total increase, and (ii) the 700MHz license, which starts to be amortized as cities are activated (100% of the cities included in the amortization plan were reached in November 2019).
Taxes, Fees and Contributions
Taxes, fees and contributions costs decreased by 9.3% in the year ended December 31, 2019, to R$832 million from R$916 million in the year ended December 31, 2018, mainly impacted by the decrease in FISTEL expenses. For further information, see “Item 4. Information on the Company—B. Business Overview—Taxes on Telecommunications Goods and Services.”
Rental and Insurance
Rental and insurance costs decreased 46.2% to R$434 million in the year ended December 31, 2019 from R$806 million in the year ended December 31, 2018. This decrease is related to the impact from the trademark license agreement (which is classified as a rent contract under IFRS) entered into in the year ended December 31, 2019 regarding the right to use the “TIM” brand.
Costs of Goods Sold
Our cost of goods sold increased by 5.4%, from R$884 million in the year ended December 31, 2018 to R$932 million in the year ended December 31, 2019. This increase is mainly related to the fact that in the period, despite the reduction of sales volume in the period, high-value products were more relevant in the mix.
Publicity and Advertising
Publicity and advertising costs decreased 15.7% in the year ended December 31, 2019 as compared to the year ended December 31, 2018, to R$355 million from R$422 million, respectively, mainly due to our maintenance of the same general levels and visibility of advertising as during 2018, but with a cost efficiency of 6.9%.
Losses on Doubtful Accounts
Losses on doubtful accounts, otherwise known as bad debt, increased 37.3%, to R$748 million in the year ended December 31, 2019 as compared to R$545 million the year ended December 31, 2018, explained by the continued growth of revenues exposed to delinquency due to the growth in our postpaid customer base, in addition to a challenging macroeconomic environment (unemployment, income and indebtedness of families).
78
Others
Other costs increased by 37.4% in the year ended December 31, 2019, as compared to the year ended December 31, 2018. For the year ended December 31, 2019, those other costs amounted to R$95 million, compared to R$69 million for the year ended December 31, 2018.
Other Income (Expenses), Net
Other income, net, increased to R$1,275 million in income in the year ended December 31, 2019 from R$283 million in expenses in the year ended December 31, 2018. This increase was due to a tax credit due to the exclusion of ICMS from the calculation basis for PIS/COFINS of approximately R$1.8 billion in 2019.
Operating Income to Net Income
The following table shows our net income, as well as the percentage change, for each of the periods indicated:
Statement of Operations Data: Net Income
|
|
|
|
|
|
|
|
(in millions of reais)
|
|
Operating income
|
4,514.9
|
2,417.5
|
86.8
|
Financial income (expenses)
|
21.2
|
(537.3)
|
n.a.
|
Income and social contribution taxes
|
|
|
|
Net income for the year
|
|
|
|
Financial Income (Expenses)
In the year ended December 31, 2019, financial income was R$21 million, as compared to the R$537 million in financial expenses in the year ended December 31, 2018, explained by the adjustment of credits from a legal proceeding of TIM Celular S.A. (merged into TIM S.A.) on the exclusion of ICMS from PIS and COFINS tax bases in the amount of R$1,228 million. See Note 9 to our consolidated financial statements.
Income and Social Contribution Taxes
Income and social contribution taxes are calculated based on the separate income of each subsidiary, adjusted by the additions and exclusions permitted in the year ended December 31, 2019 in accordance with tax law. Income tax and social contribution were negative in R$914 million in the year ended December 31, 2019, compared to positive R$665 million in the year ended December 31, 2018. In 2018, the results were impacted by the merger of TIM Celular into TIM S.A. in 2018, which generated a tax credit of R$950 million). In that year, the adjusted effective rate was negative 14.4%. In 2019, income and social contribution taxes were impacted by the non-recurring effect of PIS/COFINS credits due to the exclusion of ICMS from the calculation basis of PIS/COFINS, which increased earnings before taxes by R$3,024 million.
Net Income for the Year
As a consequence of all of the dynamics explained above, our net income in the year ended December 31, 2019 was R$3,622 million, representing an increase of 47.9% from a net income of R$2,545 million in the year ended December 31, 2018.
Results of Operations for the Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017
Operating Revenues
Our operating revenues consisted of:
79
·
|
Mobile and Fixed Services: (i) local and long distance voice, (ii) data and content (Value-Added Services), (iii) interconnection, and (iv) other services.
|
·
|
Product Revenue: sale of handsets and accessories.
|
The composition of our operating revenues by category of service is presented in Note 26 to our consolidated financial statements presented with our annual report on Form 20-F issued on April 10, 2019 and discussed below. We do not determine net operating revenues or allocate cost by category of service.
The following table shows the breakdown of our operating revenue, as well as the percentage change of each component from the prior year, for each of 2018 and 2017:
Statement of Operations Data: Operating Revenues
|
|
|
|
|
|
|
|
(in millions of reais)
|
|
Gross operating revenue
|
24,232.4
|
22,611.1
|
7.2
|
Deductions from gross revenue
|
|
|
|
Total revenue
|
|
|
|
Our gross operating revenue was R$24,232 million for the year ended December 31, 2018, representing a gain of 7.2% as compared to our gross operating revenue of R$22,611 million for the year ended December 31, 2017. This gain was mainly due to the increase of mobile service revenue, which increased by 4.5% compared to the year ended December 31, 2017, and by the increase of landline service revenue, which increased by 8.3% for the year ended December 31, 2018, compared to the year ended December 31, 2017. During the year, we had an increase in the number of clients who adhered to loyalty offers, increasing the discount given to clients. This is one of the pillars of the strategy of migrating clients to higher-value plans.
Deductions from gross revenue for the year ended December 31, 2018 were R$7,251 million, an increase of R$874 million or 13.7% compared to R$6,377 million for the year ended December 31, 2017. This dynamic is directly related to the growth in gross revenue explained above.
Our revenue for the year ended December 31, 2018 was R$16,981 million, an increase of 4.6% as compared to R$16,234 million for the year ended December 31, 2017. Net mobile service revenue increased 4.5% for the year ended December 31, 2018 as compared to the year ended December 31, 2017, from R$14,687 million in the year ended December 31, 2017 to R$15,354 million in the year ended December 31, 2018. Net landline service revenue increased by 8.3%, to R$852 million for the year ended December 31, 2018 from R$787 million for the year ended December 31, 2017, mainly explained by the results from the strong performance of TIM Live, which more than offset the decline in revenues from other fixed segments (such as corporate and wholesale).
The Company’s management understands that a breakdown of net revenue can be helpful in an analysis of the Company’s revenue dynamics. The details of net revenue and the main highlights are presented below:
Revenue Breakdown
|
|
|
|
|
|
|
|
(in millions of reais)
|
|
Total revenue
|
|
|
|
Service revenue
|
16,206.2
|
15,474.1
|
4.7
|
Service revenue – mobile
|
15,354.1
|
14,687.1
|
4.5
|
Client generated
|
14,043.5
|
13,379.6
|
5.0
|
Interconnection
|
712.2
|
835.2
|
(14.7)
|
Others
|
598.3
|
472.3
|
26.7
|
Service revenue – landline
|
852.3
|
787.1
|
8.3
|
Goods sold
|
775.1
|
759.8
|
2.0
|
80
Service Revenue
Service revenue for the year ended December 31, 2018 was R$16,206 million, an increase of 4.7% compared to R$15,474 million in the year ended December 31, 2017. Revenue from mobile services, or MSR, increased 4.5% to R$15,354 million for the year ended December 31, 2018, from R$14,687 million for the year ended December 31, 2017, mostly influenced by an increase in client generated revenues, or CGR, which are composed of local voice revenues, long distance voice and data and content revenues. We also had a decline in interconnection revenues, which was almost entirely offset by an increase in other revenues.
As mentioned above, CGR increased by 5.0%, from R$13,380 million for the year ended December 31, 2017 to R$14,044 million for the year ended December 31, 2018. This was driven by the process of clients migrating between segments and within segments to higher-value offers. CGR expansion remains limited by a challenging macroeconomic environment in Brazil, characterized by slow economic recovery and a fiercer competitive environment among telecommunications companies. These elements impact in particular our prepaid recharge levels and, to a lesser extent, our ability to increase postpaid plan subscribers. Still, revenues generated by recurring offer packages increased 29.3% from the year ended December 31, 2017 and such packages now represent 77.1% of CGR (compared to 62.7% in 2017).
Interconnection revenue decreased 14.7% for the year ended December 31, 2018, with R$712 million as compared to R$835 million for the year ended December 31, 2017. The result remains impacted by the reduction of VU-M tariffs and declining growth of incoming traffic.
Other mobile revenue for the year ended December 31, 2018 was R$598 million, an increase of 26.7% as compared to R$472 million for the year ended December 31, 2017. This increase is explained by the current dynamic of network sharing contracts and swaps that generate additional mobile revenue, and which represent more than 50% of this line of revenue (and the corresponding network and interconnection costs in connection therewith).
Monthly ARPU was R$22.4 for the year ended December 31, 2018, an increase of 11.3% as compared to the year ended December 31, 2017. The main explanation for this increase in ARPU is the trend of subscribers migrating to higher-value plans, thereby improving our base mix of customers. ARPUs per segment, which exclude “non-TIM” client revenues and other mobile revenues, were slightly improved from the year ended December 31, 2017. ARPU for prepaid customers remained stable at R$11.5 and ARPU for post-paid customers was R$39.9 (an increase of 0.5% for the year ended December 31, 2018 as compared to the year ended December 31, 2017).
Landline service revenue increased 8.3%, to R$852 million for the year ended December 31, 2018 as compared to R$787 million the year ended December 31, 2017. This performance reflects the strong performance of TIM Live, more than offsetting the decline in revenues from other fixed segments (such as corporate and wholesale).
Goods Sold
Revenue from goods sold increased 2.0%, from R$760 million for the year ended December 31, 2017 to R$775 million for the year ended December 31, 2018, reflecting a better sales mix that contributed to a higher average price of handsets sold (an increase of 7.7% for the year ended December 31, 2018 as compared to the year ended December 31, 2017). This increase in revenue from goods sold occurred in spite of a 3.1% reduction in the overall volume of handsets sold in the year ended December 31, 2018 as compared to the year ended December 31, 2017.
81
Operating Costs and Expenses
Operating costs and expenses increased 1.9% for the year ended December 31, 2018 as compared to the year ended December 31, 2017.
The following table shows the components of operating costs and expenses for each of the periods indicated.
Statement of Operations Data: Operating Costs and Expenses
|
|
|
|
|
|
|
|
(in millions of reais)
|
|
Personnel
|
(1,031.6)
|
(956.4)
|
7.9
|
Third-party services
|
(3,140.4)
|
(3,023.6)
|
3.9
|
Interconnection and means of connection
|
(2,513.2)
|
(2,632.6)
|
(4.5)
|
Depreciation and amortization
|
(3,954.3)
|
(4,013.7)
|
(1.5)
|
Taxes, fees and contributions
|
(916.3)
|
(967.6)
|
(5.3)
|
Rent and insurance
|
(805.5)
|
(764.9)
|
5.3
|
Cost of goods sold
|
(883.9)
|
(846.8)
|
4.4
|
Publicity and advertising
|
(421.6)
|
(411.0)
|
2.6
|
Losses on doubtful accounts
|
(544.9)
|
(316.4)
|
72.2
|
Others
|
|
|
|
Total operating expenses
|
|
|
|
Personnel
Personnel costs increased by 7.9% in the year ended December 31, 2018 as compared to the year ended December 31, 2017, to R$1,032 million from R$956 million, respectively. This increase can be explained by (i) inflation as compared to the previous year, which increased wages and benefits; (ii) a larger number of employees (an increase of 1.5% in the year ended December 31, 2018 as compared to the year ended December 31, 2017); (iii) a non-recurring cost resulting from the end of contracts of certain executives who left the company in the year ended December 31, 2018; (iv) re-composition of old pension plans; and (v) a revision of our labor contingency loss forecast related to our own employees.
Third-Party Services
Third-party services costs increased 3.9%, to R$3,140 million in the year ended December 31, 2018 as compared to R$3,024 million in the year ended December 31, 2017, mainly due to our increased postpaid sales resulting in a commensurate increase in commissioning expenses for such postpaid segment.
Interconnection and Means of Connection
Our costs for interconnection and means of connection decreased 4.5%, to R$2,513 million in the year ended December 31, 2018 as compared to R$2,633 million in the year ended December 31, 2017. This dynamic was influenced by lower interconnection costs, in particular (i) the decrease in the mobile termination rate (VU-M), (ii) reduced outgoing traffic to other operators and (iii) a reduction in costs relating to content providers. These positive effects more than offset the higher costs related to network elements and infrastructure sharing and rent.
Depreciation and Amortization
Depreciation and amortization expenses decreased by 1.5% in the year ended December 31, 2018 as compared to the year ended December 31, 2017, to R$3,954 million from R$4,014 million, respectively. This increase is explained mostly by a growth in the investment in software dedicated to the digitalization process and by the commencement of amortization related to our 700MHz license (which occurs once activated in certain cities).
82
Taxes, Fees and Contributions
Taxes, fees and contributions costs decreased by 5.3% in the year ended December 31, 2018, to R$916 million from R$968 million in the year ended December 31, 2017, mainly impacted by the decrease in FISTEL expenses.
Rental and Insurance
Rental and insurance costs increased 5.3% to R$806 million in the year ended December 31, 2018 from R$765 million in the year ended December 31, 2017. This increase is related to the impact from the trademark license agreement entered into in the year ended December 31, 2018 regarding the right to use the “TIM” brand.
Costs of Goods Sold
Our cost of goods sold increased by 4.4%, from R$847 million in the year ended December 31, 2017 to R$884 million in the year ended December 31, 2018. This increase is related to the increase, by 7.7% as compared with the year ended December 31, 2017, in the average selling price of handsets, which more than offset the 3.1% reduction of sales volume in the period as compared with the year ended December 31, 2017.
Publicity and Advertising
Publicity and advertising costs increased 2.6% in the year ended December 31, 2018 as compared to the year ended December 31, 2017, to R$422 million from R$411 million, respectively, mainly due to the launch of new campaigns related to our new offers in our different segments.
Losses on Doubtful Accounts
Losses on doubtful accounts, otherwise known as bad debt, increased 72.2%, to R$545 million in the year ended December 31, 2018 as compared to R$316 million the year ended December 31, 2017, explained by the continued growth of revenues exposed to delinquency due to the growth in our postpaid customer base, as well as the impact of the adoption of IFRS 9 (Financial Instruments), as explained in Note 2(f) of our consolidated financial statements presented with our annual report on Form 20-F issued on April 10, 2019. Even with this increase, however, bad debt as a percentage of gross revenues remained under control at a level of 2% in the year ended December 31, 2018.
Others
Other costs remained stable in the year ended December 31, 2018 as compared to the year ended December 31, 2017. For the year ended December 31, 2018, those other costs amounted to R$69 million, compared to R$69 million for the year ended December 31, 2017.
Other Income (Expenses), Net
Other expenses, net, decreased 5.2% to R$283 million in the year ended December 31, 2018 from R$299 million in the year ended December 31, 2017. This decrease was due to a credit arising from a lawsuit filed by TIM Nordeste S.A. (ultimately merged into TIM S.A.) in which a final and unappealable decision was issued by the appeals court during the year ended December 31, 2018 in favor of the Company, in respect of the exclusion of the ICMS from the PIS and COFINS tax bases for the period from 2002 through 2009. For additional detail on this decision, see Note 28 to our consolidated financial statements presented with our annual report on Form 20-F issued on April 10, 2019.
Operating Income to Net Income
The following table shows our net income, as well as the percentage change, for each of the periods indicated:
83
Statement of Operations Data: Net Income
|
|
|
|
|
|
|
|
(in millions of reais)
|
|
Operating income
|
2,417.5
|
1,933.4
|
25.0
|
Financial income (expenses)
|
(537.3)
|
(497.8)
|
7.9
|
Income and social contribution taxes
|
|
|
|
Net income for the year
|
|
|
|
Financial Income (Expenses)
In the year ended December 31, 2018, financial expenses were R$537 million, an increase of 7.9% as compared to the R$498 million in financial expenses in the year ended December 31, 2017.
Income and Social Contribution Taxes
Income and social contribution taxes are calculated based on the separate income of each subsidiary, adjusted by the additions and exclusions permitted in the year ended December 31, 2018 in accordance with tax law. Income tax and social contribution was R$665 million in the year ended December 31, 2018, an increase as compared with a net expense of R$201 million in the year ended December 31, 2017, mainly explained by the impact of the merger of TIM Celular into TIM S.A. in 2018, which generated a tax credit of R$952 million.
Net Income for the Year
As a consequence of all of the dynamics explained above, our net income in the year ended December 31, 2018 was R$2,545 million, representing an increase of 106.1% from a net income of R$1,235 million in the year ended December 31, 2017.
B. Liquidity and Capital Resources
The main source of our liquidity for net working capital and investment is operating cash flow, complemented by short-term credit lines with local and international banks and long-term financing with national and international development agencies.
Since the cost to us of our debts has been increasing due to the macroeconomic conditions of Brazil and related to interest rate dynamics, resulting in a narrowing positive carry with a potential to turn into a negative carry, the Company decided in 2018 to reduce indebtedness by prepaying a significant amount thereof. In 2018, we prepaid R$2.2 billion in existing indebtedness with our own cash, reducing gross debt by 48.2%. In order to partially recompose our cash position, we approved the issuance of R$1.0 billion of debentures by TIM S.A. offered through a public placement with restricted efforts in accordance with CVM Instruction 476, which was disbursed in January 2019. The net proceeds from such issuance were and are expected to continue to be used for working capital. On March 20, 2019, we also entered into, but have not yet drawn on, a R$390 million credit agreement with FINAME for purposes of the acquisition of new machines, equipment, industrial systems, components and automation and computing goods of national manufacture. This facility replaced one of the sub-credits of a BNDES financing we entered into during 2018.
We continued our focus on reprofiling our debts through the date of this annual report. In February, 2020, as part of our liability management strategy, we prepaid our total outstanding debt with BNDES, which had become proportionally more costly due to the reduction in CDI and the leveling of TJLP. The prepayment was at a cost of 171% of the CDI and without breakage costs. We replaced the BNDES debt with new loans by Bank of America Merrill Lynch, dated as of February 7, 2020 (denominated in Euros) and The Bank of Nova Scotia, dated as of January 31, 2020 (denominated in U.S. dollars), at a cost of 108.3% of the CDI. At the same time, TIM S.A. drew down new loans under these two facilities totaling the equivalent of R$800 million — R$425 million under the Bank of America Merrill Lynch facility and R$375 million under the Bank of Nova Scotia facility. We also entered into a credit agreement with Banco do Nordeste do Brasil S.A. as lender and TIM S.A., as borrower, in the principal
amount of R$752 million, secured by a bank guarantee and receivables. The agreement has a total term of eight years, with three years of grace period and five years of amortization period, to subsidize our capital expenditures plan for the next three years (2020-2022) in the northeastern region of Brazil.
84
On April 7, 2020, due to global macroeconomic uncertainty regarding COVID-19 and its possible impacts, TIM S.A. executed a new credit agreement with The Bank of Nova Scotia in the amount of R$574 million denominated in U.S. dollars, guaranteed by TIM Participações. The cost post-hedge is 155.0% and disbursement occurred on April 22, 2020, with a one year maturity.
For 2020, we expect to finance our ordinary capital expenditures and other ordinary liquidity requirements with specific short-term soft loans or the disbursement of credit lines already entered into with BNDES, FINAME and Banco do Nordeste do Brasil S.A., or BNB. The Company believes that the telecommunications sector is more resilient in the face of a possible economic crisis in 2020 but we will continue monitoring the macroeconomic scenario and new funding alternatives throughout this year.
Sources of Funds
Cash from operations
Our cash flows from operating activities was R$7,065 million in the year ended December 31, 2019 compared to R$6,129 million in the year ended December 31, 2018, an increase of 15.3% mainly explained by an increase in our EBITDA.
We had other significant variations in our operational assets and liabilities, which affected our cash from operations. The main variations of assets and liabilities were:
Positives
·
|
Authorizations payable decreased to R$100.2 million in the year ended December 31, 2019, compared to R$104.6 million in the year ended December 31, 2018.
|
·
|
Taxes, charges and contributions decreased to R$40.0 million in the year ended December 31, 2019, compared to R$187.2 million in the year ended December 31, 2018.
|
·
|
Prepaid expenses increased to R$100.9 million in the year ended December 31, 2019, compared to R$56.8 million in the year ended December 31, 2018.
|
Negatives
·
|
Trade accounts receivable decreased to R$1,027.1 million in the year ended December 31, 2019, compared to R$1,028.8 million in the year ended December 31, 2018.
|
·
|
Suppliers increased to R$401.2 million in the year ended December 31, 2019, compared to R$331.7 million in the year ended December 31, 2018.
|
Financial Contracts
We and our subsidiaries are party to the financial contracts described below, each to be used for purposes of the development of our business, generally, unless otherwise expressly provided herein. With respect to loans denominated in currencies other than reais, we enter into currency swaps to hedge against exchange rate fluctuations.
As set forth below and as each agreement is described further in the following paragraph, in 2019, the Company obtained new loans totaling R$1.4 billion. The Company requested disbursement of only R$1.0 billion of these new loans and there were no disbursements of existing credit agreements made in 2019.
85
The terms of our long-term debt contain cross-default clauses, restrictions on our ability to merge with another entity, restrictions on our ability to prematurely redeem or repay such debt and restrictions on sales and exchanges of assets. They also contain various financial ratio covenants. We are currently not, and do not expect to be, in breach of any material covenant of our debt instruments, which breach would be construed an event of default under their terms.
As mentioned above, our principal financing agreements are:
·
|
Master Loan Agreement, dated as of June 20, 2013, between Cisco Capital, as lender, TIM Celular (which has been merged into TIM S.A. in connection with the Reorganization), as borrower. The purpose of the loan is to finance TIM Celular (now TIM S.A.)’s purchase of Cisco and third-party products and services. The loan to be given pursuant to the Master Loan Agreement was executed pursuant to the following Facility Agreements: (1) Facility Agreement dated August 26, 2013, between Cisco Capital, as lender, and TIM Celular (now TIM S.A.), as borrower, in the total principal amount of U.S.$50 million and cost of 93.80% of the CDI after hedging (fully disbursed on September 13, 2013); (2) a new Facility Agreement dated October 14, 2014, between Cisco Capital, as lender, and TIM Celular (now TIM S.A.), as borrower, in the total principal amount of U.S.$50 million and cost of 91.90% of the CDI after hedging (fully disbursed on November 5, 2014); and (3) a new Facility Agreement dated October 27, 2015, between Cisco Capital, as lender and TIM Celular (now TIM S.A.), as borrower in the total principal amount of U.S.$50 million and cost of 84.50% of the CDI after hedging (fully disbursed on December 15, 2015). The agreements expire after 5 years and no guarantees were issued. As of December 31, 2019, the total outstanding debt, converted from U.S. dollars and including allowed interest, of TIM S.A. was R$40 million;and we confirm that the tranches (1) and (2)matured in September 2018 and November 2019,respectively.
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·
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Loan Agreement, dated as of December 23, 2015, between Finnish Export Credit as lender, KfW IPEX as facility agent, TIM Celular (which has been merged into TIM S.A. in connection with the Reorganization), as borrower and TIM Participações as guarantor, in the principal amount of U.S.$150 million. The new Loan Agreement is divided in three tranches of up to U.S.$50 million to be disbursed in 2016, 2017 and 2018. On April 20, 2016, the first tranche of U.S.$45 million was disbursed and it has an average cost of 79% of the CDI after hedging. The second tranche of U.S.$48 million was disbursed on April 20, 2017 and it has an average cost of 81.5% after hedging and the third tranche of U.S.$40 million was disbursed on September 17, 2018 and it has an average cost of 92.59% after hedging. On August 24, 2018, we requested the partial cancellation of U.S.$5.1 million (or U.S.$11.1 million if considered the regular reductions of total amount thereunder). As of December 31, 2019, the total outstanding amount under this credit agreement, converted from U.S. dollars and including accrued interest, was R$330 million and there will be no more disbursements. The agreements mature on January 2, 2024, December 31, 2024 and December 30, 2025, respectively.
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·
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Deed of Indenture for the Issuance of Simple Unsubordinated Debentures, with Additional Personal Guarantee, not Convertible into Shares, in a Single Series, for Public Placement with Limited Efforts of the First Issuance of TIM S.A. (Instrumento Particular de Escritura de Emissão de Debêntures Simples, da Espécie Quirografária com Garantia Adicional Fidejussória, não Conversíveis em Ações, em Série Única, para Distribuição Pública com Esforços Restritos da Primeira Emissão da Tim S.A.), dated as of January 9, 2019, between TIM S.A., as issuer, Simplific Pavarini Distribuidora de Títulos e Valores Mobiliários Ltda., as fiduciary agent, and TIM Participações, as guarantor. The total amount of the issuance was R$1,000,000,000 through the issuance of 100,000 debentures each with a nominal value of R$10,000 on the issuance date and in a single series. The debentures are non-convertible and unsubordinated with an additional personal guarantee. For all legal purposes, the issuance date is January 15, 2019 and the term of the debentures is of 18 months as from the issuance date, or July 15, 2020.
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·
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Credit Agreement, dated March 20, 2019, between Agência Especial de Financiamento Industrial S.A. – FINAME, an entity within the BNDES system, as lender and TIM S.A. as borrower, in the principal amount of R$390 million for exclusive use in the acquisition of new machines, equipment, industrial systems, components and automation and computing goods of national manufacture, accredited by the Computerized Supplier Accreditation (Credenciamento de Fornecedor Informatizado), or CFI, of the BNDES system. The new agreement replaces one of the sub-credits (Credit Line B) of the existing 2018 BNDES Facility with better interest rate and tenor conditions: a fixed interest rate up to 1.44% plus the TLP and tenor up to 16 years. There were no additional costs to sign this loan and there were no disbursements in 2019.
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86
·
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Credit Agreement, dated as of January 31, 2020, between Banco do Nordeste do Brasil S.A. as lender and TIM S.A., as borrower, in the principal amount of R$752.5 million, secured by a bank guarantee and receivables. The agreement has a total term of eight years, with three years of grace period and five years of amortization period, with the use of proceeds for our capital expenditures plan for the next three years (2020-2022) in the northeastern region of Brazil pursuant to certain standard FINAME requirements, as described in the agreement. The credit line is divided in two tranches: (i) a R$325 million tranche at IPCA plus 1.44% per year or IPCA plus 1.22%, considering a 15% compliance bonus; and (ii) a R$427 million tranche at IPCA plus 1.76% per year or IPCA plus 1.48%, considering a 15% compliance bonus. Disbursement in tranches is anticipated to occur in 2020, 2021 and 2022.
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·
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Credit Agreement, dated January 31, 2020, between The Bank of Nova Scotia, TIM S.A. as borrower and TIM Participações as guarantor, in the principal amount of U.S.$87.5 million and a term of 1.5 years, bearing a cost of 108.70% of the CDI after hedging. The Credit Agreement provides for the issuance of a promissory note by TIM S.A. in an amount in reais equivalent to U.S.$87.5 million and, in connection with the required hedging, the execution of a Swap Agreement, dated as of January 31, 2020, between Scotiabank Brasil S.A. Banco Múltiplo, as lender, and TIM S.A., as borrower, and TIM Participações S.A., as guarantor. Disbursement of the entire principal amount occurred on February 18, 2020.
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·
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Loan Agreement, dated February 7, 2020, between Bank of America Merrill Lynch and TIM S.A. as borrower, in the principal amount of €89.5 million and a term of 1.5 years, bearing a cost of 108.05% of the CDI after hedging. The Loan Agreement provides for the issuance of a promissory note by TIM S.A. in an amount in reais equivalent to €89.5 million and, in connection with the required hedging, the execution of a Swap Agreement, dated as of January 31, 2020 (with an effective date of February 18, 2020), between Bank of America Merrill Lynch Banco Múltiplo S.A., as lender, and TIM S.A., as borrower. Disbursement of the entire principal amount occurred on February 18, 2020.
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·
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Credit Agreement, dated as of April 7, 2020, between The Bank of Nova Scotia, as lender and TIM S.A., as borrower, in the principal amount of R$574 million denominated in U.S. dollars and a term of one year, bearing a cost of 155.0% of the CDI after hedging. Disbursement occurred on April 22, 2020.
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See Note 19 in our consolidated financial statements for a further description of such financing agreements.
The following financial contracts were disclosed in our annual report filed on Form 20-F with the Securities and Exchange Commission on April 10, 2019, all of which have since matured and been repaid or have been prepaid by the Company:
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Loan Agreement, dated as of April 15, 2014, between KfW IPEX as lender, TIM Celular (which has been merged into TIM S.A. in connection with the Reorganization), as borrower and TIM Participações as guarantor, in the principal amount of U.S.$100 million. The total outstanding amount as of December 31, 2019 converted from U.S. dollars was R$403 million, including accrued interest. The agreement bore an average cost of 102.50% of the CDI after hedging. No guarantees were issued under this loan. The agreement matured on April 15, 2019.
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·
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Credit Agreement, dated as of May 2, 2018, between BNDES as lender and TIM Celular (now TIM S.A.) as borrower, and TIM Participações as guarantor, or the 2018 BNDES Facility, in the principal amount of R$1,500 million. The agreement involves three credit lines with equal conditions of interest rates and tenors: (1) Credit Line A, in an amount of R$1,090 million, with a fixed interest rate of 1.95% plus the TJLP and eight years tenor; (2) Credit Line B, in an amount of R$390 million, with a fixed interest rate of 1.95% plus the TJLP and eight years tenor; and (3) Credit Line C, in an amount of R$20 million, with a fixed interest rate of 1.95% plus the TJLP and eight years tenor. Each credit line is to be used for specific purposes as set forth in the Credit Agreement and there were no disbursements on 2018 or 2019. In March 2019, Credit Line B was canceled and replaced by FINAME DIRETO (as defined above). The 2018 BNDES Facility was prepaid and terminated in December 2019.
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Credit Agreement, dated as of December 23, 2013, between BNDES, as lender and TIM Celular (which has been merged into TIM S.A. in connection with the Reorganization), as borrower, and TIM Participações as guarantor, in the principal amount of R$5,700 million. The agreement, involves six credit lines, each of which has different conditions, interest rates and tenors: (1) Credit Line A, in an amount of R$2,401 million, a fixed interest rate of 2.52% plus the TJLP and eight years tenor; (2) Credit Line B, in an amount of R$600.4 million, a fixed interest rate of 2.52% plus the SELIC and eight years tenor; (3) Credit Line C, in an amount of R$2,036 million, a fixed interest rate of 2.52% plus the SELIC and eight years tenor; (4) Credit Line D, in an amount of R$428 million, a fixed interest rate of 3.50% and seven years tenor; (5) Credit Line E, in an amount of R$189 million, a fixed interest rate of 1.42% plus the TJLP and eight years tenor; and (6) Credit Line F, in an amount of R$45 million, an interest rate of TJLP and eight years tenor. Each credit line is to be used for specific purposes as set forth in the Credit Agreement. Due to the interest rate dynamics in Brazil and strong cash flow, the Company prepaid R$800 million of this loan in December 2017 and a total of R$2.2 billion in 2018; these prepayments reduced our monthly installment payments under the Credit Agreement but the maturity date remains the same (2022). Because of that, the total outstanding amount under this credit agreement, including accrued interest, was R$633 million as of December 31, 2019. However this remaining amount was prepaid in February 2020.
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·
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Credit Agreement, dated as of November 19, 2008, amended on December 12, 2008, June 29, 2010, and December 10, 2012, among BNDES, as lender and TIM Celular (now TIM S.A.) and Intelig (each now known as or merged into TIM S.A.), as borrowers, and TIM Participações as guarantor, in the principal amount of R$3,674 million (a R$2,164 million increase in the credit limit was effected by way of amendment on December 10, 2012). The agreement bore interest at either (1) a fixed rate of 3.32% plus the TJLP; (2) TJLP or (3) fixed interest rate of 2.5% per annum. As of December 31, 2019, the was no outstanding debt of TIM S.A. under this credit agreement, as it matured on December 15, 2019.
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Funds From Subsidiaries
There are no material restrictions on the ability of our subsidiaries to transfer funds to the Company in the form of cash dividends, loans or advances.
Uses of Funds
Our principal uses of funds during the three-year period ended December 31, 2019, were capital expenditures, payment of dividends to our shareholders and loan repayments.
Material Capital Expenditures
Our capital expenditures in 2019, 2018 and 2017 related primarily to: (i) developing our fiber optic network, (ii) deployment and expansion of the capacity of our 3G and 4G networks, (iii) expanding network capacity, geographic coverage and digitalization, (iv) maintenance of our networks and IT systems, (v) purchases of equipment relating to our migration to PCS operations, and (vi) developing new operational and information technology systems.
The following table contains a breakdown of our investments in fixed assets for the years ended December 31, 2019, 2018 and 2017:
Capital Expenditures Categories
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Year ended December 31,
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|
|
|
|
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(in millions of reais)
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Network
|
2,823.7
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2,732.3
|
2,904.6
|
Information technology
|
775.0
|
720.6
|
717.8
|
Licenses
|
(82.1)
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98.9
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69.1
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Other
|
|
|
|
Total capital expenditures
|
|
|
|
88
See “Item 4. Information on the Company—A. History and Development of the Company—Capital Expenditures.”
Dividends
Our dividends are calculated in accordance with our By-laws and Brazilian corporate law. Under our By-laws, we are required to distribute an aggregate amount equal to at least 25% of our adjusted net income to our shareholders, either as dividends or as tax-deductible interest on shareholders’ equity, each year ended December 31, provided that there are funds available for distribution.
For the purposes of the Brazilian corporate law and in accordance with our By-laws, “adjusted net income” is the amount equal to the net profit adjusted to reflect allocations to or from: (1) the legal reserve, and (2) a contingency reserve for probable losses, if applicable.
The following table contains a breakdown of the dividends and interest on shareholders’ equity actually paid (net of income taxes) by us to our shareholders during the years ended December 31, 2019, 2018 and 2017:
Dividend Distribution
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|
|
|
|
|
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(in millions of reais)
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Dividends
|
—
|
—
|
103.3
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Interest on shareholders’ equity (net of withholding tax)
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|
|
|
Total distributions
|
|
|
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On April 7, 2020, our shareholders voted to approve the distribution of R$846.1 million as interest on shareholders’ equity in accordance to the minimum required by Brazilian Law, with respect to our 2019 results. The amounts indicated in the table above for 2018 and 2017 were approved at the annual general meeting in 2019 and 2018, respectively. The amount of withholding taxes was R$149.3 million. The amounts paid were R$313.6 million in 2019 and R$532.5 million in 2020.
Funding and Treasury Policies
The Company maintains a general policy of continually monitoring its financial position and treasury activities in order to ensure solid fiscal control. As a result of our (1) solid cash position and (2) increase of 0.06 (or 0.69 considering the impact of IFRS 16) in our Net Debt to EBITDA ratio (for additional detail, see “—Leverage” below), we foresee specific funding transactions to bridge working capital needs in the first quarter of 2020, especially in the context of increased volatility and overall market declines due to the ongoing COVID-19 pandemic. In accordance with our funding and treasury policy, we will continue to monitor new financing opportunities with a particular focus on soft loans, or loans with a below-market interest rate, and long-term facilities.
Leverage
Management tracks the ratio of Net Debt to EBITDA, which we refer to as the financial leverage index, in order to monitor the sustainability of our debt levels and our ability to take on additional debt. The ratio is a common credit analysis metric in the telecommunications industry and shows approximately how many years it would take to pay back our indebtedness, assuming no new debt is taken on, EBITDA remains constant and all cash and cash equivalents may be used to repay debt. In addition, we believe that the ability to take on additional debt is a critical
factor affecting success, as indebtedness may be required to make investments necessary to grow the Company’s business. We believe that our current financial leverage index, Net Debt to EBITDA, reflects conservative leverage levels and the ability to incur additional debt if needed for extraordinary investment. Investors should be cautious in comparing our financial leverage index to that of other companies that report a similar ratio of debt to EBITDA because EBITDA in particular may be calculated differently from company to company, leading to financial leverage indices that are not comparable. Accordingly, any such comparison may be misleading.
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The following table sets forth our financial leverage index for the reported periods:
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|
|
|
|
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(in millions of reais)
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Total borrowing and derivatives (Notes 19 and 36)
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1,987
|
1,987
|
1,593
|
4,643
|
Leasing – Liabilities (Note 15)
|
7,781
|
1,585
|
1,940
|
1,887
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Leasing – Assets (Note 15)
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(156)
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(156)
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(208)
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(205)
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Less: Cash and cash equivalents (Note 4)
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(2,285)
|
(2,285)
|
(1,076)
|
(2,961)
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FIC (Investment Fund in Units) (Note 5)
|
|
|
|
|
Net debt
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6,672
|
476
|
1,465
|
2,598
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EBITDA
|
9,645
|
8,328
|
6,372
|
5,947
|
Financial leverage index
|
0.69
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0.06
|
0.23
|
0.44
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A reconciliation of our net income to EBITDA, as well as a further explanation of the calculation of our financial leverage index, is also presented in Note 36 to our consolidated financial statements.
We believe that using EBITDA as a non-GAAP measure is useful to management, investors and other users of our financial information in evaluating operating profitability on a more variable cost basis as they exclude the depreciation and amortization expense related primarily to capital expenditures and acquisitions that occurred in prior years, as well as in evaluating operating performance in relation to TIM’s competitors. EBITDA is calculated by adding back interest, taxes, depreciation and amortization expense to net income.
C. Research and Development
Research and Development
We do not independently develop new telecommunications hardware and depend upon the manufacturers of telecommunications products for the development of new hardware.
Patents and Licenses
We hold no material intellectual property assets. Telecom Italia owns the rights to the “TIM” trade name, which is currently licensed to us. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—Any modification or termination of our ability to use the “TIM” trade name may adversely affect our business and operating results”.
D. Trend Information
Customer Base and Market Share
In the year ended December 31, 2019, our subscriber base decreased 2.6% to 54.4 million customers, which represented a market share of 24%, compared to 55.9 million customers and 24.4% of market share in 2018. This overall subscriber base reduction was a result of a significant decrease in the number of prepaid customers in the Brazilian mobile telecommunications market, generally, as most of our disconnections were of prepaid plans, and which were not offset by solid performance in our postpaid customer base. Prepaid plan users concentrate the lower-middle socioeconomic classes of Brazil, as defined by the IBGE. These users are particularly affected by macroeconomic pressures in Brazil, accelerating the number of users consolidating multiple SIM cards to a single
one, the high penetration of mobile service and the rapid substitution of voice for data usage, resulting in a decrease in the “community effect.”
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With respect to the composition of our customer base, the postpaid segment accounted for 39.4% of our total subscriber base in the year ended December 31, 2019, compared to 36.2% from a year ago, due to (i) customers’ migration from prepaid to postpaid (mainly via our Control plans), (ii) number portability (migration from one to another operator) and (iii) the stabilization of the churn rate. The prepaid segment represents 60.6% of our customer base at the end of 2019, compared to 63.8% in 2018, due to the disconnection of 2.7 million lines in the year, and which reflected the simultaneously high volumes of activations and cancellations.
Although no assurances can be given as to the size of our subscriber base and market share in the future, we intend to focus on maintaining and improving our strong position in the mobile and fixed telecommunications market in Brazil. Our strategies for doing so are outlined in more detail in “Item 4. Information on the Company——B. Business Overview—Our Strategy.”
Trends in Sales and Prices
The volume of unit sales continues to decrease due to a slow recovery of economic conditions, which limits consumer purchasing power, the decrease in our customer base overall, and the trend of customers seeking greater value over high volume. We will continue to monetize our customer base using the strategy of “more for more” and focus on the development of all of our business lines.
Under our PCS authorizations, we are allowed to set prices for our service plans, subject to approval by Anatel, provided that such amounts do not exceed a specified inflation adjusted cap. We expect that the adjustment of our prices will follow the market trend. The rates for our service plans, as well as a description of the main features of such plans, are set out in “Item 4. Information on the Company—B. Business Overview—Mobile Service Rates and Plans.”
Recently, public and private sector policies and initiatives to reduce the transmission of COVID-19, such as the imposition of travel restrictions, the promotion of social distancing and the adoption of work-from-home and online learning by companies and institutions, together with the adverse impact on our prepaid customers from the pandemic, could impact our operations and the amount and ways our customers use our networks and other products and services. In addition, COVID-19 may affect the ability of our suppliers and vendors to provide products and services to us, such as new mobile devices or SIM cards or the ability to service our network. Some of these factors could increase the demand for our products and services, while others could decrease demand or make it more difficult for us to serve our customers, such as closing certain of our retail locations. Due to the speed with which the situation is developing, we are not able at this time to estimate the impact of COVID-19 on our financial or operational results, but the impact could be material.
Monthly Average Revenue Per User (ARPU)
TIM’s monthly ARPU was R$23.7 in the year ended December 31, 2019, an increase of 5.6% when compared to a monthly ARPU of R$22.4 for the year ended December 31, 2018, largely due to the improvement in the composition of our customer base with more postpaid and also by the individual growth of each segment.
Competitive Environment
Brazil’s mobile telecommunications market is in a mature stage and is subject to a competitive landscape that is almost unique in the world. This market has grown at a faster pace compared to other sectors of the economy. Brazil is one of the few markets with four nationwide competitors, each with a market share between 16% and 33%, which TIM believes, acts as the driver of growth and for the development of differentiated and quality services at fair and competitive prices.
In 2019, amid this competitive landscape, our subscriber acquisition costs, or SAC, (which are comprised of a subsidy, commissions and total advertising expenses) amounted to approximately R$51.70 per gross add for the year ended December 31, 2019, compared to approximately R$46.40 per gross add in the year ended December 31, 2018. The increase of 5.1% year over year is primarily due to higher commissioning expenses (postpaid users reflected an
increased proportion of our gross additions) and to the increase in loyalty offers (discounted device offers). Despite the increase in SAC, the SAC to ARPU ratio, which indicates the return per client, remained at a healthy level of 2.2 months in 2019.
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In addition to competition from other traditional mobile telecommunications service providers, the level of competition from landline service providers has increased, and it is possible it will continue to increase due to an aggressive attempt to attract subscribers away from mobile service based on price and package offers that bundle multiple applications such as voice services (mobile and fixed), broadband and other services. Technological changes in the telecommunications field, such as the rapid development of 4G (LTE) and its derivations (Advanced LTE and others) after the consolidation of 3G in recent years, the increasing use of number portability and in the next few years, the development of the fifth generation are expected to introduce additional sources of competition. It is also expected that Anatel will auction licenses by the end of 2020, or possibly by 2021, in order to provide mobile telecommunications services over additional bandwidth frequencies to accommodate these emerging technologies.
E. Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of December 31, 2019.
F. Tabular Disclosure of Contractual Obligations
The following table shows our contractual obligations and commercial commitments as of December 31, 2019:
Payments due by Period (in millions of reais)
|
|
|
|
|
|
Total borrowings (post-hedge)(1)
|
1,987
|
1,368
|
497
|
100
|
22
|
Leases – IFRS 16(2)
|
6,196
|
828
|
1,457
|
1,281
|
2,631
|
Leasing (previous IAS 17 finance leases)
|
|
|
|
|
|
Total(3)
|
|
|
|
|
|
(1) Considering the balances related to derivative financial instruments as of December 31, 2019.
(2) Leases in which the Company, as the lessee, substantially holds all of the risks and benefits of ownership, are classified as financial leases, which are capitalized at the beginning of the lease at the lower of the fair value of the leased item and the present value of the payments provided for in the agreement. Interest related to the leases is taken to income as financial costs over the term of the contract.
(3) Other than as set forth herein (see, for example, Item 4. Information on the Company—B. Business Overview—Our Business), we have no capital lease obligations, unconditional purchase obligations, or other long-term liabilities reflected on our balance sheet of our primary financial statements. Interest is not included in long-term debt since it is subject to variable interest.
Contingent Pension Liabilities
Until December 1999, we participated in a multi-employer defined benefit plan, or the Telebrás Pension Plan, that covered the employees of the Telebrás System who retired before the breakup of Telebrás in May 1998 as well as those who continued working for the operating companies after May 1998. We are contingently liable, jointly and severally, with the other New Holding Companies, for the unfunded obligations of the Telebrás Pension Plan with respect to all such employees who retired before January 30, 2000. In December 1999, we changed to a defined benefit plan, or the PBS Plan, that covers only those former employees of Telebrás who continued to be employed by us after December 1999.
In November 2002, we created a separate defined contribution plan, or the TIMPREV Pension Plan. Migration to this plan was optional for employees linked to the PBS Plan. Migration to the TIMPREV Pension Plan extinguishes the migrating participant’s rights under the PBS Plan.
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SISTEL and TIMPREV
The Company and TIM Celular (which has been merged into TIM S.A. in connection with the Reorganization) have sponsored a private defined benefit pension plan for a group of Telebrás system’s former employees, which is managed by Fundação Sistel de Seguridade Social – SISTEL, as a consequence of the legal provisions applicable to the privatization process of these companies in July 1998.
Given that in 1999 and 2000 the sponsors of the pension plans managed by SISTEL had already negotiated conditions for the creation of individual pension plans for each sponsoring company and the maintenance of joint liability only in relation to the participants already assisted on January 31, 2000, the Company and its subsidiaries, like other companies created as a result of the former Telebrás system, created in 2002 the TIMPREV Pension Plan, a defined contribution pension plan meeting the most modern social security standards adopted by private companies, and enabling migration to this plan of the employee groups linked to SISTEL.
On November 13, 2002, the Brazilian Secretariat for Supplementary Pension Plans, through official ruling CGAJ/SPC No. 1917, approved the statutes of the new pension plan, or hereafter the Statutes of the TIMPREV Benefits Plan, as a defined contribution plan, which provide for new conditions for granting and maintaining benefits, as well as the rights and obligations of the Plan Managing Entity, the sponsoring companies, participants and the beneficiaries thereof.
Under this new plan, the sponsor’s regular contribution will correspond to 100% of a participant’s basic contribution, and TIMPREV’s managing entity will ensure the benefits listed below, under the terms and conditions agreed upon, with no obligation to grant any other benefits, even if the government-sponsored social security entity starts granting them:
· Normal retirement pension;
· Early retirement pension;
· Disability pension;
· Deferred proportional benefit; and
· Death benefit.
However, as not all of the Company’s and its subsidiaries’ employees have migrated to TIMPREV, the pension and health care plans deriving from the TELEBRÁS system listed below remain in force:
PBS: defined benefits plan of SISTEL, which includes active employees who participated in the plans sponsored by the companies of the former TELEBRÁS system;
PBS Assistidos: a multi-sponsored pension plan for inactive employees;
Convênio de Administração: for managing pension payments to retirees and pensioners of the predecessors of the subsidiary companies; and
PAMEC/Apólice de Ativos: health care plan for pensioners of the predecessors of the subsidiary companies.
As happened with the Termo de Relação Contratual Atípica, or TRCA Plan, the Company, until December 31, 2010, had understood that it was responsible for liabilities of PAMEC participants (health care plan) related to the Company and its subsidiaries. Based on a new understanding of its internal and external lawyers, the Company has changed its position. As a result, the liabilities previously recorded were written off.
In accordance with the rules established by NPC-26 (IAS 19 – Employee Benefits) issued by the Institute of Independent Auditors of Brazil – IBRACON, and approved by CVM Resolution No. 371, the plans having a surplus
are not recorded by the Company, as it is impossible to recover these amounts. Furthermore, the amounts of contributions will not be reduced for future sponsors.
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On January 29, 2007 and April 9, 2007, through the Brazilian Secretariat for Supplementary Pension Plans- SPC, the Ministry of Social Security approved the transfer of the management of the PBS–Tele CelularSul, TIM PrevSul, PBT–TIM, Convênio de Administração, PBS–Telenordeste Celular and TIM PrevNordeste benefit plans (according to SPC/DETEC/CGAT Communications Nos. 169, 167, 168, 912, 171 and 170, respectively) from SISTEL to HSBC – Fundo de Pensão.
The PBS Assistidos plan continues to be managed by SISTEL. The only exception is Plano PAMEC, which was extinguished, with the Company remaining responsible for coverage of the respective benefit, which is now called PAMEC/Apólice de Ativos.
In 2019, contributions to pension plans and other post-employment benefits amounted to R$59.7 million (R$57.9 million in 2018).
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
Board of Directors
We are administered by a Board of Directors (Conselho de Administração) and a Board of Statutory Officers (Diretoria), which are overseen by a Fiscal Council (Conselho Fiscal) and a Statutory Audit Committee (Comitê de Auditoria Estatutário). The Board of Directors is composed of five to nineteen members, each serving for a two-year term with the possibility of re-election.
Directors’ duties and responsibilities are determined by Brazilian law, our By-laws (Estatuto Social) and our Disclosure and Corporate Governance Policy (Política de Divulgação/Negociação e Diferenças de Governança Corporativa da NYSE), as determined by CVM Instruction 358/2002. All decisions taken by our Board of Directors are recorded in the board’s minute books. The Board of Directors holds regular meetings once every quarter of the fiscal year and also holds special meetings whenever called by the chairman, by two directors or by the Chief Executive Officer. The chairman of the Board of Directors may also invite, at his discretion, any of our key employees to the Board of Directors’ meetings, in order to discuss any relevant corporate matter. The Board of Directors has two special advisory committees: the Compensation Committee (Comitê de Remuneração) and the Control and Risks Committee (Comitê de Controle e Riscos), both composed only of members of the Board of Directors. The Statutory Audit Committee also reports to the Board of Directors and is composed of independent members of the Board of Directors.
Members of our Board of Directors are required to comply with, and have agreed to comply with, our Disclosure and Corporate Governance Policy, our Code of Ethics and certain other Brazilian law regulations including the “Regulamento de Listagem do Novo Mercado da B3 S.A. – Brasil, Bolsa, Balcão.”
The following are the current members of the Board of Directors and their respective titles, whose terms of office will be valid until the annual shareholders’ meeting to be held in 2021:
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Nicandro Durante
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Chairman
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September 13, 1956
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March 28, 2019
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Carlo Nardello
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Director
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May 9, 1964
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March 28, 2019
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Pietro Labriola
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Director
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October 1, 1967
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March 28, 2019
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Herculano Aníbal Alves
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Director
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February 27, 1953
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March 28, 2019
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Elisabetta Romano
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Director
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April 1, 1963
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March 28, 2019
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Gesner José de Oliveira Filho
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Director
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May 17, 1956
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March 28, 2019
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Agostino Nuzzolo
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Director
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April 12, 1968
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March 28, 2019
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Flavia Maria Bittencourt
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Director
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January 1, 1970
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July 30, 2019
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Sabrina Di Bartolomeo
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Director
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October 16, 1971
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February 11, 2020
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Carlo Filangieri
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Director
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December 19, 1967
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February 11, 2020
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On July 30, 2019, Mr. Alberto Whitaker presented his resignation as a member of the Board of Directors and Audit Committee Coordinator. Due to this resignation, the Board of Directors resolved, on the same date, to appoint Mrs. Flavia Maria Bittencourt as a member of the Board of Directors, which was further approved (ad referendum) at the annual and extraordinary shareholders’ meeting held on April 7, 2020.
On December 3, 2019, the Board of Directors acknowledged the resignation presented by Mr. Piergiorgio Peluso on November 28, 2019, effective immediately, as a member of the Board of Directors and the Control and Risks Committee.
On January 16, 2020, Mr. Raimondo Zizza presented his resignation as a member of the Board of Directors and Control and Risks Committee, effective as of February 1, 2020.
Due to the resignations of Mr. Piergiorgio Peluso and Mr. Raimondo Zizza, the Board of Directors resolved, on February 11, 2020, to appoint Mrs. Sabrina Di Bartolomeo and Mr. Carlo Filangieri as members of the Board of Directors, which was further approved (ad referendum) at the annual and extraordinary shareholders’ meeting held on April 7, 2020.
Mrs. Flavia Maria Bittencourt, Mr. Herculano Alves, Mr. Gesner Filho and Mr. Nicandro Durante are qualified as independent directors according to Brazilian independence standards. They are scheduled to be re-elected or replaced at the annual shareholders’ meeting to be held in 2021.
Set forth below are brief biographical descriptions of the members of our Board of Directors:
Nicandro Durante. Mr. Durante is a Brazilian and Italian citizen, born in September 1956, with a bachelor’s degree in Business Administration issued by Pontifical Catholic University (Pontifícia Universidade Católica), Brazil. With almost forty years of experience in the tobacco industry, since 2011 Mr. Durante has served as Chief Executive Officer at British American Tobacco, where he has held several top management positions during the past decades, including Corporate Chief Financial Officer, Regional Director, Executive Director, Chief Operating Officer. Mr. Durante is non-executive Director and Senior Independent Director at Reckitt Benckiser, a leading company in the health and care industry, and Chairman of TIM Participações’ Board of Directors and of the Compensation Committee.
Carlo Nardello. Mr. Nardello is an Italian citizen, born in Rome, Italy, with a University Degree in Economics issued in 1988 by LUISS (Libera Università Internazionale degli Studi Sociali). Mr. Nardello has over 20 years of experience in the industry of broadcasting and communications. From November 2016 through 2018, he was co-founder and CEO of CscVision, a consulting firm in media and marketing, as well as, starting from May 2017, Chief of Staff of the Special Commissioners of Alitalia (Italy’s national airline). From May 2000 through November 2016 he held various offices at RAI Group (Rai − Radiotelevisione Italiana S.p.A., Italy’s public television and media company). Before that, he worked at Lego Company, The Walt Disney Company and Johnson and Johnson. Mr. Nardello is currently a Professor of Digital Marketing at La Sapienza University in Rome, Professor of Media Economics at LUMSA University in Rome, and he was also Professor of Marketing at UNISOB in Naples. He is the author of books on television marketing and in the digital market. He has been serving as Chief Strategy, Customer Experience and Transformation Office at Telecom Italia S.p.A (the Italian TLC incumbent) since January 2019. He has been Chairman of the Board of TIM Vision S.r.L. since March 2019, Chairman of the Board of TIM Ventures S.r.L. and a board member of Inwit S.P.A. since May 2019. He has been a board member of TIM Participações S.A. since March 2019 and a board member of its Compensation Committee since April 2019, and Chairman of the Board of TIM S.A. since October 2019.
Pietro Labriola. Mr. Labriola is an Italian citizen, of Altamura, Bari, Italy, with a degree in Administration from Universidade de Studi of Bari, Italy, in 1991, and a master’s degree in Innovation and Technology Management from ASMIT Advanced School of Bari, Italy, in 1993. With over 25 years of experience in the telecommunications sector, Mr. Labriola assumed the position of Chief Operating Officer at TIM Participações between December 2015 and August 2018; the position of Chief Operating Officer of TIM Celular S.A. between April 2016 and August 2018; the position of Chief Operating Officer of TIM S.A. between May 2016 and August
2018; the position of Chief Executive Officer of TIM S.A. between February 2017 and May 2018. Prior to this, he held the following positions in the Telecom Italia group: Chief Transformation Officer from 2013 through 2015, Executive Vice President Business Market from 2009 through 2012, Executive Vice President Fixed Line Services from 2007 through 2008, Executive Vice President Marketing from 2001 through 2006. From 1996 through 2001, Mr. Labriola held positions as Marketing Director and Business Director at Infostrada Serviços de Comunicações Fixas. Mr. Labriola took office as Chief Executive Officer of TIM Participações on April 3, 2019; as Chairman of the Board of TIM Participações on April 1, 2019; as Chairman of the Board of TIM Brasil Serv. e Part. S.A. on July 2, 2019; as Chief Executive Officer of TIM S.A. on May 15, 2019; and as member of the Board of TIM S.A. on October 29, 2019.
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Herculano Aníbal Alves. Mr. Alves has developed his professional career in the financial market and has acted as an executive in companies of the Bradesco Group, ABN AMRO Bank, Unibanco and Banco Bozzano Simonsen. He is currently a member of the Fiscal Councils of Cielo, Grendene, and of the Board of Directors and of the Financial and Risks Committee of Marfrig. He is also a Board member of TIM Participações S.A. and of its advisory committees, namely, the Statutory Audit Committee(as Financial Expert) and the Control and Risks Committee. He holds a bachelor’s degree in Economics from PUCSP and a master’s degree from the School of Business Administration of São Paulo at Fundação Getulio Vargas (EAESP/FGV), with an extension course at Kellogg. His academic training also includes executive education in Risk, Compliance and Governance by the Risk University of KPMG.
Elisabetta Romano. Ms. Romano is an Italian citizen, born in Milan, Italy, with a Master in Computer Science issued by the University of Salerno – Fisciano (Italy) in 1987. She has over 30 years of experience in the industry of telecommunications, information technology and media, in the United States and Europe. Before being appointed, on July 1, 2018, Chief Technology Officer, at Telecom Italia S.p.A., Ms. Romano developed her career at Ericsson Group, where she worked from 1998 through 2018, holding various top management positions. She was honored as one of the 2017 Top 50 Women in Technology by the National Diversity Council. She is currently Chief Innovation & Partnership Office at Telecom Italia S.p.A.. She has been a board member of TIM Ventures S.r.L. since May 2019 and a board member of INWIT S.P.A. since March 2020. She has been a board member of TIM Participações S.A. since March 2019.
Gesner José de Oliveira Filho. Mr. Oliveira is a partner of GO Associados and Professor of Economics at Getulio Vargas Foundation. He has been certified as an independent board member by IBGC (Brazilian Institute of Corporate Governance). His expertise includes public and private entities. At present, he is a member of TIM Participações S.A.’s Board of Directors and of its advisory committees, namely, the Statutory Audit Committee, as its Coordinator, and of the Control and Risks Committee. He is also a member of the Board of Directors of Braskem, Iguá Saneamento S.A. and Estre Ambiental, as well as a member of the Self-Regulation Council of FEBRABAN. His past experience in Boards included being a member of the Board of Usiminas, Sabesp, CESP, Nossa Caixa and Varig. In addition, Mr. Gesner is a member of the Board of Administration of Iguá Sustainability Institute, and CIEE, nonprofitable institutions. His previous positions include being the CEO of Sabesp – Companhia de Saneamento Básico do Estado de São Paulo (2007-11), one of the largest water companies in the world; President of CADE, the federal antitrust authority (1996-2000); Deputy Secretary for Economic Policy (1993-95) and Secretary for Economic Monitoring (1995), both at the Ministry of Finance. He received his PhD in Economics from the University of California (Berkeley), his Master’s degree from the University of Campinas and Bachelor’s degree from the University of São Paulo. He has worked as a private consultant since the 1990s and published several books and articles in national and international journals. His work has focused on competition policy, macroeconomics and infrastructure which are related with his experience at CADE, Ministry of Finance and Sabesp, respectively.
Agostino Nuzzolo. Mr. Nuzzolo is an Italian citizen, born in Caserta, Italy, with degrees in Law, Economics and in Sciences of Economic and Financial Security. From 1986 to 2006, Mr. Nuzzolo served at Guardia di Finanza. From 2006 to 2016, Mr. Nuzzolo served as Group General Counsel, as Head of Fiscal Affairs, as Director of Fiscal and Legal Affairs and Compliance at Italcementi Group. From 2016 to January 2017, Mr. Nuzzolo served as General Counsel, as Chief Operating Officer and as Secretary of the Board of Directors at Italmobiliare S.P.A. Mr. Nuzzolo is currently a Professor of Tax Law at University ROMA TRE in Rome and he is the author of several books and academic articles of taxation and fiscal governance. He has been serving as General Counsel and as Head of Legal and Tax at Telecom Italia S.P.A. (the Italian incumbent) since January 2017 and has been serving as
Secretary of the Board of Directors at Telecom Italia S.P.A. since May 2017. He also served as Interim Director of Human Resources and Organizational Development at Telecom Italia S.p.A. from December 2017 to March 2018. He has been a board member of Telecom Italia Sparkle S.P.A. and a board member of Flash Fiber S.r.L. since March 2019, and a board member of Inwit S.P.A., since April 2017. He has been a board member of TIM Participações S.A. and of its advisory committees, namely, the Compensation Committee and the Control and Risks Committee since April 2018.
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Flavia Maria Bittencourt. Mrs. Bittencourt holds a B.S. degree in Chemical Engineering from UFRJ, an Executive MBA from Fundação Dom Cabral and other certificates from London Business School and INSEAD. Mrs. Bittencourt has a vast professional experience in different roles and industries, such as 8 years in Banking, 10 years in Telecom, and 3 years in Private Equity. Starting in 2013, she was the CEO for Sephora Latin America, and, since May 2019, she is the CEO of Adidas Brazil. Until 2019, she was an independent board member of Marisa Lojas S.A. Mrs. Bittencourt has been an independent member of TIM Participações S.A.’s Board of Directors and Statutory Audit Committee since July 2019.
Sabrina Di Bartolomeo. Ms. Di Bartolomeo is an Italian citizen, born in Turin, Italy, holding a Master of Science in Economics issued by University of Turin. Ms. Di Bartolomeo began her career as Auditor at Arthur Andersen in 1996, mainly focusing on large clients in the telecommunications and automotive fields, then specializing in global capital markets, supporting the Chicago team in providing services to Italian companies listed in U.S. stock exchanges. From 2002 to 2006, she held leadership roles in the Fiat Group until becoming CAO of the Fiat Powertrain Technologies Group. She was Group Finance Director at Wind Telecom Group between 2006 and 2012, and CFO and Executive Director of Sigma Tau Group (pharmaceutics) between 2012 and 2015, holding also several Executive Director positions in both groups. Subsequently, she was a Partner of a Private Equity Fund, then a Salaried Partner at PwC in the field of Business Restructuring and Turnaround Management, supporting large groups in a state of crisis in the preparation of the industrial and financial restructuring plans and in Distressed M&A. In 2019, she joined Telecom Italia S.p.A. (the Italian TLC incumbent), where she is currently VP of Group Planning & Control. She has been a board member of INWIT S.P.A. since March 2020. She has been a board member of TIM Brasil Serv. e Part. S.A.’s since January 2020, a board member of TIM Participações S.A. and its Control and Risks Committee, a board member of TIM S.A. since February 2020.
Carlo Filangieri. Mr. Filangieri, Italian citizen, born in Rome, Italy, with a degree in Electronic Engineering issued in 1992 by University of Rome – La Sapienza. Mr. Filangieri has over 25 years of experience in information technology and telecommunications as well in customer service and operations. He has managed large critical projects and organizations specializing in mobile and fixed network, information technology, cloud computing, customer service and network sharing. He is author of several articles on information and communications technology, and a member of “Il Quadrato della Radio” (a leading association of prominent individuals in the field of telecommunications in Italy). Active in the Telecom Italia Group since 1993, he was Chief Technical Officer of TIM Brasil between 2012 and 2014, focusing efforts on improving network quality and developing projects related to the 4G and the fiber service “TIM LIVE.” In 2015, he was responsible at Telecom Italia S.P.A. (the Italian TLC Incumbent) for the project regarding the synergy and integration between networks and information technology. From March 2016 to October 2019, he was Director of Open Access, a department focused on planning, developing and managing the access network of Telecom Italia S.p.A.. He is currently Deputy Chief Operation Officer at Telecom Italia S.p.A.. He has been CEO of CD FIBER S.r.L. since June 2016 and since July 2016 board member of Flash Fiber, the joint venture between TIM and Fastweb for FTTH development. He has been a board member of TIM Participações S.A. and of its Control and Risks Committee since February 2020.
Board of Statutory Officers
Pursuant to our By-laws, our Board of Statutory Officers (the members of which we also refer to as our Statutory Officers) is comprised of at least three and no more than twelve members, who may or may not be shareholders. The title of the members of our Board of Statutory Officers shall be as follows: (1) Chief Executive Officer (Diretor Presidente), (2) Chief Financial Officer (Diretor Financeiro), (3) Investor Relations Officer (Diretor de Relações com Investidores), (4) Business Support Officer, (5) Regulatory and Institutional Affairs Officer, (6) Legal Officer (Diretor Jurídico), (7) Chief Technology Information Officer; and (8) Chief Revenue Officer. Each member of our Board of Statutory Officers, who serve two-year terms of office (with re-election permitted) may be elected or dismissed by our Board of Directors at any time and with no cause.
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The following are the current members of the Board of Statutory Officers and their respective titles, whose terms of office will remain valid until the first meeting of the Board of Directors to be held after the 2022 annual shareholders’ meeting:
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Pietro Labriola
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Chief Executive Officer (Diretor Presidente)
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October 1, 1967
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April 14, 2020
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Adrian Calaza
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Chief Financial Officer and Investor Relations Officer (Diretor Financeiro and Diretor de Relações com Investidores)
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March 8, 1967
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April 14, 2020
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Bruno Mutzenbecher Gentil
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Business Support Officer
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January 20, 1969
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April 14, 2020
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Alberto Mario Griselli
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Chief Revenue Officer
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April 24, 1969
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April 14, 2020
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Mario Girasole
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Regulatory and Institutional Affairs Officer
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June 8, 1968
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April 14, 2020
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Jaques Horn
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Legal Officer (Diretor Juridico)
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March 15, 1964
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April 14, 2020
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Leonardo de Carvalho Capdeville
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Chief Technology Information Officer
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September 4, 1969
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April 14, 2020
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Brief biographical descriptions of our statutory officers are set forth below.
Pietro Labriola. See “—Board of Directors.”
Adrian Calaza. Mr. Calaza is an Argentine citizen, graduated in business administration from the University of Belgrano and holds an MBA in Management and Business Administration from the University of CEMA. With extensive experience in the telecommunications industry, Mr. Calaza was elected Chief Financial Officer in TIM Participações SA in September 2016. Before that, he held the position of Chief Financial Officer in Telecom Argentina from 2009 to 2016, where he also was Corporate Administrative Services Manager from 2007 to 2009. Previously, Mr. Calaza held various executive roles, including Capital Expenditures and Control Manager at TIM Participações S.A. from 2006 to 2007, Chief Financial Officer at Telecom América Latina S.A. from 2004 to 2005 and Chief Financial Officer in Entel S.A. from 2000 to 2004. Mr. Calaza joined the Telecom Italia Group in January, 1999, where he held various positions, including Chief Financial Officer of Entel S.A., in Bolivia, a subsidiary of the Telecom Italia Group and Corporate Chief Financial Officer of Telecom América Latina S.A. in Brazil.
Bruno Mutzenbecher Gentil. Mr. Gentil holds a degree in Business Administration and has been the Business Supply Officer (former Purchasing & Supply Chain Officer) at TIM Participações since February 2018. From 2016 to 2017, Mr. Gentil served as Executive Vice President of Corporate Resources at Telefônica Brasil S.A., where he also held the position of Executive Vice President of Strategy and Consolidation between 2015 and 2016. Previously, from 2013 to 2015, Mr. Gentil served as Executive Vice-President of Finance at GVT - Global Village Telecom S.A., where he also held the position Vice President of Controller in the period from 2006 to 2013.
Alberto Mario Griselli. Mr. Griselli holds a degree in Electronic Engineering from La Sapienza University in Rome and an FMBA from Columbia University. With more than 20-year experience in the telecom sector, he held relevant positions such as Vice President for LatAm at TIMwe, a global provider of mobile engagement solutions for telecommunication operators, and Managing Director for Brazil at Value Partners, a management consulting firm. Across his professional career, Mr. Griselli worked in several topics material to companies’ performance, with projects ranging from strategic planning to customer segmentation, value proposition definition, offer design, pricing and promotions, go-to-market approach and customer experience. Mr. Griselli took office as Chief Revenue Officer of TIM Participações S.A. and TIM S.A. on July 30, 2019.
Mario Girasole. Mr. Girasole has a Laurea Magistralis in Economics from University LUISS (Rome). He also has an LL.M. in International Business Law (London), post graduate MA in Competition Policy, in International Commerce and Modern Economic History, and executive education at London Business School (Finance), Harvard
School of Government, Columbia Business School (Advanced Management Program) and INSEAD (International Directors Programme and Advanced Corporate Finance). He joined TIM in 1997, for the regulatory and pricing area, in Rome. From 2000 to 2003, he headed, in Brussels, the TIM Group relations with the institutions of the European Union, and was appointed to the position of Deputy-Chairman of the European Mobile Sector (GSM Europe). Starting from 2004, he was Head of Public and Regulatory Affairs at Telecom Italia America Latina and at TIM Brasil. During this period, he worked also as Director of Entel Bolivia and Alternate Director of TIM Participações. Mr. Girasole is the Regulatory and Institutional Affairs Officer of the Company since January 2009 and since 2012, he runs also the Press Relations and the Corporate Social Responsibility departments. He is also member of the Boards and Councils of national and international entities, including SindiTelebrasil, GSM Latin America, Italo-Brazilian Chamber of Commerce and the Brazilian Institute for Competition Studies (Instituto Brasileiro de Estudos da Concorrência), or IBRAC. Mr. Girasole was awarded as Knight (2014) and Officer (2018) of the Order of the Star of Italy by the President of the Italian Republic “for promoting friendly relations and co-operation with other countries and ties with Italy.” In Brazil, he was awarded the Peacemaker Medal and the Medal of the Army by the Ministry of Defense (2018).
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Jaques Horn. Mr. Horn graduated in Law (LL.B.) at Candido Mendes University, and obtained specializations at Harvard and at the Academy of International and American Law. He has been Chief Legal Officer at TIM since July 2010 and Secretary of the Company’s Board of Directors since 2012. He worked at Tetra Pak from 2007 to 2010, as Legal Director, where he was responsible for the Central and South America and the Caribbean region. He also worked at Shell, from 1994 to 2007, as Legal Corporate Manager at the holding company and Legal Director at the subsidiary companies. Mr. Horn worked as Legal Counsel at Companhia Atlantic de Petróleo (ARCO Petroleum Co.) from 1990 to 1994, as a Lawyer at Franco, Bhering, Barbosa & Novaes Law Firm for one year, and as a Tax Senior Consultant at Arthur Andersen for almost four years.
Leonardo de Carvalho Capdeville. Mr. Capdeville holds a degree from Instituto Nacional de Telecomunicações – INATEL, in Electronic Engineering, specializing in Telecommunications. He also holds an MBA from Fundação Getúlio Vargas in Rio de Janeiro, Brazil. Mr. Capdeville also attended the International Program of Management Development at IEDE – Institute for Executive Development in Madrid, Spain and to the Disruptive Innovation Program by the Harvard Business School. Currently, he is Chief Technology Information Officer of the Company, elected on February 12, 2015, and Chief Technology Information Officer of TIM S.A. elected on February 3, 2017, and a member of the Trustee Council of the Telecommunications Research and Development Center (Centro de Pesquisa e Desenvolvimento de Telecomunicações), or CpQD. Prior to that, Mr. Capdeville was responsible for the Network, IT and Wholesale departments at the Company. From 1998 to 2014, Mr. Capdeville was a Network Director at Telefônica Brasil (under the brand name Vivo). Mr. Capdeville also worked at Promon Eletrônica Ltda., or Promon, from 1991 to 1995 and then from 1996 to 1998. While at Promon, he held the position of engineer responsible for implementing the mobile telephony in the State of Espírito Santo, Brazil, and performed other activities related to network projects. From February 1995 to October 1996, Mr. Capdeville worked at Gerenciamento e Assessoria de Serviços S/C Ltda., as coordinator of the implementation of the team and of the data communication area.
There are no family relationships among any of our directors and statutory officers, nor any arrangement or understanding with major shareholders, customers or suppliers pursuant to which any director or executive officer was selected
Statutory Audit Committee
The current composition of the Statutory Audit Committee consists of three members, elected by our controlling shareholder. None of the members were elected by the minority shareholders.
The following are the current members of our Statutory Audit Committee:
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Flavia Maria Bittencourt
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January 1, 1970
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July 30, 2019
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Gesner José de Oliveira Filho
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May 17, 1956
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April 3, 2019
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Herculano Aníbal Alves(*)
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February 27, 1953
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April 3, 2019
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(*) Audit committee financial expert.
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The Statutory Audit Committee was created and its first members appointed at the shareholders’ meeting held on December 12, 2013, in accordance with Rule 10A-3 under Section 301 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, and CVM Instruction 509/2011. The Statutory Audit Committee’s internal regulations were approved at the Board of Directors meeting held on December, 23, 2013.
The Statutory Audit Committee is composed of at least three (3) and at the most five (5) members, all elected by the Board of Directors, who serve two-year terms of office, matching the terms of the members of the Board of Directors. Re-election is permitted up to, for a maximum period of 10 years. Members of the Statutory Audit Committee may be dismissed by our Board of Directors at any time and without cause.
The Statutory Audit Committee’s general duties and responsibilities under Brazilian corporate law, our By-laws and its internal rules, include: (i) opining, preliminarily, on the hiring and removal from office of the independent auditor in charge of auditing the financial statements, or any other service provided by such auditor, whether or not it may be related to auditing; (ii) analyzing the auditor’s annual work plan, discussing the results of the activities performed, revisions made and assessing the performance of the independent auditors; (iii) supervising independent auditors’ activities to assess their independence, quality and adequacy of the services provided to the Company, including, to the full extent permitted by law, assistance solving any disagreement between the management and the independent auditors concerning the presentation of financial statements; (iv) supervising the activities performed by the internal audit department, and for that purpose analyzing the annual work plan, discussing the results of the activities performed, the revisions made and assess the performance of internal auditors; (v) supervising and analyzing the effectiveness, quality and integrity of the Company’s internal controls over financial reporting, in order to, inter alia, monitor the implementation of the provisions related to: (a) the presentation of the financial statements, including quarterly financial information and other interim statements; and (b) the disclosure of information and evaluations based on adjusted financial data and on non-accounting data, resulting in unexpected additions to the structure of the usual reports on financial statements; (vi) analyzing complaints, anonymous or not, concerning any accounting matters from internal controls or audit, received by the Company, as well as suggesting measures that may be taken; (vii) examining, assessing and expressing opinions, in advance, based on the material provided by the Company’s management, on whether the contracts to be signed between the Company, or its subsidiaries, on one hand, and the majority shareholder or its subsidiaries, associated companies, or companies under common control or which may control the said shareholder, or parties related in some other way to the Company, on the other hand, meet the standards that normally apply within the market to similar agreements between independent parties, with the Statutory Audit Committee having the right to request further clarification or the opinion of independent third parties, whenever deemed necessary; (viii) drawing up the annual synthesis report, pursuant CVM rules, to be presented, together with the financial statements, including a description of: (a) its activities, the results and conclusions reached and recommendations made; and (b) any situation where there is a significant disagreement between the Company’s management, independent auditors and the Statutory Audit Committee regarding financial statements of the Company; and (ix) assessing and monitoring the Company’s exposure to risk, with the right to request detailed information on policies and proceedings related to: (a) remuneration of the management; (b) utilization of the Company assets; and (c) expenses incurred on behalf of the Company; and (x) analyze any complaints received by the whistleblowing channel of the Company and its respective envisaged actions of improvement.
Fiscal Council
The current composition of the Fiscal Council consists of three members elected by our controlling shareholder. One of the members, Mr. Elias de Matos Brito, was elected by the minority shareholders.
The following are the current members of our Fiscal Council, whose terms of office will be valid until the annual shareholders’ meeting held in 2021:
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Walmir Kesseli
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August 28, 1959
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April 7, 2020
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Elias de Matos Brito
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July 28, 1965
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April 7, 2020
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Jarbas Tadeu Barsanti Ribeiro
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March 18, 1951
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April 7, 2020
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Under Brazilian corporate law, our By-laws and the internal rules of the Fiscal Council, the Fiscal Council’s general duties and responsibilities include monitoring the actions of management and verifying its compliance with legal duties and appropriate statutes; providing opinions regarding management’s annual report, business plans and budgets; and performing reviews of, and opinions regarding our financial statements. All members serve independently from the Company in their capacities on the Fiscal Council.
Other Committees
We have other non-statutory committees including a Compensation Committee and a Control and Risks Committee.
Compensation Committee
The Compensation Committee was established by the Board of Directors on September 30, 2008 to: (1) prepare proposals for our Board of Directors regarding allotment of the overall annual remuneration approved by general shareholders’ meeting; (2) provide our Board of Directors with proposals concerning the remuneration of our statutory officers; (3) evaluate the compensation criteria of Company’s statutory officers; and (4) monitor the performance of the decisions taken by management and the Company’s policies relating to senior executive compensation; and (5) analyze other matters concerning the compensation of the Company’s members, as delegated by the Board of Directors.
The members of our Compensation Committee are appointed and dismissed by our Board of Directors. The Compensation Committee consists of three members, all of whom are effective members of our Board of Directors.
The following are the current members of our Compensation Committee:
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Nicandro Durante
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September 13, 1956
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April 3, 2019
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Carlo Nardello
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May 9, 1964
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April 3, 2019
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Agostino Nuzzolo
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April 12, 1968
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April 3, 2019
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Control and Risks Committee
The Control and Risks Committee was established by the Board of Directors on June 18, 2013, and tasked with the following responsibilities: (a) recommending internal control measures to be adopted by the Board of Directors establishing the specific authority of the Board of Statutory Officers and the limits of such specific authority, subject to the provisions of the By-laws, as well as deciding on the assignment of new functions to the Directors; (b)monitoring the Company’s compliance with our corporate governance policy and periodically updating the same; (c)without prejudice to the competence of the Board of Directors, recommending procedures for better supervision of the management of the Directors; (d) acknowledging the internal audit work plan reviewed by the Company’s Statutory Audit Committee in accordance with the Company’s By-laws; (e) approving the compliance department’s work plan and monitoring compliance with the same; (f) reviewing and evaluating periodic reports issued in accordance with the internal control and risk management system by the internal audit department and the compliance department and, in connection with the same, requesting that the internal audit department review specific operational areas or that the compliance department develop new procedures; (g) requesting information from the Board of Statutory Officers regarding specific processes or issues of the Company and / or its subsidiaries, whenever it deems appropriate; (h) supervising and monitoring issues related to the social responsibility of the Company, aiming at the sustainable development of the Company and / or its subsidiaries, and monitoring the Company’s compliance with the principles established in our Code of Ethics and Conduct; and (i) analyzing any other matters related to the internal control of the Company as are delegated by the Board of Directors.
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The members of our Control and Risks Committee are appointed and dismissed by our Board of Directors. The Control and Risks Committee shall be composed of up to five members, of which two members should be independent, and all of whom shall be members of our Board of Directors.
The following are the current members of the Control and Risks committee:
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Herculano Aníbal Alves
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February 27, 1953
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April 3, 2019
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Gesner José de Oliveira Filho
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May 17, 1956
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April 3, 2019
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Agostino Nuzzolo
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April 12, 1968
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April 3, 2019
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Carlo Filangieri
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December 19, 1967
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February 11, 2020
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Sabrina Di Bartolomeo
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October 16, 1971
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February 11, 2020
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B. Compensation
At our annual shareholders’ meeting held on April 7, 2020, our shareholders voted on the aggregate amount of approximately R$37.9 million as compensation to our statutory officers, approximately R$1.9 million to our committees’ members, approximately R$0.5 million to our fiscal council’s members and approximately R$4.9 million as compensation to our Board of Directors during 2020. The statutory officers’ and directors’ compensation is composed of fixed remuneration, benefits, bonuses, short-term incentives and participation in long-term incentive plans. Accordingly, we did not set aside or accrue any amounts to provide pension, retirement or similar benefits to our officers and directors during 2020. The aggregate compensation to our statutory officers in the year ended December 31, 2019, including fixed remuneration, benefits, bonuses, short-term incentive and long term incentive plans, was approximately R$27,358,985 considering INSS (approximately R$25,745,736 without INSS).
Our statutory officers and other managers of the Company are eligible to receive a short-term incentive (Management by Objectives, or MBO) bonuses. The general criteria for the MBO bonus are approved by our Board of Directors and provide that eligible statutory officers and other managers may receive an amount calculated based on the organizational roles and certain pre-established performance targets.
Some key officers are also eligible to participate in a long-term incentive plan. The general criteria for the 2019 program are approved by our Board of Directors and provide that eligible participants may receive shares in part through the achievement of long term strategic goals (or so-called performance shares) and in part by remaining employed with the Company until the completion of the vesting period (or so-called restricted shares).
For the year ended on December 31, 2019, each member of our Board of Directors received annual compensation an average of R$864,206 considering INSS (R$720,172 without INSS) and each member of our Fiscal Council received annual compensation of R$202,160 considering INSS (R$168,467 without INSS), paid pro rata according to each member’s time of service on such body.
C. Board practices
See “—A. Directors and Senior Management” and “—B. Compensation.”
D. Our Employees
On December 31, 2019, we had 9,700 full-time employees. We do not employ a significant number of temporary employees. The following tables show a breakdown of our employees as of December 31, 2019, 2018 and 2017.
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Network & Information Technology
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2,374
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2,360
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2,281
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Sales and marketing
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3,363
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3,309
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3,326
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Customer care
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2,286
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2,577
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2,526
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Support and other
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Total number of employees
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102
All employees are represented by state unions affiliated with the following federations: National Federation of Telecommunications Workers, Interstate Federation of Telecommunications Services Researchers and Workers, and the FREE Federation. We negotiate annually a new collective bargaining agreement and profit sharing program with both unions. Management believes that our relationships with our workforce are satisfactory. We did not experience a work stoppage that had a material effect on our operations.
Employee Benefit Pension Plans
The Company and its subsidiaries have defined benefit and defined contribution plans in place.
In general, defined benefit plans establish a specific retirement benefit amount that an employee will receive upon retirement, usually dependent on one or more factors such as age, length of service and remuneration. The defined benefit obligation, recognized in the balance sheet, is calculated annually by independent actuaries. The present value of defined benefit obligation is determined by discounting estimated future cash outflows, using interest rates consistent with market yields, which are denominated in the currency in which benefits will be paid and which have maturities close to those of the respective pension plan liabilities. The actuarial gains and losses resulting from changes in actuarial assumptions are recorded within shareholders’ equity as other comprehensive income, as incurred.
Regarding defined contribution plans, the value of the complementary benefit is established only at the time of granting, based on the accumulated balance resulting from the contributions to the plan and the profitability of the investments during the contributory phase. We make contributions to pension insurance plans public or private on a mandatory, contractual or voluntary. The contributions are recognized as employee benefit expense when due.
Due to corporate reorganizations, TIM S.A. assumed responsibility for the pension plans of the Company and all of its subsidiaries.
The oldest pension plans, closed to new members, are managed by Icatu Fundo Multipatrocinado. Funcesp manages a defined benefit pension plan of AES Atimus, incorporated in 2011, later called TIM Fiber and now TIM S.A. The Icatu Fundo Multipatrocinado, a pension fund management company in Brazil, manages since 2013 (after a two-year evaluation process of multiemployer pension fund management companies) five different plans: (i) Defined Benefit Plan – PBS Tele Celular Sul; (ii) Defined Benefit Plan – PBS Tele Nordeste Celular; (iii) Defined Contribution Plan – TIMPREV Nordeste; (iv) Defined Contribution Plan – TIMPREV Sul; and (v) Defined Contribution Plan – Intelig Gente.
For new TIM S.A. employees, we now offer the supplementary defined contribution plan managed by Itaú Vida e Previdência S.A.
Share-Based Compensation Plan
We operate share-based compensation plans, which in our previous plan consisted of stock options and which in our new plan consists of performance shares and/or restricted shares, under which we receive the services of certain employees in consideration for equity granted. The fair value of the employee’s services is recognized as an expense, with a compensating entry to capital reserves, and are determined by reference to the fair value of the options granted. Non-market-related vesting conditions are included in the assumptions underlying the number of option/shares which will vest. The total expense amount is recognized during the period over which the rights vest, when specific vesting conditions should be fulfilled. On the balance sheet date, the entity reviews its estimates regarding the number of options/shares which will vest, based on the non-market-related vesting conditions. It recognizes the effect of this review of initial estimates, if any, in the income statement, with a corresponding adjustment to the capital reserve.
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Amounts paid to employees, net of any directly attributable transaction costs, are credited to capital reserve and share issuance premium reserve, if applicable, when options are exercised or shares are granted.
E. Share Ownership
As of December 31, 2019, our board members, fiscal council members and statutory officers, owned, in the aggregate, 235,341 common shares, which represented 0.01% of our common shares outstanding. Accordingly, each of our directors or statutory officers beneficially owns less than one percent of outstanding common shares.
Some key officers are also eligible to participate in a long-term incentive plan (stock option plans) for which compensation is based on performance targets for our share price, as further described in “—B. Compensation” and “—D. Our Employees—Share-Based Compensation Plan.”
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
The following table sets forth information relating to the ownership of common shares by TIM Brasil and our officers and directors, as of December 31, 2019. We are not aware of any other shareholder that beneficially owns more than 5% of our common shares.
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Percentage of Outstanding Common Shares
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TIM Brasil Serviços e Participações S.A
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1,611,969,946
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66.58%
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All our officers and directors as a group*
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Total
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* Represents less than 1%.
Since TIM Brasil owns 66.58% of our outstanding common shares, it has the ability to control the election of our Board of Directors and to determine the direction of our strategic and corporate policies. The common shares held by TIM Brasil have the same voting rights as the common shares held by other holders and TIM Brasil has no special voting rights beyond those ordinarily accompanying the ownership of our common shares.
As of December 31, 2019, there were 268,125,990 common shares represented by ADSs. As of such date, the number of common shares represented by ADSs represented 11.1% of our total capital.
TIM Brasil is a wholly owned Brazilian subsidiary of Telecom Italia Finance, which in turn is a wholly owned Dutch subsidiary of Telecom Italia. Telecom Italia is a corporation organized under the laws of the Republic of Italy. In turn, the single largest shareholder of Telecom Italia is Vivendi, which is able to exercise significant influence over Telecom Italia. See “Item 4. Information on the Company—C. Organizational Structure.”
Telecom Italia and its subsidiaries, or the Telecom Italia Group, operate mainly in Europe, the Mediterranean Basin and South America. The Telecom Italia Group is engaged principally in the communications sector and, particularly, the fixed and mobile national and international telecommunications sector. The group is focused currently on digitalization and accordingly is investing in the development of its ultra-broadband network and new technologies.
Significant Changes in Percentage Ownership of Principal Shareholders
None.
Shareholders’ Agreements
None.
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B. Related Party Transactions
As of December 31, 2019, we did not owe to our affiliates any amounts arising out of outstanding inter-company loans. We had assets and liabilities in amounts of R$10,420 thousand and R$111,823 thousand, respectively, as of December 31, 2019 with companies of the Telecom Italia Group. See Note 34 to our consolidated financial statements.
Guarantees of Obligations of our Subsidiaries
We are guarantor in favor of KfW IPEX, in the amount of U.S.$85 million as of December 31, 2019, under the Loan Agreement of TIM Celular (now TIM S.A.) between Finnish Export Credit as lender and KfW IPEX as facility agent.
We are guarantor in favor of fiduciary agent of Debentures holders, in the amount of R$1,026 million as of December 31, 2019, under the TIM S.A.’s debentures issuance.
We are guarantor in favor of The Bank of Nova Scotia, in the amount of U.S.$87.5 million as of January 31, 2020, under the Loan Agreement of TIM S.A.
For more information on our guarantees of obligations of our subsidiaries, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Sources of Funds—Financial Contracts.”
Agreement between Telecom Italia and TIM Participações and our Subsidiaries
At the annual and extraordinary shareholders’ meeting held on April 7, 2020, our shareholders voted on an extension of the Cooperation and Support Agreement, originally executed on May 3, 2007 with Telecom Italia, for an additional 12-month period until April 30, 2021. The purpose of this agreement is to enable us to benefit from Telecom Italia’s internationally recognized expertise, built throughout years of operation in more mature and developed markets. The cooperation and support activities to be performed by the parties will be focused on adding value to our operations through:
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Benefiting from Telecom Italia’s experience and industrial capacity as one of the major players in the European market;
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Applying the systems/services/processes/best practices that were largely used in the Italian market and may be easily customized for the Brazilian market through limited investments and mitigated implementation risks; or
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An increase in efficacy by adopting in-house solutions that have been widely tested and used.
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The extended term of the agreement provides for a total price cap of €9.6 million. The price cap represents the maximum consideration to be paid by TIM Participações operating companies for all the services and support rendered by Telecom Italia during 2020 and 2021 under the agreement.
C. Interests of Experts and Counsel
Not applicable.
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
See “Item 18. Financial Statements.”
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Legal Proceedings
The Company and its subsidiaries are subject to judicial and administrative proceedings, including civil, criminal, labor, tax and regulatory claims covering a wide range of matters that arise in the ordinary course of business. We adopted a policy of analyzing each such proceeding and making a judgment as to whether a loss is probable, possible or remote. We make accruals for legal proceedings that we are party to when we determine that losses are probable and can be reasonably estimated. For civil, labor, tax and regulatory proceedings where risk of loss has been classified as possible, there is no provision made and these proceedings are not expected to have a material adverse effect on our business or financial condition. Our judgment is always based on the opinion of our legal advisers. Accrual balances are adjusted to account for changes in circumstances for ongoing matters and the establishment of additional accruals for new matters. While we believe that the current level of accruals is adequate, changes in the future could impact these determinations.
In this annual report on Form 20-F, we disclose in detail those legal proceedings which we and our legal advisors have determined to be material, along with overall summaries and the aggregate value of our legal proceedings where risk of loss is probable. See Note 23 to our consolidated financial statements.
Consumer Lawsuits
As of December 31, 2019, our subsidiaries are party to consumer lawsuits at the judicial and administrative levels where the risk of loss is considered probable amounting to R$135,290 thousand (R$86,039 thousand as of December 31, 2018). These lawsuits generally relate to questions regarding alleged improper billing, contract cancellation, quality of services and undue restriction.
PROCON and Other Consumer Actions
TIM is involved in judicial and administrative proceedings brought by the Brazilian Consumer Protection Agency (Procon – Fundação de Proteção e Defesa do Consumidor), or PROCON, and various state public prosecutor’s offices where the risk of loss is considered probable in the amount of R$31,221 thousand as of December 31, 2019 (R$5,814 thousand as of December 31, 2018). These proceedings arise from consumer complaints related to alleged: (i) failures in the provision of network services; (ii) bundling arrangements for product and services; (iii) issues related to quality care; (iv) violations of PROCON’s Customer Service Rules (Novas Regras Para o Serviço de Atendimento ao Consumidor); (v) contractual violations; (vi) misleading advertising; and (vii) suspension of loyalty benefits in cases of theft of cell phones.
Former Trade Partners
TIM is a defendant in lawsuits filed by certain former commercial partners for alleged breach of contract. The amounts involved for such lawsuits where the risk of loss is considered probable are of R$12,812 thousand as of December 31, 2019 (R$10,378 thousand as of December 31, 2018).
Most materially, TIM Celular (which has been merged into TIM S.A. in connection with the Reorganization) is the defendant in a lawsuit filed by Botafogo Comércio e Importação Ltda. in 2002, by a former commercial partner, who argues that TIM Celular (now TIM S.A.) did not perform the contract and practiced unfair competition which ended up putting them out of business. A settlement procedure commenced and was adjudicated, whereby TIM Celular (now TIM S.A.) was required to pay consequential damages, lost profits and moral damages. In the meantime, TIM Celular (now TIM S.A.) filed an action to reverse the judgment, in which the Court rendered a decision to partially uphold TIM’s claims, in order to modify the methodology of calculation of damages, lost profits and moral damages. The calculations of such damages, prepared by a retained expert witness, amounted to approximately R$2,773 thousand as of January 12, 2015. Currently, TIM is waiting for a decision to be handed down in respect of Botafogo Comércio e Importação Ltda.’s appeal.
Social, Environmental, and Infrastructure
As of December 31, 2019, our subsidiaries are party to lawsuits with various actors arising from environmental licensing and installation/operation licensing issues. The amounts involved in such lawsuits where the risk of loss is considered probable are R$498 thousand as of December 31, 2019 (R$239 thousand as of December 31, 2018).
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Other
We are also party to other civil claims brought by several third parties mentioned above, in respect of, among others: (i) renewal of lease agreements; (ii) equity subscription of shares; (iii) compensation claims; (iv) alleged breach of contract; and (v) debt actions. The amounts involved in such civil claims where the risk of loss is considered probable are R$27,039 thousand as of December 31, 2019 (R$3,060 thousand as of December 31, 2018).
Additionally, TIM S.A. (formerly Intelig) is involved in a lawsuit filed by a creditor of Editora JB, Gazeta Mercantil and Problem Solver Consultoria Ltda. The judge in that case ordered a seizure of TIM S.A.’s bank account in the amount of R$5,544 thousand as of December 31, 2019, based on the reasoning that Editora JB and Gazeta Mercantil are part of the same economic group as TIM S.A.
TIM S.A. filed an interlocutory appeal, which was not granted. After that, TIM S.A. filed a request for amendment, which was also rejected. TIM S.A. filed an appeal to the Superior Court (Superior Tribunal de Justiça), which also was denied. The National Treasury Attorney’s Office (Procuradoria-Geral da Fazenda Nacional) filed a motion contesting the discussed values. The relevant amount is still maintained in an escrow account (judicial deposit).
Labor Claims
A significant percentage of our labor claims relate to either claims filed by former employees of service providers who, in accordance with Brazilian labor legislation, have filed claims against us on the grounds that we are responsible for labor-related obligations not satisfied by the service provider companies, or our organizational restructuring processes, in particular the closure of our customer service call centers, including in-house staff and outsourced personnel. There were 12,088 labor claims filed against the Company and its subsidiaries as of December 31, 2019, (16,967 as of December 31, 2018), most of which relate to employment claims filed by employees as well as claims that involve former employees of service providers. The amount involved in such labor claims where the risk of loss is considered probable is R$252,968 thousand as of December 31, 2019 (R$426,570 thousand as of December 31, 2018).
There are a series of labor claims, particularly in São Paulo, brought by former Gazeta Mercantil employees who have filed claims requesting the inclusion of Holdco (the former controlling shareholder of Intelig) or TIM Participações as defendants, claiming damages from Holdco and TIM Participações. Plaintiffs who have filed the claims were employees of Gazeta Mercantil, without any employment ties to Holdco or TIM Participações. However, prior to the merger with TIM Participações, Holdco belonged to the Docas economic group, of which Gazeta Mercantil is part.
Social Security Claims
In São Paulo, TIM Celular (which has been merged into TIM S.A. in connection with the Reorganization) received an assessment notice in the amount of R$538 thousand as of December 31, 2019 (R$538 thousand as of December 31, 2018) referring to alleged irregularity in the payment of social security contributions in connection with the payment of profit sharing. TIM Celular (now TIM S.A.) filed its administrative defense, but on September 16, 2009, a decision was rendered which upheld the assessment notice. An administrative appeal was filed on October 5, 2009, the judgment of which is still pending.
In May 2006, TIM Celular (now TIM S.A.) was issued a tax assessment notice in the amount of R$9,693 thousand as of December 31, 2019 (R$9,693 thousand as of December 31, 2018) for social security contributions that were allegedly due in connection with the following: (1) hiring bonuses (2) non-adjusted bonuses (3) payments to self-employed persons, and (4) sales incentives. TIM Celular (now TIM S.A.) filed an administrative defense but the tax assessment was upheld. TIM Celular (now TIM S.A.) filed an appeal with the Ministry of Finance’s Taxpayers’ Council, which is now pending judgment.
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Tax Claims
Federal Taxes
The total federal tax claims not including regulatory taxes (FUST/FUNTTEL/FISTEL and other) assessed against the Company with a possible risk of loss is equal to R$4,279,570 thousand as of December 31, 2019 (R$3,952,125 thousand as of December 31, 2018).
The amounts relating to federal taxes where the risk of loss is considered probable is R$155,495 thousand as of December 31, 2019 (R$82,033 thousand as of December 31, 2018).
The most relevant claims assessed are:
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Tax carryforward losses and Social Contribution on Profits (Contribuição Social sobre o Lucro Líquido), or CSLL, negative basis compensation disallowance; challenge to the goodwill expenses deduction; disallowance of withholding tax compensation due to an alleged lack of documental support; lack of payment of tax carryforward loss/CSLL due on a monthly estimate basis; fine for failure to present digital files; failure to to comply with requirements and procedures related to regional tax incentives from Superintendency for the Development of the Northeast (Superintendência de Desenvolvimento do Nordeste), or Sudene. The amount in controversy, classified as a possible contingency, is R$2,672,754 thousand as of December 31, 2019 (R$2,543,851 thousand as of December 31, 2018).
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Alleged improper credits that resulted in tax carryforward losses and CSLL negative basis compensation disallowance. The amount in controversy, classified as a possible contingency, is R$203,302 thousand as of December 31, 2019 (R$198,175 thousand as of December 31, 2018).
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Social contribution on net income on exchange variation resulting from swap operations accounted for on a cash basis. The amount in controversy, classified as a possible contingency, is R$66,164 thousand as of December 31, 2019 (R$64,537 thousand as of December 31, 2018).
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Withholding tax collection on income of residents abroad, including those remitted as international roaming and payment to unidentified beneficiaries, as well as the payment of CIDE on royalties remittances abroad, including international roaming The amount in controversy, classified as a possible contingency, is R$256,833 thousand as of December 31, 2019 (R$296,589 thousand as of December 31, 2018).
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Alleged failure to calculate and collect corporate income tax, PIS/COFINS and social contribution on profits due to total or partial disregard, by the Brazilian Internal Revenue Service (Receita Federal do Brasil), of the compensations proceeded and from tax carryforward loss negative balance calculated on previous years. The amount in controversy, classified as a possible contingency, is R$427,233 thousand as of December 31, 2019 (R$412,715 thousand as of December 31, 2018).
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State Taxes
The total state tax claims assessed against the Company where the risk of loss is considered possible is equal to R$8,221,808 thousand as of December 31, 2019 (R$8,904,916 thousand as of December 31, 2018). The amounts relating to state tax disputes where the risk of loss is considered probable is R$93,790 thousand as of December 31, 2019 (R$103,546 thousand as of December 31, 2018).
The most relevant claims assessed are:
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Alleged incorrect deduction of unconditional discounts offered to customers in the ICMS basis of calculation, as well as penalties for alleged noncompliance with an accessory obligation. The amount in controversy, classified as a possible contingency, is R$1,053,411 thousand as of December 31, 2019 (R$1,344,288 thousand as of December 31, 2018).
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108
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Use of tax benefit (Program for the Economic, Integrated and Sustainable Development of the Federal District – PRO-DF) granted by the state tax authority, which was later declared unconstitutional by the STF. Additionally, the Company was assessed due to alleged undue credit of ICMS resulting from interstate purchase of goods with tax benefit granted in the state of origin. The amount in controversy, classified as a possible contingency, is R$887,637 thousand as of December 31, 2019 (R$1,110,827 as of December 31, 2018).
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ICMS credits reversal and credits arising from the acquisition of fixed assets. The amount in controversy, classified as a possible contingency, is R$731,864 thousand as of December 31, 2019 (R$767,142 as of December 31, 2018).
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ICMS credit entries and debt reversals, identification and documentation support of amounts and information included in clients’ bills, such as the tax rate and credits granted, as well as credits arising from ICMS substitution or nontaxable operations. The amount in controversy, classified as a possible contingency, is R$3,284,473 thousand as of December 31, 2019 (R$3,340,448 as of December 31, 2018).
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Appropriation of ICMS credits originated from operational energy consumption and acquisition. The amount in controversy, classified as a possible contingency, is R$131,057 thousand as of December 31, 2019 (R$140,368 thousand as of December 31, 2018).
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Alleged conflict between the information filed in the accessory obligations and the tax collection as well as the charge of specific penalty for noncompliance with those obligations. The amount in controversy, classified as a possible contingency, is R$138,684 thousand as of December 31, 2019 (R$116,880 thousand as of December 31, 2018).
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Alleged non-payment of ICMS due to the loss of reversed debits related to prepaid service, as well as alleged undue ICMS credit on goods alleged to have benefited from reduction in the calculation basis. The amount in controversy, classified as a possible contingency, is R$198,505 thousand as of December 31, 2019 (R$192,074 thousand as of December 31, 2018).
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ICMS credits entries regarding the tax treatment of handsets loan operations. The amount in controversy, classified as a possible contingency, is R$180,920 thousand as of December 31, 2019 (R$177,128 thousand as of December 31, 2018).
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Charge of ICMS related to subscription services excluded from taxation due to its classification as non-telecommunication services. The amount in controversy, classified as a possible contingency, is R$249,659 thousand as of December 31, 2019 (R$139,758 thousand as of December 31, 2018).
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Municipal Taxes
The total municipal tax claims assessed against the Company with a possible risk of loss is equal to R$703,132 thousand as of December 31, 2019 (R$693,616 thousand as of December 31, 2018). The amounts relating to municipal taxes where the risk of loss is considered probable is R$8,227 thousand as of December 31, 2019 (R$1,713 thousand as of December 31, 2018).
The most relevant claims assessed are:
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Alleged lack of ISS collection regarding services import. The amount in controversy, classified as a possible contingency, is R$147,572 thousand as of December 31, 2019 (R$142,355 thousand as of December 31, 2018).
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Charge of ISS tax and penalties due to the supposed lack of collection over the Company’s revenue accounts. The amount in controversy, classified as a possible contingency, is R$300,669 thousand as of December 31, 2019 (R$283,620 thousand as of December 31, 2018).
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109
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Constitutionality of the collection of the Inspection Fee for Operation (Taxa de Fiscalização de Funcionamento – TFF) by municipal authorities of different locations. The amount in controversy, classified as a possible contingency, is R$120,503 thousand as of December 31, 2019 (R$118,114 thousand as of December 31, 2018).
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FUST and FUNTTEL
The total amount assessed against the Company is R$2,991,567 thousand as of December 31, 2019 (R$2,979,404 thousand as of December 31, 2018).
The main discussion involves the collection of FUST and FUNTTEL followed by a discussion of the issuance by Anatel of Ordinance No. 07/2005, specifically aiming at the collection of these contributions on interconnection revenues earned by telecommunications services providers from the date upon which Law No. 9,998/2000 came into force.
Material Proceedings with Adverse Director, Management or Affiliate
None.
Dividend Policy
Under our By-laws, we are required to distribute an aggregate amount equal to at least 25% of our adjusted net income to our shareholders, either as dividends or as tax-deductible interest on shareholders’ equity. We may also make additional distributions to the extent of available distributable profits and reserves. Our subsidiary TIM S.A. is also subject to mandatory distribution requirements and, to the extent of distributable profits and reserves, is accordingly required to pay dividends to us. All of the aforementioned distributions may be made as dividends or as tax-deductible interest on shareholders’ equity.
Brazilian corporations may make payments to shareholders characterized as interest on shareholders’ equity (juros sobre capital próprio) as an alternative form of making dividend distributions to the shareholders. The rate of interest may not be higher than the Federal Government’s long-term interest rate as determined by BNDES from time to time. Dividends are not subject to withholding income tax when paid. On the other hand, interest on shareholders’ equity paid to shareholders is deductible from the corporation’s net income for tax purposes, but the distributions are subject to withholding tax.
For the purposes of Brazilian corporate law, and in accordance with our By-laws, adjusted net income is an amount equal to net profit adjusted to reflect allocations to and from:
· the legal reserve; and
· contingency reserves.
We are required to maintain a legal reserve to which we must allocate 5% of net income for each fiscal year until the amount for such reserve equals 20% of our capital. However, we are not required to make any allocations to our legal reserve in respect of any fiscal year in which our legal reserve, together with our other capital reserves, exceeds 30% of our capital. Losses, if any, may be charged against the legal reserve.
Brazilian corporate law also provides for two discretionary allocations of net income that are subject to approval by the shareholders at the annual meeting. First, a percentage of net income may be allocated to a contingency reserve for anticipated losses that are deemed probable in future years. Any amount so allocated in a prior year must be either reversed in the fiscal year in which the loss was anticipated if such loss does not in fact occur, or written off in the event that the anticipated loss occurs. Second, if the mandatory distributable amount exceeds the sum of realized net income in a given year, such excess may be allocated to unrealized revenue reserve. Under Brazilian corporate law, realized net income is defined as the amount of net income that exceeds the net positive result of equity adjustments and profits or revenues from operations with financial results after the end of the next succeeding fiscal year.
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Under Brazilian corporate law, any company may, as a term in its By-laws, create a discretionary reserve that authorizes the allocation of a percentage of a company’s net income to the discretionary reserve and must also indicate the purpose, criteria for allocation and a maximum amount of the reserve. The Company’s By-laws authorize the allocation of the net income balance not allocated to the payment of the mandatory minimum dividend to a supplementary reserve for the expansion of corporate business, not to exceed 80% of the capital.
We may also allocate a portion of our net income for discretionary appropriations for plant expansion and other capital investment projects, the amount of which would be based on a capital budget previously presented by our management and approved by shareholders. Under Brazilian corporate law, capital budgets covering more than one year must be reviewed at each annual shareholders’ meeting. After completion of the relevant capital projects, we may retain the appropriation until the shareholders vote to transfer all or a portion of the reserve to capital realized.
The amounts available for distribution may be further increased by a decrease in the contingency reserve for anticipated losses anticipated in prior years but not realized. The amounts available for distribution are determined on the basis of financial statements prepared in accordance with IFRS.
The legal reserve is subject to approval by the shareholders voting at the annual meeting and may be transferred to capital but is not available for the payment of dividends in subsequent years. Our calculation of net income and allocations to reserves for any fiscal year are determined on the basis of financial statements prepared in accordance with CVM rules and Brazilian corporate law.
Under Brazilian corporate law, a company is permitted to suspend the mandatory dividend in respect of common shares not entitled to a fixed or minimum dividend if:
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its management (board of directors and board of statutory officers) and fiscal council report to the shareholders’ meeting that the distribution would be incompatible with the financial circumstances of that company; and
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the shareholders ratify this conclusion at the shareholders’ meeting.
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In this case,
·
|
the management must forward to CVM within five days of the shareholders’ meeting an explanation justifying the information transmitted at the meeting; and
|
·
|
the profits which were not distributed are to be recorded as a special reserve and, if not absorbed by losses in subsequent fiscal years, are to be paid as dividends as soon as the financial situation permits.
|
For the purposes of Brazilian corporate law, 25% of the net income after income tax and social contribution for such fiscal year, net of any accumulated losses from prior fiscal years and any amounts allocated to warrants and employees’ and management’s participation in a company’s profits, shall be distributed as dividends.
Payment of Dividends
We are required by law and by our By-laws to hold an annual shareholders’ meeting by April 30 of each year, at which, among other things, an annual dividend may be declared by decision of our shareholders on the recommendation of our statutory officers, as approved by our Board of Directors. The payment of annual dividends is based on the financial statements prepared for the fiscal year ending December 31. Under Brazilian corporate law, dividends are required to be paid within 60 days following the date the dividend is declared to shareholders of record on such declaration date, unless a shareholders’ resolution sets forth another date of payment, which in any event shall occur prior to the end of the fiscal year in which such dividend was declared.
A shareholder has a three-year period from the dividend payment date to claim dividends in respect of its shares, after which we have no liability for such payment. Because our shares are issued in book-entry form, dividends with respect to any share are credited to the account holding such share. We are not required to adjust the amount of paid-in capital for inflation. Annual dividends may be paid to shareholders on a pro rata basis according to the date when the subscription price is paid to us.
111
B. Significant Changes
None.
Item 9. The Offer and Listing
A. Offer and Listing Details
Our common shares are listed on the Novo Mercado segment of the B3, under the symbol “TIMP3” and our ADSs are listed on the NYSE, under the symbol “TSU.” The table below sets forth, for the indicated periods, the high and low closing prices of the ADSs on the NYSE, in U.S. dollars, and the common shares on the B3, in reais. On December 31, 2019, the last reported sales price of our common shares on the B3 was R$15.57 and on December 31, 2019, the last reported sales price of our ADSs on the NYSE was U.S.$18.99. As of December 31, 2019, the U.S. dollar-real exchange rate was R$4.03 per U.S.$1.00.
|
|
|
|
|
|
|
|
|
(in U.S.$ per ADS)
|
(in reais
per common share)
|
Year ended
|
|
|
|
|
December 31, 2015
|
24.38
|
8.44
|
12.88
|
6.56
|
December 31, 2016
|
13.85
|
7.12
|
8.86
|
5.68
|
December 31, 2017
|
19.43
|
12.30
|
13.10
|
7.73
|
December 31, 2018
|
22.93
|
14.06
|
15.95
|
10.63
|
December 31, 2019
|
19.16
|
12.48
|
15.57
|
100.20
|
|
|
|
|
|
Year ended December 31, 2018
|
|
|
|
|
First quarter
|
22.49
|
19.52
|
14.74
|
12.66
|
Second quarter
|
22.93
|
16.55
|
15.95
|
12.63
|
Third quarter
|
17.64
|
14.34
|
13.60
|
11.35
|
Fourth quarter
|
19.22
|
14.32
|
12.41
|
11.04
|
|
|
|
|
|
Year ended December 31, 2019
|
|
|
|
|
First quarter
|
17.00
|
14.25
|
12.58
|
11.05
|
Second quarter
|
15.73
|
12.48
|
12.08
|
10.20
|
Third quarter
|
15.88
|
13.76
|
12.25
|
11.07
|
Fourth quarter
|
19.16
|
13.44
|
15.47
|
11.16
|
|
|
|
|
|
Month ended
|
|
|
|
|
October 31, 2019
|
14.39
|
13.44
|
11.61
|
11.16
|
November 30, 2019
|
16.25
|
14.19
|
13.83
|
11.39
|
December 31, 2019
|
19.16
|
16.10
|
15.57
|
13.60
|
January 31, 2020
|
20.15
|
19.33
|
17.02
|
15.77
|
February 29, 2020
|
20.06
|
18.03
|
17.49
|
16.13
|
March 31, 2020
|
18.78
|
11.74
|
17.20
|
12.20
|
April 2020 (through April 28, 2020)
|
13.18
|
10.66
|
13.54
|
12.20
|
At an extraordinary shareholders meeting held on June 22, 2011 our shareholders approved, among other things: (1) the conversion of all of our preferred shares into common shares, at a ratio of 0.8406 common shares for each preferred share; (2) our adherence to the Novo Mercado rules and the transfer of trading of the shares issued by us to the Novo Mercado, and (3) amendments to our By-laws.
In order to join the Novo Mercado, we entered into a Novo Mercado Participation Agreement with the B3. Through this agreement, which became effective on July 27, 2011, we are required to comply with heightened requirements relating to corporate governance and the disclosure of information to the market. Additionally, as of
such date, our shares started trading on the Novo Mercado segment of the B3. Pursuant to the Novo Mercado Regulations, we are not permitted to issue preferred shares, participation bonuses or any kind of shares with restricted voting rights.
112
Prior to August 2, 2011 we had common shares and preferred shares listed on the B3 under the symbols “TCSL3” and “TCSL4,” respectively. Our ADSs listed on the NYSE each represented 10 preferred shares. As part of our migration to the Novo Mercado listing segment of the B3, our preferred shares ceased to trade on August 2, 2011. On August 4, 2011, our ADSs representing preferred shares ceased to trade on the NYSE. From August 3, 2011, we only had common shares traded on the Novo Mercado listing segment of the B3, by using the symbol “TIMP3” and as from August 5, 2011, our ADSs representing five common shares instead of ten preferred shares commenced trading on the NYSE.
B. Plan of Distribution
Not applicable.
C. Markets
Our common shares are listed on the Novo Mercado segment of the B3 under the symbol “TIMP3” and our ADSs are listed on the NYSE, under the symbol “TSU.” For additional detail, see “—A. Offer and Listing Details.”
Trading on the Brazilian Stock Exchanges
B3 S.A. – Brasil, Bolsa, Balcão
The B3 is the only Brazilian Stock Exchange on which equity and debt securities issued by Brazilian companies are traded.
Trading on the B3 is conducted every business day, from 10:00 a.m. to 5:00 p.m., or from 11:00 a.m. to 6:00 p.m. during daylight saving time in Brazil, on an electronic trading system called “PUMA.” Trading is also conducted between 6:00 p.m. and 7:30 p.m., or between 7:00 p.m. and 8:30 p.m. during daylight savings time in Brazil, in an after-market system. The “after-market” trading is the scheduled after the close of principal trading sessions, when investors may send purchase and sell orders and make trades through the home broker system. This after-market trading is subject to regulatory limits on price volatility of securities traded by investors operating on the Internet.
When shareholders trade shares or units on the B3, the trade is settled in three business days after the trade date, without adjustments to the purchase price. The seller is ordinarily required to deliver the shares or units to the exchange on the second business day following the trade date. Delivery of and payment for shares or units are made through the facilities of Central Depositária of B3 clearing house.
In order to maintain control over the fluctuation of the B3 index, B3 has adopted a “circuit breaker” system pursuant to which trading sessions may be suspended for a period of 30 minutes or one hour whenever the B3 index falls below 10% or 15%, respectively, in relation to the closing index levels of the previous trading session. The B3 also implemented a 15% limit, up or down, on price fluctuations in shares traded on the spot market. The minimum and maximum price is based on a reference price for each asset, which will be the previous session’s closing quote, when considering the asset at the beginning of the day before the first trade, or the price of the day’s first trade. The asset’s reference price will be altered during the session if there is an auction sparked by the intraday limit being breached. In this case the reference price will become whatever results from the auction.
Although the Brazilian equity market is Latin America’s largest in terms of market capitalization, it is smaller and less liquid than the major U.S. and European securities markets. Moreover, the B3 is less liquid than the NYSE and other major exchanges in the world. Although any of the outstanding shares of a listed company may trade on a Brazilian stock exchange, in most cases fewer than half of the listed shares are actually available for trading by the public, the remainder being held by small groups of controlling persons, governmental entities or one principal shareholder. Trading on Brazilian stock exchanges by non-residents of Brazil is subject to registration procedures.
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Trading on Brazilian stock exchanges by a holder not deemed to be domiciled in Brazil, for Brazilian tax and regulatory purposes (a “non-Brazilian holder”), is subject to certain limitations under Brazilian foreign investment legislation. With limited exceptions, non-Brazilian holders may only trade on Brazilian stock exchanges in accordance with the requirements of Resolution CMN 4,373 (that replaced Resolution CMN 2,689). Resolution CMN 4,373 (that replaced Resolution CMN 2,689) requires that securities held by non-Brazilian holders be maintained in the custody of, or in deposit accounts with, financial institutions and be registered with a clearinghouse duly authorized by the Central Bank and the CVM. In addition, Resolution CMN 4,373 (that replaced Resolution CMN 2,689) requires non-Brazilian holders to restrict their securities trading to transactions on Brazilian stock exchanges or qualified over-the-counter markets. With limited exceptions, non-Brazilian holders may not transfer the ownership of investments made under Resolution CMN 4,373 (that replaced Resolution CMN 2,689) to other non-Brazilian holders through a private transaction. See “Item 10. Additional Information—E. Taxation—Brazilian Tax Considerations” for a description of certain tax benefits extended to non-Brazilian holders who qualify under Resolution CMN 4,373 (that replaced Resolution CMN 2,689).
Differentiated Levels of Corporate Governance and the Novo Mercado
In order to increase the transparency of the Brazilian capital markets and protect minority shareholders’ rights, the B3 has implemented certain new initiatives, including:
·
|
a classification system referred to as “Differentiated Levels of Corporate Governance” applicable to the companies already listed on the B3; and
|
·
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a new separate listing segment for qualifying issuers referred to as the Novo Mercado.
|
The Differentiated Levels of Corporate Governance, Basic Levels, Level 1 and Level 2, are applicable to listed companies that voluntarily comply with special disclosure and corporate governance practices established by the B3. The companies may be classified into different levels, depending on their degree of adherence to the B3’s practices of disclosure and corporate governance.
The Novo Mercado is a separate listing segment for the trading of shares issued by companies that voluntarily adopt certain additional corporate governance practices and disclosure requirements which are more demanding than those required by the current law in Brazil. Companies may qualify to have their shares traded in the Novo Mercado, if, in addition to complying with the Level 2 corporate governance practices referred to above, their capital stock consists only of voting common shares.
Below we highlight some of corporate governance practices required by the Novo Mercado listing segment of the B3:
·
|
only common shares, with voting rights;
|
·
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100% tag along, with the same conditions for all shareholders in transfer of control;
|
·
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establishment and maintenance of Internal Audit, Compliance Department and Audit Committee (statutory or non-statutory);
|
·
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public offer required in case of delisting from Novo Mercado;
|
·
|
at least two or 20% of board members must be independent (whichever is greater);
|
·
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listed companies’ commitment to maintain a free float of at least 25% or 15%, in case of an average daily trading volume above R$25 million.
|
On May 20, 2011 the Board of Directors of TIM Participações recommended to the extraordinary general shareholders’ meeting of the Company its migration to the Novo Mercado listing segment of the B3 (at that time, the BM&FBOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros), which took place on June 22, 2011. With this
migration TIM moved to the highest level of corporate governance. Only 39% of Brazilian listed companies are in the Novo Mercado and TIM is the only telecommunications company stock among them.
114
B3 Market Arbitration Panel
Pursuant to Law No. 9,307/96, a Market Arbitration Panel, or the Panel, has been established by the B3. The Panel was established to settle certain types of disputes, including disputes relating to corporate governance, securities issues, financial regulatory issues and other capital market matters, with respect to B3 listed companies that have undertaken to voluntarily comply with Level 2 and Novo Mercado levels of corporate governance and disclosure. The Panel will provide a forum for dispute resolution involving, among others, the B3, the applicable listed company and the shareholders, directors and management of the applicable listed company.
Regulation of Brazilian Securities Markets
The Brazilian securities markets are principally governed by Law No. 6,385, of December 7, 1976, and Brazilian corporate law, each as amended and supplemented, and by regulations issued by the CVM, which has authority over stock exchanges and the securities markets in general; the National Monetary Council; and the Central Bank, which has, among other powers, licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions.
These laws and regulations, among others, provide for licensing and oversight of brokerage firms, governance of the Brazilian stock exchanges, disclosure requirements applicable to issuers of traded securities, restrictions on price manipulation and protection of minority shareholders. They also provide for restrictions on insider trading. Accordingly, any trades or transfers of our equity securities by our officers and directors, our controlling shareholders or any of the officers and directors of our controlling shareholders must comply with the regulations issued by the CVM.
Under Brazilian corporate law, a corporation is either publicly held (companhia aberta), as we are, or closely held (companhia fechada). All publicly held companies are registered with the CVM and are subject to reporting requirements. We have the option to ask that trading in securities on the B3 be suspended in anticipation of a material announcement. Trading may also be suspended on the initiative of the B3 or the CVM, based on or due to, among other reasons, a belief that a company has provided inadequate information regarding a material event or has provided inadequate responses to inquiries by the CVM or the B3.
The Brazilian over-the-counter market consists of direct trades between individuals in which a financial institution registered with the CVM serves as intermediary. No special application, other than registration with the CVM, is necessary for securities of a public company to be traded in this market. The CVM requires that it be given notice of all trades carried out in the Brazilian over-the-counter market by the respective intermediaries.
Trading on the B3 by non-residents of Brazil is subject to limitations under Brazilian foreign investment and tax legislation. The Brazilian custodian for our common shares on behalf of the depositary for the ADSs, has obtained registration from the Central Bank to remit U.S. dollars abroad for payments of dividends, any other cash distributions, or upon the disposition of the shares and sales proceeds thereto. In the event that a holder of ADSs exchanges common shares for ADSs, the holder will be entitled to continue to rely on the custodian’s registration for five business days after the exchange. Thereafter, the holder may not be able to obtain and remit U.S. dollars abroad upon the disposition of our common shares or upon distributions relating to our common shares, unless the holder obtains a new registration. See “Item 10. Additional Information—B. Memorandum and Articles of Association.”
Brazilian regulations also require that any person or group of persons representing the same interest that has directly or indirectly acquired an interest corresponding to 5% of a type or class of shares of a publicly traded company must provide such publicly traded company with information on such acquisition and its purpose, and such company must transmit this information to the CVM. If this acquisition causes a change in the corporate control or in the administrative structure of the company, as well as when such acquisition triggers the obligation of making a public offering in accordance with CVM Instruction 358/03, then the acquiring entity shall disclose this information to the applicable stock exchanges and the appropriate Brazilian newspapers. Regulations also require disclosure of
any subsequent increase or decrease of 5% or more in ownership of common shares, including warrants and debentures convertible into common shares in the same terms above.
115
Trading on the NYSE
We are a “controlled company” and a “foreign private issuer” within the meaning of the NYSE corporate governance standards. Under the NYSE rules, a controlled company is exempt from certain NYSE corporate governance requirements. In addition, a foreign private issuer may elect to comply with the practice of its home country and not to comply with certain NYSE corporate governance requirements, including the requirements that (1) a majority of the board of directors consist of independent directors, (2) a nominating and corporate governance committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities, (3) a compensation committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities and (4) an annual performance evaluation of the nominating and corporate governance and compensation committees be undertaken. Although we have similar practices, they do not entirely conform to the NYSE requirements, therefore, we currently use these exemptions and intend to continue using them.
Code of Business Conduct and Ethics
Although adoption of a code of ethics is not required by Brazilian Corporate Law, we implemented not only a code of ethics regulating the conduct of our managers in connection with the registration and control of financial and accounting information and their access to privileged and nonpublic information and data to comply with the requirements of Sarbanes-Oxley and NYSE rules, but also trainings and e-learnings to guarantee the understanding by the leadership. See “Item 16B. Code of Ethics.”
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the issue
Not applicable.
Item 10. Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
The following summarizes certain material provisions of TIM’s By-laws and the Brazilian corporate law, the main bodies of regulation governing us. Copies of TIM’s By-laws have been filed as exhibits to this annual report on Form 20-F. Except as described in this section, TIM’s By-laws do not contain provisions addressing the duties, authority or liabilities of the directors and senior management, which are instead established by Brazilian corporate law.
Registration
TIM’s By-laws have been registered with the Public Registry of the state of Rio de Janeiro under company number (NIRE) 33.3.0027696-3.
116
Corporate Purpose
Article 2 of our By-laws provides that our corporate purpose is to: (1) hold interest in the capital of companies that explore any type of telecommunications services, under the terms and conditions provided for in the relevant permits, authorizations or concessions, companies that develop activities that are necessary or useful to the provision of such services, or companies that provide Internet connection services, Value-Added Services and Internet application services; (2) promote, through its controlled or affiliated companies, the expansion and implementation of any type of telecommunications services, under the terms and conditions provided for in the relevant permits, authorizations or concessions; (3) promote, perform or give guidance in relation to the borrowing of funds from internal and external sources to be invested by the Company or by its controlled companies; (4) promote and incentivize study and research activities for the development of any type of telecommunications services, as well as of Internet connection services, other Value-Added Services and Internet application services; (5) provide, directly or through controlled or affiliated companies, services related to the telecommunications industry; (6) promote, incentivize and coordinate, through controlled or affiliated companies, the education and training of the staff required by the telecommunications industry in general; (7) perform or promote the importation of goods and services for the controlled or affiliated companies; (8) engage in any other activities related or akin to its purpose; and (9) hold interest in the corporate capital of other companies.
Company Management
According to our By-laws, our Board of Directors is comprised of at least five and at most 19 permanent members. The following is a description of some of the provisions of our By-laws concerning the Board of Directors:
·
|
the Board of Directors has the power to approve loans and financing as well as other transactions giving rise to indebtedness, for an amount exceeding R$300 million, as set forth in Article 22, Item XIII;
|
·
|
the Board of Directors has the power to allocate the total budget for management remuneration approved by the shareholders’ meeting among the directors and the statutory officers, as necessary; and
|
·
|
the Board of Directors has the power to authorize the Company, as well as its controlled companies and affiliates, to enter into, amend or terminate shareholders’ agreements.
|
There are no provisions in the By-laws with respect to:
·
|
a director’s power to vote on a proposal in which such director is materially interested;
|
·
|
a director’s power to vote compensation to him or herself in the absence of an independent quorum;
|
·
|
borrowing powers exercisable by the directors;
|
·
|
age limits for retirement of directors;
|
·
|
required shareholding for director qualification; or
|
·
|
disclosure of share ownership.
|
The statutory officers are the Company’s representative and executive body, and each one of them shall act within his/her respective scope of authority. Following is a description of some of the provisions of our By-laws concerning the Board of Statutory Officers:
·
|
the power to authorize the participation of the Company or its companies controlled in any joint venture, partnership, consortium or any similar structure;
|
·
|
the power to ratify, within the limits set forth in the By-laws, the purchase of materials and equipment and the execution of property, construction work and service agreements; and
|
117
·
|
the power to approve the contracting by the Company or by its controlled companies of loans, financing, or any other transactions implying indebtedness to the Company or its controlled companies, whose individual value is greater than R$30.0 million, provided that certain provisions of the By-laws are observed.
|
Rights Relating to Our Shares
Dividend Rights
Under our By-laws, we are required to distribute an aggregate amount equal to at least 25% of our adjusted net income to our shareholders, either as dividends or as tax-deductible interest on shareholders’ equity. We may also make additional distributions to the extent of available distributable profits and reserves. Our subsidiary TIM S.A. is also subject to mandatory distribution requirements and, to the extent of distributable profits and reserves, is accordingly required to pay dividends to us. All of the aforementioned distributions may be made as dividends or as tax-deductible interest on shareholders’ equity.
Brazilian corporations may make payments to shareholders characterized as interest on shareholders’ equity (juros sobre capital próprio) as an alternative form of making dividend distributions to the shareholders. The rate of interest may not be higher than the Federal Government’s long-term interest rate as determined by BNDES from time to time. Dividends are not subject to withholding income tax when paid. On the other hand, interest on shareholders’ equity paid to shareholders is deductible from the corporation’s net income for tax purposes, but the distributions are subject to withholding tax.
For the purposes of Brazilian corporate law, and in accordance with our By-laws, adjusted net income is an amount equal to net profit adjusted to reflect allocations to and from:
· the legal reserve; and
· contingency reserves.
We are required to maintain a legal reserve, to which we must allocate 5% of net income for each fiscal year until the amount for such reserve equals 20% of our capital. However, we are not required to make any allocations to our legal reserve in respect of any fiscal year in which our legal reserve, together with our other capital reserves, exceeds 30% of our capital. Losses, if any, may be charged against the legal reserve.
Brazilian corporate law also provides for two discretionary allocations of net income that are subject to approval by the shareholders at the annual meeting. First, a percentage of net income may be allocated to a contingency reserve for anticipated losses that are deemed probable in future years. Any amount so allocated in a prior year must be either reversed in the fiscal year in which the loss was anticipated if such loss does not in fact occur, or written off in the event that the anticipated loss occurs. Second, if the mandatory distributable amount exceeds the sum of realized net income in a given year, such excess may be allocated to unrealized revenue reserve. Under Brazilian corporate law, realized net income is defined as the amount of net income that exceeds the net positive result of equity adjustments and profits or revenues from operations with financial results after the end of the next succeeding fiscal year.
Under Brazilian corporate law, any company may, as a term in its By-laws, create a discretionary reserve that authorizes the allocation of a percentage of a company’s net income to the discretionary reserve and must also indicate the purpose, criteria for allocation and a maximum amount of the reserve. The Company’s By-laws authorize the allocation of the net income balance not allocated to the payment of the mandatory minimum dividend to a supplementary reserve for the expansion of corporate business, not to exceed 80% of the capital.
We may also allocate a portion of our net income for discretionary appropriations for plant expansion and other capital investment projects, the amount of which would be based on a capital budget previously presented by our management and approved by shareholders. Under Brazilian corporate law, capital budgets covering more than one year must be reviewed at each annual shareholders’ meeting. After completion of the relevant capital projects, we may retain the appropriation until the shareholders vote to transfer all or a portion of the reserve to capital realized.
118
The amounts available for distribution may be further increased by a decrease in the contingency reserve for anticipated losses anticipated in prior years but not realized. The amounts available for distribution are determined on the basis of financial statements prepared in accordance with IFRS.
The legal reserve is subject to approval by the shareholders voting at the annual meeting and may be transferred to capital but is not available for the payment of dividends in subsequent years. Our calculation of net income and allocations to reserves for any fiscal year are determined on the basis of financial statements prepared in accordance with CVM rules and IFRS.
Under Brazilian corporate law, a company is permitted to suspend the mandatory dividend in respect of common shares not entitled to a fixed or minimum dividend if:
·
|
its management (Board of Directors and Board of Statutory Officers) and Fiscal Council report to the shareholders’ meeting that the distribution would be incompatible with the financial circumstances of that company; and
|
·
|
the shareholders ratify this conclusion at the shareholders’ meeting.
|
In this case,
·
|
the management must forward to CVM within five days of the shareholders’ meeting an explanation justifying the information transmitted at the meeting; and
|
·
|
the profits which were not distributed are to be recorded as a special reserve and, if not absorbed by losses in subsequent fiscal years, are to be paid as dividends as soon as the financial situation permits.
|
For the purposes of Brazilian corporate law, 25% of the net income after income tax and social contribution for such fiscal year, net of any accumulated losses from prior fiscal years and any amounts allocated to warrants and employees’ and management’s participation in a company’s profits, shall be distributed as dividends.
Payment of Dividends
We are required by law and by our By-laws to hold an annual shareholders’ meeting by April 30 of each year, at which, among other things, an annual dividend may be declared by decision of our shareholders on the recommendation of our statutory officers, as approved by our Board of Directors.
The payment of annual dividends is based on the financial statements prepared for the fiscal year ending December 31. Under Brazilian corporate law, dividends are required to be paid within 60 days following the date the dividend is declared to shareholders of record on such declaration date, unless a shareholders’ resolution sets forth another date of payment, which in any event shall occur prior to the end of the fiscal year in which such dividend was declared.
A shareholder has a three-year period from the dividend payment date to claim dividends in respect of its shares, after which we have no liability for such payment. Because our shares are issued in book-entry form, dividends with respect to any share are credited to the account holding such share. We are not required to adjust the amount of paid-in capital for inflation. Annual dividends may be paid to shareholders on a pro rata basis according to the date when the subscription price is paid to us.
Voting Rights
Each common share entitles the holder to one vote at meetings of shareholders.
Meeting of Shareholders
According to Brazilian law, shareholders must be previously notified through a notice published three times in Brazilian official gazettes in order for an annual or extraordinary shareholders’ meeting to be held. The notification
must occur at least 15 days prior to the meeting scheduled date. If the meeting so noticed is not held for any reason on first notice, a second notification must be published at least eight days before the second meeting date.
119
On the first notice, meetings may be held only if shareholders holding at least one-fourth of voting shares are represented. Extraordinary meetings for the amendment of the By-laws may be held on the first notice only if shareholders holding at least two-thirds of the voting capital are represented. On a second call, the meetings are held regardless of quorum.
Pursuant to our By-laws and Brazilian corporate law, shareholders at our annual shareholders’ meeting, which is required to be held within the first four months following the end of the fiscal year, will convene to:
·
|
take the management accounts; examine, discuss and vote on the financial statements;
|
·
|
decide on the uses to which the net income of the fiscal year should be put and on the distribution of dividends; and
|
·
|
elect the members of the Fiscal Council and, when applicable, the members of the Board of Directors.
|
An extraordinary shareholders’ meeting shall be convened whenever the Company interests so require. Pursuant to our By-laws and Brazilian corporate law, the following actions, among others, are exclusive powers of the shareholders’ meeting:
·
|
to amend the By-laws;
|
·
|
to decide on the appraisal of assets given by shareholders to pay up capital stock;
|
·
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to decide on the Company’s transformation, merger, takeover and split-up; its dissolution and liquidation; to appoint and remove liquidators and appreciate their accounts;
|
·
|
to suspend the rights of shareholders not in compliance with their duties imposed by law, the By-laws or the Novo Mercado Listing Rules;
|
·
|
to elect and remove, at any time, the members of the Board of Directors and the Fiscal Council;
|
·
|
to determine the global or individual remuneration of the Board of Directors, Board of Statutory Officers and the Fiscal Council;
|
·
|
to annually take the accounts of the management and decide on the submitted financial statements;
|
·
|
to decide where the Company shall file a civil liability law suit against the management for losses in the Company’s assets as provided by law;
|
·
|
to resolve in compliance with all provisions of any law, the By-laws or the Novo Mercado rules about capital stock increase by means of subscription of new shares, and on the issuance of any other bonds or securities, whether in Brazil or abroad and whenever the limit of the authorized capital has been attained;
|
·
|
to decide on the withdrawal from the register of publicly held companies before the CVM;
|
·
|
to decide on the delisting of the Company from the Novo Mercado listing segment;
|
·
|
to choose a company to prepare an opinion concerning the appraisal of the Company’s shares in the event of cancellation or delisting; and
|
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to previously approve the execution of loan agreements, management agreements and technical support services agreements, between the Company or its controlled companies, on the one side, and the controlling shareholder or its controlled companies, affiliated or under the same control or the controlling companies of the latter, or parties related to the Company, on the other side, after prior assessment of the Statutory Audit Committee to the effect that the terms and conditions of the agreement in question are in compliance with standards normally adopted in the market for transactions of the same nature between independent parties.
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Preemptive Rights
Except in the case of a public offering of ordinary shares or convertible debentures, public subscription or a public tender offer (whereby such actions must be authorized by the Board of Directors in accordance with article 22, section II of the By-laws), each of our shareholders has a general preemptive right to subscribe shares in any capital increase, in proportion to its shareholding. A minimum period of 30 days following the publication of notice of the capital increase is allowed for the exercise of the right, and the right is transferable.
Preemptive rights to purchase shares may not be offered to U.S. holders of the ADSs unless a registration statement under the Securities Act is effective with respect to the shares underlying those rights or an exemption from the registration requirements of the Securities Act is available. Consequently, if you are a holder of our ADSs who is a U.S. person or is located in the United States, you may be restricted in your ability to participate in the exercise of preemptive rights.
Right of Redemption
Subject to certain exceptions, the common shares are redeemable by shareholders exercising withdrawal rights in the event that shareholders representing over 50% of the voting shares adopt a resolution at a duly convened shareholders meeting to:
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reduce the mandatory distribution of dividends;
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change our corporate purpose;
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participate in a group of companies;
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transfer all of our shares to another company in order to make us a wholly owned subsidiary of that company;
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split up, subject to the conditions set forth by Brazilian corporate law;
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change corporate form;
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approve the acquisition of another company, the price of which exceeds certain limits set forth in Brazilian corporate law; or
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merge or consolidate ourselves with another company.
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The redemption right expires 30 days after publication of the minutes of the relevant shareholders’ meeting. The shareholders would be entitled to reconsider any action giving rise to redemption rights within 10 days following the expiration of those rights if they determine that the redemption of shares of dissenting shareholders would jeopardize our financial stability.
Brazilian corporate law excludes dissenters’ rights in such cases for holders of shares that have a public float rate higher than 50% and that are “liquid.” Shares are defined as being “liquid” for these purposes if they are part of the B3 Index or another stock exchange index (as defined by CVM). For as long as our shares are part of any qualifying market index, the right of redemption shall not be extended to our shareholders with respect to decisions regarding our merger or consolidation with another company, or the participation in a group of companies as defined by Brazilian corporate law. Currently, our common shares do not have a public float rate higher than 50%; accordingly, dissenter’s withdrawal rights are applicable.
Unless otherwise provided in the By-laws, which is not the case with us, a shareholder exercising rights to redeem shares is entitled to receive the book value of such shares, determined on the basis of the last annual balance sheet approved by the shareholders. If the shareholders’ meeting giving rise to redemption rights occurs more than
60 days after the date of the last annual balance sheet, a shareholder may demand that its shares be valued on the basis of a new balance sheet that is as of a date within 60 days of such shareholders’ meeting.
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Form and Transfer
Our shares are maintained in book-entry form with a transfer agent, Banco Bradesco S.A., and the transfer of our shares is made in accordance with the applicable provision of the Brazilian corporate law, which provides that a transfer of shares is effected by an entry made by the transfer agent on its books, debiting the share account of the seller and crediting the share account of the purchaser, against presentation of a written order of the seller, or judicial authorization or order, in an appropriate document which remains in the possession of the transfer agent. The common shares underlying our ADS are registered on the transfer agent’s records in the name of the Brazilian depositary.
Transfers of shares by a foreign investor are made in the same way and executed by such investor’s local agent on the investor’s behalf except that, if the original investment was registered with the Central Bank under the Brazilian foreign investment in capital markets regulations, the foreign investor should also seek amendment, if necessary, though its local agent, of the certificate of registration to reflect the new ownership.
The B3 reports transactions carried out in its market to its Central Depositária, which is the exchange’s central clearing system. A holder of our shares may choose, at its discretion, to participate in this system. All shares elected to be put into the system will be deposited in custody with the relevant stock exchange, through a Brazilian institution duly authorized to operate by the Central Bank and CVM and having a clearing account with the relevant stock exchange. The fact that such shares are subject to custody with the relevant stock exchange will be reflected in our register of shareholders. Each participating shareholder will, in turn, be registered in our register of beneficial shareholders, as the case may be, maintained by the relevant stock exchange and will be treated in the same way as registered shareholders.
C. Material Contracts
See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Sources of Funds—Financial Contracts” the summary of certain financing agreements to which we have been a party, other than contracts entered into in the ordinary course of business.
D. Exchange Controls
There are no restrictions on ownership of our common shares by individuals or legal entities domiciled outside Brazil. However, the right to convert dividend payments and proceeds from the sale of shares into foreign currency and to remit such amounts outside Brazil is subject to restrictions under foreign investment legislation, which generally requires, among other things, that the relevant investments have been registered with the Central Bank.
Foreign investors may register their investment under Law No. 4,131/62 of September 3, 1962 or Resolution CMN 4,373 (that replaced Resolution CMN 2,689). Registration under Law No. 4,131/62 or under Resolution CMN 4,373 generally enables foreign investors to convert into foreign currency dividends, other distributions and sales proceeds received in connection with registered investments and to remit such amounts abroad. Resolution CMN 4,373 affords favorable tax treatment to foreign investors who are not resident in a Low or Nil Tax Jurisdiction, which is defined under Brazilian tax laws as a country that does not impose taxes or where the maximum income tax rate is lower than 17% or that restricts the disclosure of shareholder composition or ownership of investments.
Under Resolution CMN 4,373, foreign investors may invest in almost all financial assets and engage in almost all transactions available in the Brazilian financial and capital markets, provided that certain requirements are fulfilled. In accordance with Resolution CMN 4,373, foreign investors are individuals, corporations, mutual funds and collective investments domiciled or headquartered abroad.
Pursuant to Resolution CMN 4,373, foreign investors must:
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appoint at least one representative in Brazil with powers to perform actions relating to the foreign investment;
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complete the appropriate foreign investment registration form;
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obtain registration as a foreign investor with the CVM; and
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register the foreign investment with the Central Bank.
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The securities and other financial assets held by the foreign investor pursuant to Resolution CMN 4,373 must be:
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registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank or by the CVM; or
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registered in registration, clearing and custody systems authorized by the Central Bank or by the CVM.
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In addition, securities trading by foreign investors pursuant to Resolution CMN 4,373 is restricted to transactions carried out on the stock exchanges or organized over-the-counter markets licensed by the CVM.
On January 26, 2000, the Central Bank enacted Circular No. 2,963, providing that beginning on March 31, 2000, all investments by a foreign investor under Resolution CMN 4,373 are subject to the electronic registration with the Central Bank. Foreign investments registered under the Annex IV regulations were required to conform to the new registration rules by June 30, 2000.
Resolution No. 1,927 of the CMN provides for the issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers. Our ADS program was approved under the Annex V regulations by the Central Bank and the CVM prior to the issuance of the ADSs. Accordingly, the proceeds from the sale of ADSs by ADR holders outside Brazil are free of Brazilian foreign investment controls and holders of the ADSs will be entitled to favorable tax treatment. According to Resolution CMN 2,689, foreign investments registered under Annex V Regulations may be converted into the new investment system and vice-versa, provided that the conditions set forth by the Central Bank and the CVM are complied with.
Under current Brazilian legislation, the Federal Government may impose temporary restrictions on remittances of foreign capital abroad in the event of a serious imbalance or an anticipated serious imbalance of Brazil’s balance of payments. For approximately six months in 1989 and early 1990, the Federal Government froze all dividend and capital repatriations that were owed to foreign equity investors, in order to conserve Brazil’s foreign currency reserves. These amounts were subsequently released in accordance with Federal Government directives. The imbalance in Brazil’s balance of payments increased during 1999, and there can be no assurance that such increases will not incur in the future or that the Federal Government will not impose similar restrictions on foreign repatriations in the future for similar or other reasons.
E. Taxation
The following summary contains a description of the principal Brazilian and U.S. federal income tax consequences of the ownership and disposition of the common shares or ADSs, but it does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to hold common shares or ADSs. The summary is based upon the tax laws of Brazil and regulations thereunder and on the federal income tax laws of the United States and regulations and other authorities thereunder as of the date hereof, all of which are subject to change. Holders of common shares or ADSs should consult their tax advisers as to the tax consequences of the ownership and disposition of common shares or ADSs in their particular circumstances.
Although there is at present no income tax treaty between Brazil and the United States, the tax authorities of the two countries have had discussions that may culminate in such a treaty in the future. No assurance can be given, however, as to whether or when a treaty will enter into force or how it will affect the U.S. holders of common shares or ADSs.
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Brazilian Tax Considerations
The following discussion summarizes the principal Brazilian tax consequences of the ownership and disposition of common shares or ADSs by a non-Brazilian holder. This discussion does not address all the Brazilian tax considerations that may be applicable to any particular non-Brazilian holder, and each non-Brazilian holder should consult its tax adviser about the Brazilian tax consequences of investing in common shares or ADSs.
Taxation of Dividends
Dividends paid by us in cash or in kind from profits of periods beginning on or after January 1, 1996 (1) to the depositary in respect of common shares underlying ADSs or (2) to a non-Brazilian holder in respect of common shares will generally not be subject to Brazilian income tax withholding.
Taxation of Gains
According to Article 26 of Law No. 10,833 of December 29, 2003, which came into force on February 1, 2004, capital gains realized on the disposition of assets located in Brazil by non-Brazilian residents, whether or not to other non-residents and whether made outside or within Brazil, are subject to taxation in Brazil. Since January 1, 2017, the rate of the income tax on capital gains accrued by non-Brazilian individual residents may vary between 15% and 22.5% depending on the capital gain amount. Ultimately, a 25% rate may apply if the capital gain is realized by investors located in a Low or Nil Tax Jurisdiction (see below under “—Discussion on Low or Nil Tax Jurisdictions”). Although we believe that the ADSs will not fall within the definition of assets located in Brazil for the purposes of Law No. 10,833, considering the general and unclear scope of Law 10,833 and the absence of any judicial guidance in respect thereof, we are unable to predict whether such interpretation will ultimately prevail in the Brazilian courts.
Gains realized by non-Brazilian holders on dispositions of common shares in Brazil or in transactions with Brazilian residents may be exempt from Brazilian income tax or taxed at a rate that may vary between 15% and 25%, depending on the circumstances. This is because the current legislation prescribes specific taxation rules for gains arising from investments in the Brazilian financial and capital markets as opposed to other types of gains.
In this sense, gains realized by non-Brazilian holders through transactions on Brazilian stock exchanges, if carried out in accordance with Resolution CMN 4,373 (that replaced Resolution CMN 2,689), as described below, are exempt from Brazilian income tax or subject to income tax at a rate of 15% if a holder in a Low or Nil Tax Jurisdiction realizes the gain. On the other hand, gains realized through transactions with Brazilian residents or not executed on the Brazilian stock exchanges are subject to tax at a rate that may vary between 15% and 22.5% depending on the capital gain amount, or of 25% if the transactions are made by investors resident in a Low or Nil Tax Jurisdiction. Non-Brazilian holders should consult their tax advisors on the applicable income tax rate.
Non-Brazilian holders of common shares registered under Resolution CMN 4,373 (which includes ADSs) will only be subject to the tax exemption mentioned herein if the investor has:
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appointed a representative in Brazil with power to take action relating to the investment in common shares;
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registered as a foreign investor with the CVM; and
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registered its investment in common shares with the Central Bank.
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In addition, Resolution CMN 4,373 also establishes that securities held by foreign investors must be maintained under the custody of, or in deposit accounts with, financial institutions duly authorized by the Central Bank and the CVM.
Securities trading under Resolution CMN 4,373 is restricted to transactions on Brazilian stock exchanges or qualified over-the-counter markets. As stated herein, the preferential treatment afforded under Resolution CMN 4,373 and afforded to investors in ADSs is not available to investors resident or domiciled in Low or Nil Tax Jurisdictions.
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There can be no assurance that the current preferential treatment for non-Brazilian holders of common shares under Resolution CMN 4,373 will be maintained.
Gain on the disposition of common shares, subject to the tax treatment described above, is measured by the difference between the amounts in Brazilian currency realized on the sale or exchange and the acquisition cost of the shares sold, measured in Brazilian currency, without any correction for inflation. The acquisition cost of shares registered as an investment with the Central Bank is calculated on the basis of the foreign currency amount registered with the Central Bank.
The deposit of common shares in exchange for the ADSs may be subject to Brazilian income tax if the amount previously registered with the Central Bank as a foreign investment in our common shares is lower than
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the average price per common share on the B3 on the day of the deposit; or
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if no common shares were sold on that day, the average price per common share on the B3 during the fifteen preceding trading sessions.
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The difference between the amount previously registered and the average price of the common shares, calculated as set forth above, may be considered by the tax authorities as a capital gain subject to income tax. Unless the common shares were held in accordance with Resolution CMN 4,373, in which case the exchange would be tax-free, the capital gain will be subject to income tax at the following rates: (1) 15%, for gains realized through transactions that were conducted on Brazilian stock exchanges; or (2) from 15% to 22.5% for gains realized through transactions in Brazil that were not conducted on the Brazilian stock exchanges, or 25% if realized by investors located at Low or Nil Tax Jurisdiction.
The cancellation of ADSs in exchange for common shares is not subject to Brazilian income tax if the non-Brazilian holder qualifies under Resolution CMN 4,373, but is subject to the IOF/Exchange tax as described below.
Discussion on Low or Nil Tax Jurisdictions
For purposes of Brazilian law, Low or Nil Tax Jurisdictions are countries and jurisdictions that do not tax income or that have a maximum income tax rate lower than 17%. Since 1998, the Brazilian Internal Revenue Service has issued acts expressly listing the countries/jurisdictions that are to be considered low tax jurisdictions for Brazilian tax purposes. Currently, the tax authorities have deemed approximately 65 countries to be low tax jurisdictions pursuant to Normative Instruction 1,037/2010, article 1. These countries include the Bahamas, the British Virgin Islands, the Cayman Islands, Hong Kong and certain corporate regimes of Singapore.
Under Brazilian tax legislation, holders domiciled in Low or Nil Tax Jurisdictions are: (1) subject to a higher rate of withholding tax on income and capital gains; (2) not entitled to exemptions for investments in the Brazilian capital markets; (3) subject to automatic application of transfer pricing rules in transactions with Brazilian legal entities that are resident in Brazil; and (4) subject to thin capitalization rules on debt with legal entities that are resident in Brazil.
On June 24, 2008, Law No. 11,727/08 established the concept of “privileged tax regime”, which is a tax regime that (1) does not tax income or taxes it at a maximum rate lower than 20%; (2) grants tax benefits to non-resident entities or individuals (a) without the requirement to carry out a substantial economic activity in the country or dependency or (b) contingent to the non-exercise of a substantial economic activity in the country or dependency; (3) does not tax or that taxes the income generated abroad at a maximum rate lower than 20%; or (4) does not provide access to information related to shareholding composition, ownership of assets and rights or economic transactions carried out. However in 2014, an executive order National Treasury Ordinance No. 488/14 was issued (endorsed by Normative Instruction No. 1,530/14) indicating that, if countries are aligned with the international standards of fiscal transparency, the maximum rate to be considered as a “privileged tax regime” would be 17% and not 20%.
In principle, the best interpretation of Law No. 11,727/08 is that the new concept of privileged tax regime should be solely applied for purposes of transfer pricing rules in export and import transactions. However, due to the
recent enactment of this Law, we are unable to ascertain whether or not the privileged tax regime concept will be extended to the concept of Low or Nil Tax Jurisdiction. The provisions of Law No. 11,727/08 that refer to the privileged tax regime came into effect on January 1, 2009. Although we are of the opinion that the concept of privileged tax regime should not affect the tax treatment of a non-resident shareholder described above, we cannot assure you whether subsequent legislation or interpretations by the Brazilian tax authorities regarding the definition of privileged tax regime will extend such concept to the tax treatment of a non-resident shareholder described above.
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Prospective purchasers should therefore consult with their tax advisors regarding the consequences of the implementation of Law No. 11,727/08, Normative Instruction No. 1,037/2010 and of any related Brazilian tax laws or regulations concerning Low or Nil Tax Jurisdictions and privileged tax regimes.
Distributions of Interest on Capital
A Brazilian corporation may make payments to its shareholders characterized as interest on the corporation’s capital as an alternative form of making dividend distributions. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Dividend Policy.” The rate of interest may not be higher than the TJLP, as determined by the Central Bank from time to time. The total amount distributed as interest on capital may not exceed, for tax purposes, the greater of:
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50% of net income for the year in respect of which the payment is made, after the deduction of social contribution or net profits and before (1) making any deduction for corporate income taxes paid and (2) taking such distribution into account; or
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50% of retained earnings for the year prior to the year in respect of which the payment is made.
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Payments of interest on capital are decided by the shareholders on the basis of recommendations by our Board of Directors.
Distributions of interest on capital paid to Brazilian and non-Brazilian holders of common shares, including payments to the depositary in respect of common shares underlying ADSs, are deductible by us for Brazilian tax purposes up to the limit mentioned above. Such payments are subject to withholding income tax at the rate of 15%, or 25% in the case of a stockholder who is domiciled in a Low or Nil Tax Jurisdiction. These payments may be qualified, at their net value, as part of any mandatory dividend. As described herein the Company and its subsidiaries executed interest on equity payments in 2017. Please refer to “Item 4. Information of the Company—2017 Important Events—Interest on Equity” for detailed information. No assurance can be given that our Board of Directors will not recommend that future distributions of profits be made as interest on capital instead of as dividends.
Other Brazilian Taxes
There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of the common shares or ADSs by a non-Brazilian holder except for gift and inheritance taxes levied by some states in Brazil on gifts made or inheritances bestowed by individuals or entities not resident or domiciled in Brazil or in the relevant state to individuals or entities that are resident or domiciled within such state in Brazil. There is no Brazilian stamp, issue, registration or similar taxes or duties payable by holders of common shares or ADSs.
In 2018, there were two changes related to IOF: (i) the tax rate on foreign exchange transactions was increased to 1.10% (it was 0.38%) pursuant to Decree No. 9,297/2018; and (ii) rules were adopted relating to incidence of IOF in credit transactions of a period longer than one year pursuant to RFB Normative Instruction No. 1,814/2018.
Tax on Foreign Exchange and Financial Transactions
Tax on foreign exchange transactions, or the “IOF/Exchange Tax”
Brazilian law imposes the IOF/Exchange Tax on the conversion of reais into foreign currency and on the conversion of foreign currency into reais. Currently, the tax rate related to foreign investments in the Brazilian financial and capital markets is zero.
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However, it is important to note that the Brazilian Government is permitted to increase such rate at any time up to 25%. However, any increase in rates may only apply to future foreign exchange transactions.
Tax on transactions involving bonds and securities, or the “IOF/Bonds Tax.”
Brazilian law imposes the IOF/Bonds Tax on transactions involving bonds and securities, including those carried out on a Brazilian stock exchange. The rate of IOF/Bonds Tax applicable to transactions involving the deposit of common shares in exchange for ADSs is currently zero, but can be reviewed by the Brazilian government any time. The rate is applied to the product of the number of common shares received and the closing price for those shares on the date prior to the transfer, or if such closing price is not available, the last available closing price for such shares.
U.S. Federal Income Tax Considerations
The following are the U.S. federal income tax consequences to a U.S. Holder described below of owning and disposing of common shares or ADSs, but it does not purport to be a comprehensive description of all tax considerations that may be relevant to a particular person’s decision to hold or dispose of such securities. The discussion applies only to a U.S. Holder that holds common shares or ADSs as capital assets for U.S. federal income tax purposes and it does not describe all tax consequences that may be relevant to U.S. Holders subject to special rules, such as:
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certain financial institutions;
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insurance companies;
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dealers or traders in securities or foreign currencies who use a mark-to-market method of tax accounting;
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persons holding common shares or ADSs as part of a hedge, “straddle,” wash sale, conversion transaction, integrated transaction or similar transaction or persons entering into a constructive sale with respect to the common shares or ADSs;
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persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;
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partnerships or other entities classified as partnerships for U.S. federal income tax purposes;
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persons liable for the alternative minimum tax or the provisions of the Code (as defined below) known as the Medicare Contribution Tax;
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tax-exempt entities, including “individual retirement accounts” or “Roth IRAs;”
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persons who acquired our common shares or ADSs pursuant to the exercise of an employee stock option or otherwise as compensation;
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persons holding shares in connection with a trade or business conducted outside the United States; or
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persons holding common shares or ADSs that own or are deemed to own 10% or more of our stock (by vote or value).
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If an entity that is classified as a partnership for U.S. federal income tax purposes holds common shares or ADSs, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships holding common shares or ADSs and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of holding and disposing of the common shares or ADSs.
This discussion is based on the Internal Revenue Code of 1986, as amended, or the “Code,” administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date hereof. These laws are subject to change, possibly with retroactive effect. It is also based in part on representations by the
depositary and assumes that each obligation under the deposit agreement and any related agreement will be performed in accordance with its terms.
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A “U.S. Holder” is a holder who, for U.S. federal income tax purposes, is a beneficial owner of common shares or ADSs that is:
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a citizen or individual resident of the United States;
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a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state therein or the District of Columbia; or
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an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.
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In general, a U.S. Holder that owns ADSs will be treated as the owner of the underlying common shares represented by those ADSs for U.S. federal income tax purposes. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges ADSs for the underlying common shares represented by those ADSs.
U.S. Holders should consult their tax advisers concerning the U.S. federal, state, local and foreign tax consequences of owning and disposing of common shares or ADSs in their particular circumstances.
This discussion assumes that the Company is not, and will not become, a passive foreign investment company, as described below.
Taxation of Distributions
Distributions paid on common shares or ADSs, including distributions of interest on capital, will generally be treated as dividends to the extent paid out of the Company’s current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Because the Company does not maintain calculations of its earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported to U.S. Holders as dividends. Subject to applicable limitations and the discussion above regarding concerns expressed by the U.S. Treasury, dividends paid by qualified foreign corporations to certain non-corporate U.S. Holders are taxable at rates applicable to long-term capital gains. A foreign corporation is treated as a qualified foreign corporation with respect to dividends paid on stock that is readily tradable on a securities market in the United States, such as the NYSE (where our ADSs are traded). U.S. Holders should consult their tax advisers to determine whether these preferential rates will apply to dividends they receive and whether they are subject to any special rules that limit their ability to be taxed at these preferential rates.
The amount of a dividend will include any amounts withheld by the Company in respect of Brazilian taxes on the distribution. The amount of the dividend will be treated as foreign-source dividend income to U.S. Holders and will not be eligible for the dividends-received deduction generally allowed to U.S. corporations under the Code. Dividends will be included in a U.S. Holder’s income on the date of the U.S. Holder’s or, in the case of ADSs, the depositary’s receipt of the dividend. The amount of any dividend income paid in reais will be the U.S. dollar amount calculated by reference to the exchange rate in effect on the date of such receipt regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. A U.S. Holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of its receipt.
Sale or Other Disposition of Common Shares or ADSs
For U.S. federal income tax purposes, gain or loss realized on the sale or other disposition of common shares or ADSs will be capital gain or loss, and will be long-term capital gain or loss if the U.S. Holder held the common shares or ADSs for more than one year. The amount of the gain or loss will equal the difference between the U.S. Holder’s tax basis in the common shares or ADSs disposed of and the amount realized on the disposition, in each case as determined in U.S. dollars. Such gain or loss will generally be U.S.-source gain or loss for foreign tax credit purposes. If a Brazilian tax is withheld on the sale or other disposition of common shares or ADSs, a U.S. Holder’s
amount realized will include the gross amount of the proceeds of such sale or other disposition before deduction of the Brazilian tax.
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See “—Brazilian Tax Considerations—Taxation of Gains” for a description of when a disposition may be subject to taxation by Brazil.
Foreign Tax Credits in Respect of Brazilian Taxes
Subject to applicable limitations that may vary depending upon a U.S. Holder’s circumstances and subject to the discussion above regarding concerns expressed by the U.S. Treasury, Brazilian income taxes withheld from dividends on common shares or ADSs generally will be creditable against a U.S. Holder’s U.S. federal income tax liability.
A U.S. Holder will be entitled to use foreign tax credits to offset only the portion of its U.S. tax liability that is attributable to foreign-source income. This limitation on foreign taxes eligible for credit is calculated separately with regard to specific classes of income. Because a U.S. Holder’s gains from the sale or exchange of common shares or ADSs will generally be treated as U.S.-source income, this limitation may preclude a U.S. Holder from claiming a credit for all or a portion of the Brazilian taxes imposed on any such gains. U.S. Holders should consult their tax advisers as to whether these Brazilian taxes may be creditable against the U.S. Holder’s U.S. federal income tax liability on foreign-source income from other sources. Instead of claiming a credit, a U.S. Holder may elect to deduct such Brazilian taxes in computing its taxable income, subject to generally applicable limitations under U.S. law. An election to deduct foreign taxes instead of claiming foreign tax credits must apply to all taxes paid or accrued in the taxable year to foreign countries and possessions of the United States.
The Brazilian IOF/Bonds Tax and any IOF/Exchange Tax imposed on the deposit of common shares in exchange for ADSs and the cancellation of ADSs in exchange for common shares (as discussed above under
“—Brazilian Tax Considerations—Tax on Foreign Exchange and Financial Transactions”) will not be treated as creditable foreign taxes for U.S. federal income tax purposes. U.S. Holders should consult their tax advisers regarding the tax treatment of these taxes for U.S. federal income tax purposes.
The rules governing foreign tax credits are complex and, therefore, U.S. Holders should consult their tax advisers regarding the availability of foreign tax credits in their particular circumstances.
Passive Foreign Investment Company Rules
The Company believes that it was not a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes for its 2019 taxable year. However, since PFIC status depends upon the composition of a company’s income and assets and the market value of its assets from time to time, there can be no assurance that the Company will not be a PFIC for any taxable year.
If the Company were a PFIC for any taxable year during which a U.S. Holder held common shares or ADSs, gain recognized by such U.S. Holder on a sale or other disposition (including certain pledges) of the common shares or ADSs would be allocated ratably over the U.S. Holder’s holding period for the common shares or ADSs. The amounts allocated to the taxable year of the sale or other disposition and to any year before the Company became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for such taxable year, and an interest charge would be imposed on the resulting tax liability for such taxable year. Similar rules would apply to any distribution received by a U.S. Holder on its common shares or ADSs to the extent in excess of 125% of the average of the annual distributions on common shares or ADSs received by a U.S. Holder during the preceding three years or such U.S. Holder’s holding period, whichever is shorter. Certain elections (such as a mark-to-market election) may be available that would result in alternative treatment under the PFIC rules. U.S. Holders should consult their tax advisers to determine whether the Company is a PFIC for any given taxable year and the tax consequences to them of holding shares in a PFIC.
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If the Company is a PFIC for any taxable year during which a U.S. Holder owned common shares or ADSs, the U.S. Holder will generally be required to file IRS Form 8621 with its annual U.S. federal income tax returns, subject to certain exceptions.
Information Reporting and Backup Withholding
Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and may be subject to backup withholding unless (1) the U.S. Holder is a corporation or other exempt recipient or (2) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding.
The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle the U.S. Holder to a refund, provided that the required information is timely furnished to the IRS.
Certain U.S. Holders who are individuals (and certain specified entities) may be required to report information relating to their ownership of an interest in certain foreign financial assets, including stock of a non-U.S. person, subject to exceptions (including an exception for stock held through a U.S. financial institution). U.S. Holders should consult their tax advisers regarding their reporting obligations with respect to our common shares or ADSs.
U.S. Holders of our common shares or ADSs should consult their own tax advisers as to the Brazilian, U.S. federal, state, local and other tax consequences of the ownership and disposition of our common shares or ADSs based upon their particular circumstances.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
Statements contained in this annual report as to the contents of any contract or other document referred to are not necessarily complete, and each of these statements is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit hereto. Anyone may read and copy this report, including the exhibits hereto, at the SEC’s public reference room in Washington, D.C. Information on the operation of the public reference room is available over the Internet at http://www.sec.gov.
We are subject to the information and periodic reporting requirements of the Exchange Act and, in accordance therewith, will file periodic reports and other information with the SEC. These periodic reports and other information will be available for inspection and copying at the regional offices, public reference facilities of the SEC referred to above. As a foreign private issuer, we are exempt from certain provisions of the Exchange Act prescribing the furnishing and content of proxy statements and periodic reports and from Section 16 of the Exchange Act relating to short swing profits reporting and liability.
We will furnish to J.P. Morgan, as depositary, copies of all reports we are required to file with the SEC under the Exchange Act, including our annual reports in English, containing a brief description of our operations and our audited annual consolidated financial statements. In addition, we are required under the Deposit Agreement to furnish the depositary with copies of English translations to the extent required under the rules of the SEC of all notices of common shareholders’ meetings and other reports and communications that are generally made available to holders of common shares. Under certain circumstances, the depositary will arrange for the mailing to all ADR holders, at our expense, of these notices, reports and communications.
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We also file financial statements and other periodic reports with the CVM. Copies of our annual report on Form 20-F and documents referred to in this annual report and our By-laws will be available for inspection upon request at our offices at 850, João Cabral de Melo Neto, North Tower – 12th floor, 22775-057, Rio de Janeiro, RJ, Brasil.
I. Subsidiary Information
Not applicable.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in both foreign currency exchange and interest rates. We are exposed to foreign exchange rate risk mainly because certain of our costs are denominated in currencies (primarily U.S. dollars) other than those in which we earn revenues (primarily reais). Similarly, we are subject to market risk deriving from changes in interest rates, which may affect the cost of our financing. Since 1999, we began entering into hedging agreements, derivative instruments such as foreign exchange forward contracts, foreign currency options, interest rate swaps and forward rate agreements, to manage these market risks, covering payments of principal on our foreign exchange denominated indebtedness. We also have entered into arrangements to hedge market risk deriving from changes in interest rates for some of our debt obligations. We do not hold or issue derivative or other financial instruments for trading purposes.
Interest Rate Risk
On December 31, 2019, the amount of our outstanding debt which accrued interest at the CDI, TJLP and SELIC floating interest rates totaled R$1,969 million, compared to R$1,540 million for the year ended December 31, 2018. On the same date, we had cash and cash equivalents in the amount of R$2,939 million in instruments accruing interest at the CDI rate, as compared to R$1,861 million on December 31, 2018.
Over a one-year period, before accounting for tax expenses, a hypothetical, instantaneous and unfavorable change of 100 basis points in interest rates applicable to our financial assets and liabilities on December 31, 2019 would have resulted in a variation of R$0.019 million in our interest expenses from financial contracts and a variation of R$0.029 million in our income from financial investments (assuming that this hypothetical 100 basis point movement in interest rates uniformly applied to each “homogenous category” of our financial assets and liabilities and that such movement in interest rates was sustained over the full one-year period).
Exchange Rate Risk
As of December 31, 2019, we did not have any outstanding unhedged financial loans denominated in foreign currency and were thus not exposed to exchange rate risk based on our loans. We enter into hedging agreements to hedge our borrowings denominated in foreign currency and thus have limited our exchange rate exposure regarding such borrowings.
Our revenues are earned almost entirely in real, and we have no material foreign currency-denominated assets. We acquire our equipment and handsets from global suppliers, the prices of which are primarily denominated in U.S. dollars. Thus, we are exposed to foreign exchange risk arising from our need to make substantial dollar-denominated expenditures, particularly for imported components, equipment and handsets, that we have limited capacity to hedge. In order to hedge part of the exchange rate risk linked to capital expenditures and operating expenses, a bandwidth of -/+ 10% is generally negotiated into our agreements in order to minimize effects of exchange rate fluctuations on the acquisition costs of equipment.
In August 2018, we purchased a series of call options in the total amount of U.S.$100 million and strike at R$4.00 to hedge our exposure with suppliers. The options were divided into nine maturities of U.S.$11.1 million each (from October 2018 to June 2019) and were acquired at the initial value of R$11.7 million each. Due to the increase in the value of the U.S. dollar as compared to the Brazilian real and the reduction in risk exposure in commercial contracts, we sold in advance the October 2018 and November 2018 maturities for R$5.6 million. In November 2018, considering the upcoming maturity dates and the reduction in risk exposure in commercial contracts, we sold in advance the December 2018 and January and February 2019 for R$1.0 million. On June 15, 2019, the remaining options expired.
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As of December 31, 2019, we did not have call options.
Item 12. Description of Securities Other than Equity Securities
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. Description of American Depositary Receipts in Respect of Common Shares
Our depositary is J.P. Morgan Chase Bank, N.A., with its corporate trust office at which the ADRs will be administered is located at 4 New York Plaza, Floor 6, New York, NY, 10004, United States.
Each ADS represents five common shares, deposited with the custodian and registered in the name of the depositary.
Charges of Depositary
The depositary may charge U.S.$5.00 or less per 100 ADSs (or portion thereof) from each person to whom ADSs are issued, including issuances against deposits of shares, issuances in respect of share distributions, rights and other distributions, issuances pursuant to a stock dividend or stock split declared by the Company or issuances pursuant to a merger, exchange of securities or any other event affecting the ADSs or the deposited securities. It may also charge each person surrendering ADRs for withdrawal or whose ADSs are cancelled or reduced for any other reason.
Furthermore, the depositary may also charge any additional fees incurred in connection with such transaction by any governmental authorities or other institutions such as the Brazilian Clearing and Depository Corporation (Companhia Brasileira de Liquidação e Custódia) or the B3, the stock exchange on which the shares are registered for trading.
Altogether, the following fees and charges can be incurred by ADR holders, any party depositing or withdrawing common shares or any party surrendering ADRs or to whom ADRs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by TIM Participações or an exchange of stock regarding the ADRs or deposited securities or a distribution of ADRs pursuant to the deposit agreement), whichever is applicable:
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Description of Fees Incurred by ADR Holders per Payment:
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Depositing or substituting the underlying shares
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U.S.$5.00 or less per 100 ADSs (or portion thereof)
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Receiving or distributing dividends
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U.S.$0.05 or less per ADS (or portion thereof)
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Selling or exercising rights
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U.S.$5.00 or less per 100 ADSs for all distributions of securities or the net cash proceeds from the sale thereof
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Withdrawal of an underlying security
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U.S.$5.00 or less per 100 ADSs (or portion thereof)
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Transferring, splitting, grouping receipts
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U.S.$1.50 per ADR or ADSs for transfers made, to the extent not prohibited by the rules of any stock exchange or interdealer quotation system upon which the ADSs are traded, including, as necessary, any transfer or registration fees in connection with the deposit or withdrawal of deposited securities
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General depositary services
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An aggregate fee of U.S.$0.05 or less per ADS per calendar year (or portion thereof) for services performed by the depositary in administering the ADRs.
As necessary, expenses incurred by the depositary in connection with the conversion of reais into U.S. dollars
As necessary, cable, telex and facsimile transmission and delivery charges incurred at the request of persons depositing or delivering common shares, ADRs or any deposited securities
As necessary, any fees and expenses incurred by the depositary in connection with the delivery of deposited securities or otherwise in connection with the depositary’s or its custodian’s compliance with applicable laws, rules or regulations.
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Ongoing Reimbursements by the Depositary
J.P. Morgan, as depositary, has agreed to reimburse certain reasonable Company’s expenses related to the establishment and maintenance of the ADR program. Such reimbursable expenses include legal fees, investor relations servicing, investor related presentations, broker reimbursements, ADR-related advertising and public relations in those jurisdictions in which the ADRs may be listed or otherwise quoted for trading, accountants’ fees in relation to this Form 20-F filing with the SEC and other bona fide Program-related third party expenses.
During the year ended December 31, 2019, we received from our depositary U.S.$2,406,773 as reimbursement of expenses related to annual stock exchange listing fees, standard maintenance costs of ADRs, underwriting and legal fees and investor relations activities.
See also “Item 10. Additional Information—E. Taxation.”
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